Last week, Cytori Therapeutics (CYTX) was notified by the U.S. FDA that they will be required to conduct a clinical program prior to final approval of its Celution System. This was in-line with our expectations. Management plans to meet with the FDA in the next few months to discuss the requirements necessary for the Pre-Market Approval (PMA) program.

Assuming the meeting takes place this second quarter, Cytori should be in position to file the investigation device exemption (IDE) and initiate the program by the end of the year. Our best guess is that the FDA will require Cytori to conduct a 12-month study in approximately 100 patients looking at endpoints similar to the RESTORE-2 program conducted in Europe, including graft retention, patient and physician satisfaction and safety. If all goes smoothly, data should be available during the first half of 2012.

The filing could take place mid-2012. Therefore, we could be looking at a U.S. launch of the Celution System in 2013, with an indication for soft tissue filling and aesthetic body contouring in cosmetic and reconstructive surgery.

In the meantime, Cytori plans to ramp sales of its PureGraft product in the U.S. as a gateway product into the plastic surgery market. PureGraft is a low entry price, but high margin, useful tool that helps drive awareness and Cytori’s presence as a major player in aesthetic body contouring. The product compliments the Celase (Cytori’s proprietary enzyme product) and Celbursh (Cytori’s graft delivery instrument) products available for cosmetic and reconstructive procedures.

Ex-U.S. Market Key

The cosmetic surgery market outside the U.S. remains the key driver of revenues given the lack of reimbursement issues and growing movement toward the use of fat tissue procedures. We note that a direct sales model is the best strategy to target physicians and customers in the area of aesthetic body contouring, so management has become more active in the marketing and distribution of Celution around Europe and Asia.

Support for fat grafting procedures using Cytori’s Celution System has been growing nicely since the release of the interim data from the RESTORE-2 program in San Antonio in December 2009. Data at the San Antonio Breast Cancer Symposium, along with recent data at the Miami Breast Cancer Symposium in March 2010, demonstrated high patient and physician satisfaction, along with objective endpoints in both breast defect and overall breast shape post reconstruction.

In the above investigator-initiated studies for reconstruction, cell-enriched fat grafting with Cytori’s Celution System was safe and generally improved breast deformities and quality of life. Plus, the technique can be used alone or with other forms of breast reconstruction, including in reconstruction with implants.

We think these results bode very well for the future of cell-enriched breast reconstruction and Cytori’s Celution CRS System. We expect this to ramp significantly in the next few quarters as awareness, familiarity and reimbursement improve.

Expanding Cytori’s Use?

Beside the progress being made in cosmetic and reconstructive surgery, Cytori is looking to expand the development of new applications for Celution System. In 2009, enrollment was completed in two cardiovascular disease trials, both of which met key end-points of safety and feasibility. The APOLLO trial (n=14) treated patients with acute myocardial infarction or heart attack. The PRECISE trial (n=27) included patients suffering from chronic myocardial ischemia.

Importantly, the trials demonstrated that physicians were able to safely extract a meaningful volume of adipose tissue, separate and concentrate the stem and regenerative cells using the Celution System and deliver these cells into the heart during the same interventional procedure.

Management noted that investigators in APOLLO saw an average 45% reduction in perfusion defect size at six month in the first five of the 13 patients testing, and although the data is still blinded, and 4 of the 13 patients are on placebo, this significant reduction in defect size is clearly far beyond what should normally be expected in this post-major heart attack population.

Our guess is that a pivotal program in approximately 250 patients will be necessary for a marketing claim with Celution for use in an acute MI population. This could begin in 2011. Outcomes from both of these studies will be reported on May 7, 2010 at the Seventh International Symposium on Stem Cell Therapy and Cardiovascular Innovations in Madrid, Spain. Additional studies are planned or underway including peripheral vascular disease, heart failure, liver insufficiency, kidney ischemia, burn scar adhesions, HIV facial wasting, wrinkle therapy, GvHD, and others.

Partnership Possibilities and Summary

Management believes that the company is well-positioned to establish another substantial partnership in 2010. While we agree with management that all the requisite elements are converging, including clinical data, business model, clarified U.S. regulatory strategy, and growing body of successful clinical and commercial work, we are not expecting a sizable U.S. deal in 2010.

More likely is that the company signs another distribution partner outside the U.S. similar to the GE Healthcare or MBA Group deals. On the fourth quarter call, management noted it is analyzing numerous partnership opportunities, including the signing of a letter of intent (LOI) with a group in Japan.

We continue to be very positive on Cytori Therapeutics and 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. Sales of the system have been tracking with our expectations.

Ultimately, the clinical data will determine the pace at which the ramp continues. So far, the clinical data has been exciting, and with several investigator-sponsored programs ongoing. Additional data expected over the next few years will have an immediate impact on the financial results.

Today’s price represents a very attractive entry point, in our view. We are maintaining our ‘Outperform’ rating and $10 target.

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