Cytori Therapeutics. Cardiac Celution. ATHENA aspires, BARDA burns. A bedside device with profitable disposables

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1 Cytori Therapeutics Cardiac Celution Initiation of coverage Healthcare equipment & services Cytori offers a strong investment case in cell therapy. It uses concentrated adipose (fat) derived regenerative cells (ADRC) from the patient. When injected into damaged tissues, ADRC appears to trigger their healing. Cytori sells Celution, point-of-care disposables and a bedside device to prepare ADRC in 90 minutes or less. This makes the procedure flexible to use with a potentially broad range of indications and an affordable price point. In the US, a Phase II study, ATHENA, aims to boost heart function in patients with ischemic cardiomyopathy. A US government contract (BARDA) could enable development of a burn therapy. The Lorem Vascular deal provided $24m in equity and may open the massive Chinese market. Year end Revenue** ($m) PBT* ($m) EPS* (c) 12/ (33.1) (62.4) / (32.9) (56.5) /13e 15.8 (33.3) (49.8) /14e 22.4 (34.3) (46.5) 0.0 NA Note: *Normalised, excluding intangible amortisation, exceptional items and share-based payments. **Revenue includes sales plus development revenues including deferred income. ATHENA aspires, BARDA burns The Phase II ATHENA trial uses Celution to produce a regenerative cell mixture to treat ischemic heart failure. Recruitment of stage one (45 patients) should be complete in Q214 with initial data likely in Q414. This could lead to a partnering deal in The BARDA programme tests if Celution could be used to treat burns and radiation, for example, after a worst-case terrorist incident. The initial contract completes by Q314 but extensions, possible from mid-2014, could lead to a burn treatment for commercial use by 2016 using a smaller, cheaper Celution device. DPS (c) A bedside device with profitable disposables P/E (x) Yield (%) 2013 product sales are expected to be $11m plus BARDA development income of $3m. There was also $1.8m of recognised but non-cash income. Celution is CE-marked and sold in the EU mainly for academic clinical investigations. Cardiac indications need Phase III data. Celution has Japanese device approval and Japan comprises over 50% of cash sales. Japan is funding cell therapy research and set up the legal framework for a fast-track approval route in November The Celution system is not sold in the US. FDA approval by 2019 is possible after Phase III trials. Valuation: Multiple indications and China potential Edison assumes a chronic ischemia launch by 2019 at 35% probability. A burns indication is assumed with a 2017 launch and 30% probability. Partnering is needed to fund a Phase III in chronic ischemic heart failure. Edison uses a 65% probability of a 2015 deal at 35% revenue share. Lorem sales of Celution in China and SE Asia should generate revenue for Cytori plus $500m in sales-based milestones at a 10% success probability. Edison values Cytori at $230m, or $3.10/share using a pre-tax 2025 multiple of 15x. Scenario analysis indicates future values ranging from $3.65 (burns success only) to $17.45 (both cardiac and burns success) by February 2014 Price $2.50 Market cap $188m Net debt ($m) at 30 September 12.1 Shares in issue 75.2m Free float 100% Code Primary exchange Secondary exchanges Share price performance CYTX NASDAQ FRA, ETR % 1m 3m 12m Abs (5.3) 21.4 (12.0) Rel (local) (0.4) 22.7 (23.5) 52-week high/low $3.35 $2.06 Business description Cytori Therapeutics produces concentrated regenerative cells from adipose tissue using a bedside device and disposables. The unit is sold in Japan and the EU. The cells are administered to damaged heart muscle to improve heart function. There is also a US government (BARDA) contract to develop regenerative cells for burns therapy and a hamstring repair indication. Lorem Vascular will sell in China and South-East Asia. Next events Q4 and FY13 results March 2014 ATHENA first data Analysts Q414 Dr John Savin MBA +44 (0) Robin Davison +44 (0) healthcare@edisongroup.com Edison profile page Cytori Therapeutics is a research client of Edison Investment Research Limited.

2 Investment summary Cytori uses the Celution device to extract and concentrate individual patient adipose-derived regenerative cells (ADRC) to heal damaged tissues. Celution (see page 8) is a point-of-care system producing its main revenue from single-use disposables and reagents. It is an approved EU and Japanese device. In the US, ATHENA, a key Phase II chronic heart failure study, is expected to produce initial dose data in Q414. US Phase III trials are needed for FDA approval and could start in 2015 after a second Phase II dose arm reports. The EU-based ADVANCE study in heart attacks closed in December The RECOVER study for hamstring muscle tears started in January Cytori sells Celution for clinical research in Japan, where a fast-track approval route is being developed after legal approval in November In the EU, Celution is used mostly for clinical research and has approval for tissue reconstruction after breast cancer surgery. A US government-funded development project (BARDA) may yield a commercial indication for burns by 2017; the probability of this will be clearer by Q314. Cytori was founded in July 1996 i and acquired StemSource, the Celution developer, in 2002; deals are given in Exhibit A1. ii The business was named Cytori in deals include the sale of PureGraft for $5m and the licensing of the Chinese, Australian and South-East Asian markets to a new venture, Lorem Vascular, for $24m upfront. Cytori is based in San Diego where it manufactures Celution. There are 115 employees. The shares transferred to NASDAQ in The deficit was $291m to September Valuation: Burns may overtake cardiac Edison assumes a chronic ischemia launch by 2019 at 35% probability. A burns indication is assumed with a 2017 launch and 30% probability. Partnering is needed to fund a Phase III in chronic ischemic heart failure. Edison uses a 65% probability of a 2015 deal at 35% revenue share. Lorem sales of Celution in China and SE Asia should generate revenue for Cytori plus $500m in sales-based milestones at a 10% success probability. Edison values Cytori at $230m, or $3.10/share using a pre-tax 2025 multiple of 15x. Scenario analysis indicates future values ranging from $3.65 (burns success only) to $17.45 (both cardiac and burns success) by Financials: Growing revenues with high costs In 2013, product sales are guided to be $11 plus $3m cash from the US BARDA contract. Cytori refinanced with $25.3m in new debt in H113 and repaid debt of $22.2m. The Q313 PureGraft divestment yielded $5m cash. The Lorem deal brought in $24m in equity in Q413 at $3 per share with no lock-up provision. We estimate that this may give cash into Q115, but further funding or a cardiac partnering deal will be needed in H214. Cytori may gain further US government BARDA contracts from Q314. These will increase its costs, with a modest margin. Sensitivities: Promising, but distant Celution, as a lower-priced, flexible point-of-care system, could effectively compete with autologous cultured products. Its position against allogeneic, out-of-the-freezer products will depend on relative price, ease-of-use and efficacy. The chronic ischemia market is currently not well defined but appears to be large. Cytori will probably require a partner to fund Phase III. There is a reasonable prospect of a burn treatment launch in 2017 provided that BARDA funding continues; a burns indication could be developed and sold without a partner to maximise profits. Japanese investigator-led trials could generate sales from 2015 but may have limited value in other jurisdictions. The Chinese market (through Lorem) could be significant but is hard to quantify as yet. i The business incorporated in May 1997 as MacroPore. It made bioresorbable implants. These were mostly sold to Medtronic in 2002 for $15.5m with residual rights sold in ii Exhibit A1 is available on the Edison website here. Cytori Therapeutics 4 February

3 Company description: Healing cell preparation Cytori produces a patient-specific ADRC dose using a point-of-care platform technology: the Celution device and disposables and its associated proprietary enzyme preparations. In clinical use, a consistent pattern of reports indicates that injection of ADRC may give a prolonged healing response. Scar tissue is softened and remodelled, new microvasculature forms and damaged tissue starts to heal. The duration of the effect is clinically unknown but anecdotally may be long lasting if natural healing mechanisms are triggered. In the US, use of Celution is restricted to clinical trials, currently ATHENA and RECOVER. The device and reagents are CE-marked and Celution is Class I-approved in Japan and now in Australia. Hence, they can be bought by clinical investigators in many countries and are used commercially for tissue reconstruction in the EU. In Japan, it is possible that small studies could allow conditional approval and reimbursement from 2015 following new legislation. Chinese and other regional approvals will now be sought. Cardiac indications: ATHENA data in 2014 In the US, Cytori is running a key trial, ATHENA in chronic myocardial ischemia. A European trial (ADVANCE) in acute myocardial ischemia (AMI: a heart attack) was closed in December Chronic ischemia Ischemia (poor blood supply) can cause the heart muscle to distend (cardiomyopathy) to try to pump more blood. Increasing distortion means less efficient pumping. Ischemia is normally due to a previous heart attack that damaged the muscle, but can be due to narrowed coronary arteries, infection, diabetes or a poor lifestyle and alcohol. The reduced efficiency can be measured by tracking the maximum volume of oxygen that a patient uses, which is related to heart efficiency. Heart chamber volumes can be measured by MRI and, less accurately, by SPECT imaging. iii The reduced heart output severely limits the amount of exercise that can be tolerated. The usual exercise measured is a six-minute walk. The amount of oxygen that a patient can take in is also limited by circulation and heart performance. The maximum volume of oxygen used when walking on a treadmill is a good guide (mvo 2) to heart performance. iv, 1 Some patients with poor heart function are house bound and experience repeated hospital admissions. Clinical trials often use a quality of life scoring system since small improvements in these patients lifestyle are very important. They may be close to heart failure and therefore need either a left ventricle assist device (an implanted pump) or a heart transplant. Neither option is cheap and both involve surgery with constant medical care thereafter. The heart transplant waiting list in the US is a relatively constant 3,000 per year with just under 2,000 transplants. Clinical status of stem cell trials in chronic ischemic heart disease Clinical trials in chronic ischemic cardiomyopathy have generally been small and conducted using bone marrow-derived stem cells. The usual procedure is to inject the cells directly into the heart muscle around the periphery of the ischemic area. The theory is that this zone has enough iii MRI is magnetic resonance imaging using a large magnet to directly visualise tissue through its water content. Single-photon emission computed tomography (SPECT) is a nuclear medicine imaging technique where an imaging agent is given to produce high-energy gamma rays in metabolically active tissues; this means that ischemic heart areas appear dark relative to healthy tissue. iv Patients who do poorly on this test have high levels of morbidity and a higher risk of mortality, although it has recently been noted that peak VO 2 may be more appropriately used as a continuous variable in multivariate models to predict prognosis in severe chronic heart failure ; in other words that in itself it is not a good predictor of heart failure. 8 Cytori Therapeutics 4 February

4 perfusion to sustain the new cells and allow them to trigger healing of the damaged area. Cells are supposed to have angiogenic properties enabling reperfusion of the damaged zone. A 2013 meta-analysis 2 of 10 chronic ischemic heart disease studies showed that bone marrow cells improved the patient s left ventricular ejection fraction (LVEF) and enabled heart remodelling so that the heart muscles became less distended. v Mean LVEF improved by 4.48% with a wide range of between 2.4% and 6.5%. The paper s authors, Kandala et al 2013, 2 felt that even small changes in mean LVEF could be clinically significant. Most of the patients (across seven studies) also received cardiac bypass arterial grafts (CABG) so the effect of cells alone is not clear. PRECISE pointing to ATHENA? PRECISE was a 36-month Cytori EU-based trial that recruited 27 patients with initial follow up at six and 18 months; 21 patients were randomised to therapy with six in a placebo control group. Full data is in publication. Up to 15 injections were given into the ventricle wall in the ischemic area. Each injection was 0.2ml. The six-month data showed the infarct size was 3% smaller in treated patients relative to baseline; untreated patients showed a 5% increase in infarct size so the difference was 8%, which was statistically significant, p=0.04. vi The heart muscle can be tested using a NOGA catheter to detect its electrical conductance. Treated patients showed less scar tissue and better muscle function. However, SPECT imaging showed no difference between the groups. vii What matters to patients are not highly technical assessments but whether they gain an improved lifestyle. A measure of this is mvo 2: the peak amount of oxygen consumed during exercise as the heart has to pump blood around the body to transport the oxygen. A weak heart means less oxygen transported and so less muscle performance. The PRECISE data showed that treated patients improved mvo 2 from 16.6ml/kg/min to 17.1ml/kg/min at 18 months, while placebo declined to 15.3ml/kg/min, p= Metabolic equivalents (METs), the rate at which the body produces energy and a measure of heart function, did not deteriorate over 18 months in the treated patients (4.8 to 5.0), but control patients saw a reduction (5.3 to 4.4). viii This was significant at p=0.03. ATHENA current Phase II ATHENA is an important trial for Cytori as it gives exposure to US clinicians interested in stem cell cardiac therapy. The current arm ix involves a dose of up to 40m cells (0.4 million/kg) prepared in the Celution device. These cells are injected in 0.2m aliquots into the ischemic areas of the heart by a catheter. The double-blind study aims to recruit 45 patients per dosed level (15 of whom receive placebo) and has a primary safety endpoint looking for major adverse events. Recruitment should be completed by Q2 (April 2014). The secondary endpoint mvo 2 parameter will be measured six months after treatment so the data should be available in Q414. Other secondary endpoints like ejection fraction, heart volume and quality of life scores will also be important. x Cytori plans to have a second, higher ATHENA dose arm with up to 80m cells injected. This will start with new centres in early 2014 with the current centres recruiting once the first dose arm completes. Full ATHENA data should be released in 2015, allowing a Phase III to start once the FDA has reviewed the data. Phase III timing and partnering uncertainty The ATHENA trial will need to be followed by at least one pivotal Phase III study. If a focused Phase III starts in H215, marketing may be feasible from In addition, a partner is required to run and v Studies were selected as they focused on LVEF and LV. This produced 10 published trials covering 283 patients who received cells and 236 who received placebo or control. vi American Heart Association meeting presentation vii SPECT measures the metabolic function of the tissue and tends to be more accurate. viii One unit of metabolic activity (MET) is defined as 3.5ml O 2 kg 1 min 1, which is 1kcal kg 1 h 1. ix Cytori now has eight sites. This could enable full recruitment of the second dose arm within six months. x Cardio3 BioSciences had Phase II results with autologous bone marrow cells. In these results, 76% had an absolute LVEF increase of over 3%, while 57% showed over 5% increase. Patients had LVEFs of 15% to 40%. Cytori Therapeutics 4 February

5 fund pivotal studies. A 35% probability of successful development has been used as Celution and ADRC have yet to show a hard clinical endpoint. The main risk is probably efficacy. Chronic competition Exhibit 1 shows cell therapy trials for chronic ischemia. The leader was Baxter with a rather complicated process but the status on this trial is unclear. The Cardio3 product with directed cardiomyocyte progenitor cells 4 may be the first to achieve an approval, in the EU only. The Cardio3 US Phase III is unlikely to start before mid Teva (licensed from Mesoblast) has filed its 1,700 patient Phase III protocol in chronic heart failure with an allogeneic therapy; data is due in Q318. Exhibit 1: Chronic ischemia cardiac stem cell trials Company Indication Stage Dose Notes on trial Method Cytori Chronic myocardial ischemia Aastrom Baxter Teva (Mesoblast) Cardio3 Capricor / Jansen ATHENA Phase II NCT Two-stage trial with first dose in 45 patients reporting in Q414. Ischemic dilated Phase II NCT cardiomyopathy 108 patients. Data Aug Chronic ischemia Phase III halted recruitment at 291 patients out of 450. Congestive heart Phase III 1,700 patient failure NCT approved to start H1 2014, data in Q318. Chronic ischemic heart failure regeneration after infarct Source: Edison Investment Research Phase III NCT patients EU start H113; US trial may start mid Phase II phase of 274 patient ALLSTAR NCT , Data Q Market size First dose max 40m cells, second followon 80m ml injections 1x10 6 CD34+ cells/kg 150m cells 600m 25m Primary endpoint serious adverse events (SAEs), major adverse cardiac events (MACE), arrhythmia, change in cardiac function and resource utilisation. Intramyocardial injection of cells into ischemic region visualised by imaging. Dose of 400,000 cells/kg. Adipose cells from Celution. Injection into LV muscle. Endpoint is number of clinical events over 12 months. Bone marrow (about 50ml) cultured at a central facility for 14 days. The primary endpoint is change in total Cells harvested by apheresis and exercise capacity at 12 months. CD34+ cells isolated in central lab. Allogeneic therapy in both ischemic and A single injection of allogeneic non-ischemic patients. A MACE endpoint Mesenchymal Precursor Cells is being used for Phase III. (MPC). Class II-III patients. Change between groups from baseline Cardiopoiesis technology from the and 39 weeks in a hierarchical composite Mayo Clinic. This reprogrammes endpoint including mortality and events. bone marrow into cardiac cells. US endpoint will be six-minute walk. Class II/III-IV patients. Seems to build on academic autologous Cardiosphere culture of cardiac Phase II at Cedar Sinai Medical Center cells. Deal in Jan Cells given but using an allogeneic approach. by intracoronary infusion. It is difficult to define precisely the chronic myocardial ischemia market, but its core is probably patients who have restored coronary artery flow after a heart attack with impaired heart function due to an infracted area. A broader market may be patients with angina, the subject of the Baxter Phase II. Baxter put the prevalence of chronic angina (chest pain due to restricted coronary arteries) in the US at million patients. Most of these are managed with pharmaceuticals. Baxter estimates that 850,000 have chronic myocardial ischemia with an incidence of 170,000. Cytori has a lower price point for this market than any cultured cell product. Pricing will vary but for modelling purposes, Edison has assumed a global average figure for Celution consumables of $8,500. Celution may be a cost-effective treatment for longstanding patients; a 10% share of this prevalence market is worth $740m. A 20% share of the new patients (incidence market) adds a potential market of $289m: $1,029m in total. From Exhibit 1, the likely entrants in order are perhaps Cardio3, Cytori and Aastrom (with a currently niche indication). The Teva study is planned to start recruitment in Q114 but has a large number of patients to recruit. Not all these may reach the market and some may be more effective than others. Baxter recently ceased recruitment at 291 patients out of 450 planned to a big, threearm Phase III. The trial will run to the end and data may emerge. A Phase II entrant is Jansen in a deal with Capricor based on an allogeneic cardiac cell product. This draws on earlier cultured autologous clinical Phase II data from Cedar Sinai Medical Center. Cytori, as the possibly second entrant, is assumed to gain a potential 15% US market share, 20% in the EU (as the EU is more price sensitive and Celution may be the cheapest therapy) and 25% in Japan, as Celution has a strong base of experienced users already. The US is normally 50% of the world market for advanced therapy, with the EU being 35% and Asia and Japan being 15%. Cytori Therapeutics 4 February

6 Other indications A heart attack (acute myocardial infarction, AMI) results from the blockage of a coronary artery cutting off blood supply to part of the heart. Cytori has now made AMI a secondary objective. The European ADVANCE trial was closed at the end of 2013 with up to 25 patients enrolled. xi The RESTORE-2 study on breast reconstruction after cancer surgery reported good outcomes in , xii Cytori is focusing on sales to investigator-led clinical studies in the EU. Cytori also has a licence to sell PureGraft (divested 2013) with Celution-prepared ADRC doses. xiii Cytori started a trial in a new indication for hamstring muscle repair xiv, RECOVER, in January It will enrol 10 patients in a 90-day follow-up open-label safety phase then expand to a 60-patient, double-blind multi-centre trial. The three arms will be placebo, low dose or high dose. Cytori notes millions of sport injuries in the US each year. A reduction in the rest period would be of interest to many amateurs and of economic value to sports professionals. Investigator studies and potential Japanese approvals Adipose tissue is recognised as a good source of regenerative cells. xv Cytori estimates that over 50 investigator-led clinical Celution trials are completed, ongoing or planned. Academic trials in other counties In Europe, the Celution 800 System has CE-mark approval for soft tissue procedures. The CEmarked proprietary Intravase solution prevents clumping of isolated cells, enabling safe intravenous infusion. xvi In France, there is an academic study, NCT , treating the hands of 13 patients suffering from systemic sclerosis, an autoimmune condition. In Russia, there is a trial in 12 patients in urethral strictures (NCT ). An Italian paper has described the use of Celution to treat chronic leg ulcers in 10 patients with peripheral arterial disease; six showed full ulcer healing. 16 Japan: Funding and a possible fast-track route A Japanese researcher developed induced pluripotent stem cells (IPS) and won the Nobel Prize, which has prompted the Japanese government and regulators to invest in stem cell academic and clinical development. The governmental allocated a 20bn ($206m) stem cell budget for The focus seems to be on IPS work but other regenerative cell methods also seem to be covered. xvii There were 66 clinical research trials registered as of February 2013 and six clinical trials. xi Modern clinical practice is to treat AMI patients with angioplasty as soon as possible after hospital admission Delaying therapy for liposuction and cell processing is not favoured. Celution might have a role in additional healing therapy once a patient has been stabilised, but this would need a separate study. xii This study in 67 treated patients used an adipose graft enhanced with ADRC. Independent, blinded assessment judged 54 or 65 evaluable patients to have improved at 12 months. Physician satisfaction with the reconstruction was 85% and patient satisfaction 75%. However, there was no non-adrc control group. xiii In this, ADRC from Celution are added to the washed graft prepared in the PureGraft manual system before implantation; this is a different process to that used in RESTORE-2. The combination is allowed in the EU. The process is applicable to tissue reconstruction after surgery, especially after breast cancer. xiv The hamstring muscles are a three muscle group in the thigh. Grade II muscle tears, the indication targeted, enable limited walking but are noticeable and tender and usually need three months rest. If exacerbated, they can develop into a Grade III rupture needing surgical repair. Tears are different to hamstring tendon injuries. xv The Tissue Genesis Inc Icellator Cell Isolation System isolates stem cells from adipose tissue, is CE-marked and uses a proprietary enzyme mixture Adipase. Trials are planned. TiGenix is developing adipose stem cells as a cultured allogeneic product, now in a Phase III trial, to healing perianal fistula in Crohn s disease. xvi The CE mark also covers tissue ischemia, deficiency or injury of skin, fat, muscle and fascia, and soft tissue wounds or fistulae associated with trauma, diabetes, ischemia or radiation injury. Note that the CE mark is a manufacturing standard coupled with clinical safety data. It does not require clinical efficacy demonstrations. xvii The mature, differentiated cells produced by Celution are less risky given the current state of knowledge. Cytori Therapeutics 4 February

7 In Japan, Cytori sells Celution directly. Clinicians can get funding to buy Celution and run investigator-led trials. xviii A new law was passed in November 2013 that enables fast-track approval and reimbursement of safe cell therapies. It is possible that a typical cell therapy project would need to undergo a small safety and indicative efficacy study. If this was positive, conditional approval and reimbursement could be given with patients entered into a registry. The approval would be reviewed after a number of years to see if it was effective. Japanese indications may generate data without control groups, and this is likely to be supportive but not definitive under FDA and EMA rules. Cells that are processed (as in Celution), not manipulated or cultured, are classed as medical devices so will have an easier regulatory pathway; cultured and manipulated cells will be classed as drugs. Reimbursement in Japan involves a 30% patient co-payment so very costly therapies may have limited take-up. Celution is already approved as a Class 1 device. Its lower cost means that co-payment could be less of an issue. BARDA Cytori has a US government contract from BARDA. xix This started in Q312. The proof-of-concept stage worth up to $4.7m in total is underway, of which $0.38m was received in 2012 and up to $3m is expected over Up to $1.32m may be received over The project is to see if ADRC is useful in the treatment of burns with radiation damage. Government estimates are that there could be 10,000 burns casualties from a major incident. There is good, if anecdotal, evidence that ADRC is useful in promoting the healing of skin grafts with reduced scarring. If initial objectives are met, BARDA may assign further cost-plus contracts. Cytori notes that it already has the data to support the case that these objectives have been met. An initial review meeting is possible by spring 2014 and this may lead to further contracts from Q314. The total value could be up to $106m over five years but project costs will depend on the exact FDA requirements, so totals awarded may be lower. There are three options. Option 1 funds a pilot clinical trial on thermal burns, development of a compact Celution device and preclinical work. The budget estimate is currently up to $32.6m. If Option 1 is successful, it could lead up to a $50m clinical contract (Option 2). A meeting on Option 3 during 2014 may trigger up to a $23.4m contact (initial estimate) over four years on other, undisclosed projects. These activities provide a contribution to overheads and a small margin. Cytori must fund the work before full subsequent reimbursement but payments are regular so it does not cause cash flow issues. On successful completion, Edison, for valuation purposes, has assumed Cytori may equip US hospitals with 1,000 Celution systems over generating possible revenues of $112m. This revenue is then risk-adjusted, as for the burns therapy in Exhibit 3. This sales projection is not part of any current BARDA contract and has not been guided by Cytori management. The big gain is that BARDA would fund a full pivotal study for thermal burn therapy. A compact Celution device, part of the BARDA contract, should have a much lower production cost; no launch date has been announced as yet. If FDA commercial burns approval is given, there are 50,000-70,000 burns cases a year in the US, offering a major new market. A burns treatment could be launched before any cardiac indication and does not need a marketing partner. xviii Indications include stress, urinary incontinence, wound healing, fistula repair, burns, facial wasting, liver insufficiency, radiation injury, bone regeneration, kidney disease, spinal disc injury, periodontal disease, vocal cord paralysis and peripheral vascular disease. xix The Biomedical Advanced Research and Development Authority (BARDA), within the Office of the Assistant Secretary for Preparedness and Response in the U.S. Department of Health and Human Services, provides an integrated, systematic approach to public health medical emergencies. Cytori Therapeutics 4 February

8 Celution, a medical device for ADRC isolation The Celution system comprises a unit to run the process, a set of consumable plastic devices for aseptic processing of adipose tissue, and two reagents: Celase and Intravase, Exhibit 2. Clinical groups in the EU and Japan purchase Celution systems and consumables, generating about $10m in expected 2013 sales. Celution and consumables sales ytd to Q3 are estimated at about $3.4m. The Celution device produces a mix of cell types. Cytori hypothesises that this mix is important in activating and supporting the healing process. This could be a major advantage over allogeneic cultures but comparative data is not available. Cell variability between patients is a potential issue but Cytori s internal research indicates that this is low so may not affect clinical trial outcomes; we have not seen any specific data. The important types may be the 2% of multi-potent stem cells and 37% of CD34+ cells xx (due to their paracrine effects) and, possibly, macrophages, which comprise 22.5% of the mix. xxi Adipose tissue contains 2,500 fold more stem cells than other tissues so is an excellent sources of regenerative cells. Exhibit 2: Cytori product portfolio Product Image Description Celution device CE-marked and approved as a Class 1 device in Japan and Australia. Cell processing consumables Reagents Celase and Intravase Both are CE-marked. StemSource Source: Edison Investment Research based on Cytori information This is a movable unit designed to operate at the patient s bedside. It means the cells can be processed and used where needed within about an hour. There are multiple potential clinical applications. A smaller device is being developed as part of the BARDA contract. This should be faster with a lower manufacturing cost. Celution takes up to 450ml of liposuction material. This is first digested using Celase solution (see below) and passed through a filter (to remove debris) into a second chamber. The cells are washed and centrifuged at low speed to pellet the cells. The cells are repeatedly washed and spun until a pre-set cell weight is obtained. A unit is priced in the low six-figure dollar region; we assume leasing based on direct disposable sales after FDA approval. Celution is not sold in the US as the FDA does not want it used for unproven stem-cell therapies. This was confirmed in a 2013 court judgement. The Celution system uses disposable plastic chambers and bags linked by tubing so the tissue remains sterile and available for immediate use. Soft tissue disposable sets are about $2,500 with vascular disposable sets at $8,000-12,000 each. No sales breakdown is given on current sales of disposables but this is where the profit will reside. Celase is a proprietary, GMP standard freeze-dried preparation of recombinant (so very pure) proteolytic enzymes. The main one is collagenase, to separate out the cells from tissue. Intravase is a proprietary, undisclosed enzyme mixture that keeps the isolated cells separate for injection and stops them clumping. It is CE-marked (as of 2013). It has no FDA clearance. For both of these, there is significant know-how in liberating viable cells without destroying them. This is a range of products for cryogenic storage of cells. The StemSource system includes the Celution device. A debated issue is how injected ADRC may deliver clinical benefits. 6, 7 It seems unlikely that the small number of administered cells, relative to organ size, form new tissue. The best current theory is that the cells exert a localised healing paracrine effect xxii by secreting cytokines and hormones xxiii to trigger the natural repair processes of the heart. This process might continue, at least anecdotally, for perhaps months based on observation, for example, of the integration of adipose grafts in tissue reconstruction and of skin grafts in burns treatments (see Cytori s website for case studies). Scar tissue appears to soften, improving tissue mobility and appearance. However, the duration and extent of clinical effects needs to be established in clinical trials. xx CD34+ hematopoietic stem cells are normally found in the bone marrow and produce a range of different blood and blood vessel lining cell types. They can promote new blood vessel growth (angiogenesis). xxi Macrophages come in M1 and M2 varieties. The cells switch role depending on their environment. The M2 role is non-inflammatory and involved in tissue regeneration whereas M1 macrophages are inflammatory. xxii There is evidence that human embryonic stem cells, can help healing though paracrine mechanisms. 5 xxiii In a 2011 review of the cardiac cell therapy, Malliaras and Marbán commented: 90% of the retained cells die within the first week... and [only] 1% of transplanted cells can be identified 4 weeks after transplantation. 9 Cytori Therapeutics 4 February

9 Sensitivities: Very promising, but very distant Celution, as a lower-priced, flexible point-of-care system, could effectively compete with autologous cultured products. Its position against allogeneic, out-of-the-freezer products will depend on relative price, ease-of-use and efficacy. The chronic ischemia market is currently not well defined but is probably large. Cytori will probably require a partner to fund Phase III. There is a reasonable prospect of a burn treatment launch in 2017 provided that BARDA funding continues and this may become the main focus for Cytori, as a burns indication could be developed and sold without a partner to maximise profits. Japanese indications developed through investigator trials could drive Japanese sales from 2015 but may have limited value in other regulatory jurisdictions. The Chinese market could be significant, but cannot be quantified as yet. Valuation Edison values Cytori at $230m, or $3.10/share using a pre-tax 2025 multiple of 15x, Exhibit 3. Exhibit 3: Cytori 2025 valuation as of January 2014 Royalty Partnering/ Success 2025 forecast ($m) progression probability Non-risk adjusted Risk adjusted Chronic ischemia 35% 65% 35% 1, Burns 75% 30% BARDA procurement 75% 30% 4 1 Tissue reconstruction and research 19 Total revenues (ex AMI) 134 Cost of goods (20) Operating expenses (57) Tax 0% 0 Reported profit 57 Potential 2025 value Profit multiple 15x 858 PV continuing value 209 PV cash flow (excluding Phase III costs and Lorem) 5 PV Lorem milestones from % NPV (at 12.5%) 230 Shares (m) (post Lorem deal) 75 Per share 3.10 Source: Edison Investment Research The valuation multiple reflects possible indications and the potential from China. It assumes a Phase III partner at 65% probability in 2015 to progress cardiac trials. The royalty rate assumed is 35% for a medical device with Cytori manufacturing. Sales to hospitals for tissue reconstruction and burns are assumed to be direct by Cytori. The cardiac indication is given a 35% probability of market success based on PRECISE data. The burns indication is given a 30% probability with a 75% probability that the BARDA contract progresses. We assume a zero tax rate until The Lorem deal is conservatively valued at the moment, with the assumption that the $500m in milestones disclosed by Cytori are received after 2020 and with a 10% likelihood of success. Scenario analysis is based on adjusting the various risk assessments based on a future event but discounted to January 2014 values. The aim is to gain an impression of how future events may affect the indicative fair value. Note there is no guarantee that such events will occur and the market, regulatory and competitive frameworks will also change over time. The Full Success scenario, discounted to 2014 at 12.5% per year, would be worth $17.45 per current share. If the Heart Only scenario applies, then cardiac is successful but burns would not be. This gives a big return from cardiac sales of $ If CMI proves too difficult or uneconomic, a successful burns indication alone (the Burns Only scenario) has a discounted value of $3.65. Dilution from any future share issues is not taken into account. Cytori Therapeutics 4 February

10 Exhibit 4: Valuation scenarios using projected timelines Scenario Base case (standard assumptions) Heart only (Cardiac indication approval only Burns only (Burns indication approval only Full success: (Cardiac and Burns approved) Source: Edison Investment Research Date range Probability of success Current value when outcome is known Project Partner Clinical Current CMI 65% 35% $3.10 BARDA up to 75% 30% CMI 100% 100% $13.10 BARDA 100% 0% CMI 100% 0% $3.65 BARDA 100% 100% CMI 100% 100% $17.45 BARDA 100% 100% Financials Cytori has published its Q313 results. Edison s financial forecasts are given in Exhibit 5. P&L Q3 ytd 2013 results showed sales of $4.4m. Cost of goods ytd of $2.3m is high at 52% of sales due to the fixed cost base and low volumes. Margins in H2 may fall after PureGraft divestment. Development revenues ytd comprised $2.5m cash from BARDA ($1m in Q3). The final part of the Olympus JV termination, $0.63m, was recognised in Q1. A $2.38m licence to Senko was terminated in Q1, of which $1.2m cash will be refunded in quarterly instalments of $0.2m to Q214 with $1.1m recognised. Management 2013 guidance is for $14m sales from $11m in product and $3m from BARDA; sales in Japan will need to have an excellent Q4 but Lorem will also buy $2m of product. Marketing costs at $6.45m ytd are higher than sales. R&D ytd was $12m, up 16% on the comparable 2012 period due to ATHENA clinical costs. Administration costs ytd were $12.2m, up 6%. Warrant and option non-cash liabilities increased by $2.6m ytd to Q3; there are 9.2m options and warrants, which might convert. There was an equity accounting gain of $4.9m from the former Olympus JV and a further net gain of $4.4m on the PureGraft sale. Other losses totalled $1.4m. Net interest ytd was $2.5m and will be around $2.7m for 2013 after the June debt refinancing. Balance sheet On 28 June, Cytori refinanced its debt for $27m repayable over four years at 9.75% with a year one interest only period. Fees were $1.7m plus warrants. In addition, a further $0.6m cash is due to be paid for the Senko termination by Q214 and there is a liability to terminate the Olympus JV of $4.7m; $0.77m is payable within 12 months of the termination. On 30 September, accounts payable were $5.5m with nearly $1m in provisions. Cytori had $10.2m in cash and was owed nearly $2.6m in accounts receivable. Inventory was $4.1m, which is very high relative to the $11m sales target. Cash flow and funding Operational cash outflow ytd was $25.1m offset by a small net equity issue of $2.8m. Cytori repaid an outstanding loan of $22.3m and received a new loan of $27m less costs of $1.7m. In July 2013, Cytori received $5m from the sale of PureGraft. The Lorem deal brings in $2m of Q4 Celution sales, and $24m in equity (8m shares at $3 each). A further $5m of equipment could be bought by Lorem in 2014 after Chinese approval. Edison estimates that this gives cash into Cytori Therapeutics 4 February

11 Exhibit 5: Financial summary $'000s e 2014e Year end 31 December IFRS IFRS IFRS IFRS PROFIT & LOSS Sales and development revenues 9,996 14,501 15,817 22,407 Cost of Sales (3,837) (4,000) (5,670) (6,399) Gross Profit 6,159 10,501 10,147 16,008 EBITDA (29,489) (28,659) (28,917) (30,741) Operating Profit (before amort and except) (30,344) (29,470) (30,517) (31,741) Intangible Amortisation (932) (1,052) (807) (800) Exceptionals 0 (165) 8,271 0 Other (264) (314) (692) (700) Operating Profit (31,540) (31,001) (23,745) (33,241) Net Interest (2,775) (3,382) (2,748) (2,529) Profit Before Tax (norm) (33,119) (32,852) (33,265) (34,271) Profit Before Tax (FRS 3) (32,451) (32,279) (24,880) (34,171) Tax Profit After Tax (norm) (33,383) (33,166) (33,957) (34,971) Profit After Tax (FRS 3) (32,451) (32,279) (24,880) (34,171) Average Number of Shares Outstanding (m) EPS - normalised (c) (62.4) (56.5) (49.8) (46.5) EPS - normalised fully diluted (c) (60.7) (55.0) (36.5) (45.5) EPS - (IFRS) (c) (60.7) (55.0) (36.5) (45.5) Dividend per share (c) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except) (%) BALANCE SHEET Fixed Assets 8,197 9,271 17,129 17,129 Intangible Assets 5,886 6,662 15,229 15,229 Tangible Assets 1,711 2,174 1,550 1,550 Investments Current Assets 43,337 33,979 35,625 16,157 Stocks 3,318 3,175 4,138 3,300 Debtors 2,260 3,926 2,622 5,280 Cash 36,922 25,717 27,737 6,449 Other 837 1,161 1,128 1,128 Current Liabilities (7,821) (17,613) (15,369) (22,113) Creditors (5,334) (7,829) (11,251) (13,272) Short term borrowings (2,487) (9,784) (4,118) (8,841) Long Term Liabilities (33,767) (19,182) (23,871) (27,030) Long term borrowings (21,962) (12,903) (22,882) (26,041) Other long term liabilities (11,805) (6,279) (989) (989) Net Assets 9,946 6,455 13,514 (15,856) CASH FLOW Operating Cash Flow (32,548) (28,811) (26,196) (25,641) Net Interest (2,775) (3,382) (2,748) (2,529) Tax Capex (560) (1,204) (1,000) (1,000) Acquisitions/disposals 0 0 5,000 0 Equity raised 15,941 24,884 26,964 0 Dividends Net Cash Flow (19,942) (8,513) 2,020 (29,170) Opening net debt/(cash) (32,415) (12,473) (3,030) (737) HP finance leases initiated Other 0 (930) (4,313) 0 Closing net debt/(cash) (12,473) (3,030) (737) 28,433 Source: Cytori SEC filings, Edison Investment Research forecasts. Note: There are 9.2m warrants and options, which give rise to noncash accounting items depending on movements in the share price. References 1. Mancini, D. M. et al. Value of peak exercise oxygen consumption for optimal timing of cardiac transplantation in ambulatory patients with heart failure. Circulation 83, (1991). 2. Kandala, J. et al. Meta-Analysis of Stem Cell Therapy in Chronic Ischemic Cardiomyopathy. Am. J. Cardiol. (2013). doi: /j.amjcard Sridhar, P. et al. Stem Cells Adipose-Derived Regenerative Cells for the Treatment of Patients with Non-revascularisable Ischemic Cardiomyopathy The PRECISE Trial Stem Cells (2012). 4. Behfar, A. et al. Guided cardiopoiesis enhances therapeutic benefit of bone marrow human mesenchymal stem cells in chronic myocardial infarction. J. Am. Coll. Cardiol. 56, (2010). 5. Pérez-Cano, R. et al. Prospective trial of adipose-derived regenerative cell (ADRC)-enriched fat grafting for partial mastectomy defects: the RESTORE-2 trial. Eur. J. Surg. Oncol. 38, (2012). 6. Bai, X. et al. Both cultured and freshly isolated adipose tissue-derived stem cells enhance cardiac function after acute myocardial infarction. Eur. Heart J. 31, (2010). 7. Sánchez, P. L. et al. Cultured and freshly isolated adipose tissue-derived cells:. Eur. Heart J. 31, (2010). 8. Myers, J. et al. Cardiopulmonary exercise testing and prognosis in severe heart failure: 14 ml/kg/min revisited. Am. Heart J. 139, (2000). 9. Malliaras, K. & Marbán, E. Cardiac cell therapy. Br. Med. Bull. 98, (2011). Cytori Therapeutics 4 February

12 Contact details 3020 Callan Road, San Diego, California US Revenue by geography % 50% 13% 23% 14% Japan US EU Other CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS 10-14e EPS 12-14e 0.0% EBITDA 10-14e EBITDA 12-14e 0.0% Sales 10-14e Sales 12-14e 0.0% Management team CEO: Christopher J Calhoun ROCE 13e Avg ROCE 10-14e ROE 13e Gross margin 13e 51.9% Operating margin 13e Gr mgn / Op mgn Mr Calhoun is a co-founder of Cytori and has been CEO since He is a coinventor on multiple medical device patents. He has a BA from the University of California and an MBA from the University of Phoenix. President: Marc H Hedrick MD Dr Hedrick joined Cytori in 2002 and was appointed president in Previously, Dr Hedrick co-founded, and was president and CEO of StemSource. Dr Hedrick is a plastic surgeon and a former associate professor at UCLA. He obtained his MD from the University of Texas and an MBA from UCLA. Gearing 13e Interest cover 13e CA/CL 13e 5.5 Stock days 13e Debtor days 13e Creditor days 13e CFO: Mark E Saad Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices Mr Saad joined Cytori as CFO in Previously, Mr Saad served as COO of UBS, Healthcare. Prior to UBS, Mr Saad was an analyst with Salomon, Smith Barney. He holds a BA from Villanova University, Philadelphia. President Asia Pacific: Seijiro N Shirahama Seijiro N Shirahama was appointed president Asia-Pacific in November Until 2002, he was president of Touchmetrics K.K. and worked for Bristol-Myers Squibb and Baxter Biotech Group in Tokyo. He holds a BA from Kanagawa University in Yokohama, and an MA from the University of San Francisco. Principal shareholders (March 2013) (%) Olympus Corp BlackRock Fund Advisors 5.96 The Vanguard Group, Inc Astellas Pharma, Inc Perkins Capital Management, Inc SSgA Funds Management, Inc Northern Trust Investments, Inc Companies named in this report Mesoblast (MSB), Teva (TEVA), TiGenix (TIGB), Aastrom (ASTM), Cardio3 Biosciences (CARD), Miltenyi Biotec (MILTEBP), Baxter (BAX), Neostem (NBS), Capricor (CAPR), Athersys (ATHX), Tissue Genesis Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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