Written by Jason Napodano, CFA

On November 4, 2010, Cytori Therapeutics Inc. ( CYTX ) reported financial results for the third quarter ended September 30, 2010.  Total revenues in the quarter were $1.6 million, below our expectations for total revenues of $2.4 million.  The shortfall versus our estimate came from both unit sales and consumable shipments.

 

Installed Base

Q3 2010

Comps

Reported

Zacks Est.

Q2 2010

Q3 2009

Revenue Systems (cumulative)

135

137

122

85

Consumables Shipped

221

415

392

314

Consumable Re-Orders

162

290

304

185

% Re-Orders

73%

70%

78%

59%

Utilization Rate

1.6x

3.0x

3.2x

3.7x

Cytori sold or placed 13 revenue generating systems in the third quarter, bringing the total installed base to 135 units.  This was 2 units shy of our forecast; however, still up from the 12 sold in the second quarter and 9 in the first quarter of 2010.  There were no StemSource banks sold during the quarter, in-line with expectations.  For the year management has installed 2 StemSource systems.

Cytori sold 221 consumable units in the third quarter, which was far below our expectations.  We had been expecting 415 consumables shipped.  By comparison, in the second quarter Cytori shipped 392 consumables.  On the conference call management noted significant seasonality over the summer months in Europe and Asia as the culprit for the drop-off in consumables.  Also, several investigator sponsored programs that were ongoing in Europe and big users of consumables earlier in 2010 have completed.  This also contributed to the drop-off in shipments.

Of the 221 consumables the company did ship, 162 (73%) were re-orders.  The re-order rate at 73% is down 5% from an all-time high of 78% in the second quarter 2010.  The utilization rate (consumables / installed base) was disappointing at only 1.6x, far below the rate of > 3x we saw in the previous few quarter.  In fact, this is the lowest utilization rate we have seen since Celution launched.  This is a concern and something to keep an eye on for the fourth quarter 2010.

Net loss for the third quarter totaled $10.4 million, or $0.23 per share.  This was far greater than our forecast for a loss of $0.14 per share on lower revenues and a greater recognized negative change in the fair value of the warrant and option liabilities.  Otherwise, operating expenses were in-line with our expectations.  Gross margin for the third quarter was only 39%, far below expectations based on lower than expected consumable sales. 

Management must work to improve profitability by growing the direct sales model for Celution and improving manufacturing efficiencies.  Research and development remains low that this point for the company as Cytori continues to manage costs well and rely on investigators and innovation partners for clinical trials.  Although we expect an uptick in R&D in the coming quarters as management plans to initiate a European heart attack approval trial, called ADVANCE, in early 2011.  ADVANCE is expected to enroll up to 360 patients over the next several quarters, at a cost of $10 to 15 million to completion. 

Cytori’s cash position stands out as the one strong item from the third quarter report.   The company raised significant capital earlier in the year through small bi-weekly offerings to Seaside 88, LP, and in June 2010 Cytori completed a $20 million secured loan facility with GE Capital, Healthcare Financial Services, Oxford Finance Corporation, and Silicon Valley Bank.  Cash at the exit of the third quarter totaled $30.7 million.  In October 2010, management raised an additional $19.3 million through a public offering of 4.6 million shares at $4.50 per share.

We view the current cash balance as sufficient to funds the company’s commercialization and clinical development activities in Europe, Asia and the U.S., including the pivotal ADVANCE cardiovascular program and the soft tissue defect repair IDE program in the U.S.  Guidance is that funds are enough to fund operations through 2012.

Recommendation

We continue to be very positive on Cytori Therapeutics despite a slow third quarter.  We are expecting a pick-up in consumable sales in the fourth quarter 2010, and especially in 2011 once some additional trials are underway.  We believe the company’s Celution System, a better mousetrap for quickly and efficiently harvesting adult stem cells, will see sales ramp significantly over the next few years as Cytori can add indications and expand into new markets.  In 2011 we expect the company to initiate two key programs, an IDE program in the  U.S. for soft tissue defect repaid and a European cardiovascular program called ADVANCE.  Ultimately the success of these trials will determine the pace at which the ramp in unit sales and consumables continues.  So far, the clinical data has been exciting. 

Today’s price represents an attractive entry point.  We are maintaining our ‘Outperform’ rating and $10 price target.

 
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