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Expert Financial Analysis and Reporting

Caladrius Biosciences: The Business Model is Intriguing, But the Cash Position Is Weak (CLBS, $0.57, No Opinion at this time)

Investment Overview

I am interested in Caladrius Biosciences primarily because of the potential for its PCT cell therapy manufacturing business. PCT has a rapidly growing sales base that had $13 million of sales in 2014 and $23 million in 2015. Management is projecting $30 million in 2016. These are all revenues from third parties and do not include any development work on internal products being developed by Caladrius.

In March 2016, 19.9% of PCT was sold to Hitachi Chemical for $19.4 million. This valued PCT at $97 million which compares to the current market capitalization of about $33 million. This disparity reflects the market’s concern about the weak cash position. This situation has some parallels to Repligen which has been an exceptional stock. Repligen exited the biotechnology business to focus on bioprocessing. See my December 12, 2012 report  “Repligen: Initiating Coverage with a Buy”

I don’t think that PCT will emerge as attractive a business model as Repligen whose products are incorporated into the manufacturing process of a product and are used throughout the life of the product. PCT will likely develop a manufacturing process through phase 1 and 2 and perhaps phase 3. However, once a product is commercialized the owner of the product will probably want to take over most of the manufacturing and use PCT as a second source. If so, PCT will not enjoy long life cycles of Repligen’s products. Still, this still looks like a very good business model with the extensive amount of research going on in cell based therapies. According to the alliance for regenerative medicine, at the end of 2015, there were 632 regenerative medicine clinical trials underway with 63 Phase III trials and 376 Phase II trials. 62% and 83% increases over 2014 respectively. I am intrigued with the prospects for PCT.

The Company will also take advantage of its manufacturing assets and clinical knowhow to develop certain cell based therapies to the proof of concept stage and then license them to larger companies to conduct the much more expensive regulatory trials. This approach could allow Caladrius to develop a broad portfolio of licensed products. Potentially the expense incurred will be recouped in licensing fees and CLBS will also benefit by providing manufacturing for the product. Caladrius will not be involved in expensive clinical development expenses and will receive a royalty if the products are eventually commercialized.

The current cash position is strained as the Company ended 1Q, 2016 with $25 million of cash and issued guidance that the operating cash burn and capex spending would approximate $23 to $26 million for the remainder of 2016. Clearly the Company needs to raise capital and I estimate later in this report that if they raised $20 million in an equity offering that it could double the fully diluted share count to 114 million. Because of the strained cash position, I remain on the sidelines for now.

Caladrius Used to be Neostem

Caladrius was formerly known as Neostem and was focused on the development of cell based therapies. The Company had three products in its portfolio:

  • NBS10 - a stem-cell treatment for myocardial infarction
  • CLBS20 – A cancer vaccine for metastatic melanoma, and
  • CLBS03 – an autologous T-cell therapy for type 1 Diabetes.

The original lead drug was NBS10. Mixed results (mainly negative) were reported in the randomized, placebo controlled  phase 2 study, PreSERVE AMI, that enrolled heart attack victims with left ventricular dysfunction after suffering a STEMI. After this trial, emphasis and financial resources were shifted to a phase 3 trial of the cancer vaccine CLBS20 in metastatic melanoma.

Management Change

In June, 2015 there was a significant management change in which Dr. David Mazzo became CEO, replacing the founder and previous CEO Robin Smith and the Company was renamed from Neostem to Caladrius. Neostem had been a long term target of negative blogs and the target of an all too familiar attack by short selling hedge funds. The price was driven down and the Company was unable to access sufficient capital to fund its clinical trials. Dr. Mazzo made a strategic decision to halt US development of NBS10 and all development of CLBS20.

Caladrius is planning a phase 2 trial of NBS10 in Japan, which is much more responsive to cell based therapies than the US. This trial, if successful, could lead to conditional regulatory approval in Japan and enhance the chance of finding a global partner. CLBS03 is beginning a phase2 proof of concept trial.

Primary Focus is on Manufacturing Cell Based Therapies

Caladrius (then NeoStem) acquired PCT in January 2011; it was a small but leading contract manufacturer of cell therapies which was acquired to provide the manufacturing capability for Neostem’s cell based products. PCT is an industry leader in contract development and manufacture of cell therapy products. Over the 17 years of its existence, it has dealt with 120 clients, 20,000 products and these products have treated over 6,000 patients. Representative current and past clients are shown in the following table.

 Caldrius Clients

Different Approach to Biotechnology Development

The Company is continuing development of CLBS03 for type 1 diabetes. This is an autologous cell therapy targeted at the treatment of type 1 diabetes mellitus which uses the patient’s own regulatory T-cells (Treg).  The aim is to halt the immune response that is destroying insulin producing beta cells in the pancreas by enhancing Treg cell number and function. This therapy can be used if 20% or more of beta cells remain functional at time of diagnosis. Caladrius is beginning a 111 patient, phase 2 proof of concept study in 1Q, 2016 conjunction with Sanford Research. If this phase 2 trial is promising they will seek a licensor; they will not try to carry CLBS03 through to phase 3. This model of developing a cell based therapy through proof of concept and then licensing could be widely applied.

Financial Issues

Caladrius ended the March 31, 2016 quarter with cash and cash equivalents of $25.4 million. During the quarter, they sold 19.9% of PCT to Hitachi Chemical for $19.4 million which valued PCT at $97 million. This is nearly three times the market capitalization of $33 million. Hitachi also obtained rights for certain PCT technology for Japan and certain other territories in exchange for $5.6 million. The operating cash burn for 1Q, 2016 was $8.0 million and capex was $1 million.

Guidance for the remainder of 2016 calls for an operating cash burn of $17 to $20 million and capex of about $6 million for a total cash burn of $23 to $26 million which compares to the current cash position of $25 million. The Company clearly needs to bring in cash in the immediate futures. I estimate that if the Company decided to raise $20 million of cash at the current price of $0.57 that it would have to offer 38 million shares at a discount to perhaps $0.52 and issue 0.5 warrants for each share issued. This would add 57 million shares and double the fully diluted share count to 114 million shares.

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