Ocata Therapeutics To Trade On Nasdaq Global Market: Can The Bulls Finally Rejoice?
$OCAT Seeking Alpha
Biotech Research Group
Feb. 26, 2015 9:33 PM ET | 6 comments | About: Ocata Therapeutics, Inc. (OCAT)
Disclosure: The author is long OCAT. (More...)
Summary
Ocata completes SEC filing to commence uplist to Nasdaq Global Market.
Patience can be rewarded as Ocata takes a major step forward toward potential partnerships.
Institutional coverage now available to Ocata.
After months, if not years for some, Ocata shareholders were pleasantly surprised by the after-hours filing of the Form 8-A on February 23, 2015 by Ocata Therapeutics (NASDAQ:OCAT), which provides for registration of certain classes of securities pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934.
The filing indicates that trading shall commence on February 26, 2015, and that shares will be listed on the Nasdaq Global Market under the current ticker symbol, OCAT.
Bulls are looking for a long awaited payday, but what immediate benefits can shareholders expect from this uplist?
First, institutional investment houses will now have the ability to invest into common shares of Ocata. Although many have argued that institutional ownership was already available to Ocata, the fact of the matter is that most every hedge fund and/or mutual fund that I have researched clearly prohibits fund assets to be invested in any bulletin board stock, regardless of future prospects. These restrictions can be found in the fund prospectus, and are consistent between funds, even microcap and emerging microcap stock investment funds.
Second, Ocata shares will now trade in a far more transparent and orderly market based on presumed and realistic supply and demand issues. Investors can have increased confidence that the trading of shares will be far more scrutinized by both the SEC as well as the Nasdaq, as it relates to regulations not regularly enforced on bulletin board and pink sheet stocks.
Third, with Ocata qualifying for listing under the market value standard rule by having a market value in excess of $75 million, the company has positioned itself to not only attract institutional interest, but to attract institutional investment as well. Ocata was hamstrung in efforts to receive tier one funding while trading on a pink sheet exchange. The new listing has the potential to open new avenues of potential financing and partnership agreements.
Shareholder Frustration
Although many long-time shareholders have been understandably frustrated, new management has certainly not wavered on their promise to uplist the company, nor have they become complacent in exuding confidence about results of the clinical studies.
And until shareholders receive a full explanation as to why the recent rights offering was withdrawn, it might be prudent to allow the benefit of the doubt to remain on the side of management as they execute the business plan though an extremely complex set of dynamics, inclusive of dialogue with the FDA, consolidating information from participating clinics and doctors, and the steps necessary prior to the implementation of a new phase 2 clinical trial.
The stem cell trial that Ocata is conducting is revolutionary and can change the medical landscape for how illnesses and disease might be treated in the future. Because of these groundbreaking studies, the FDA will closely scrutinize all aspects of these trials, especially monitoring early phase 1/2 data for safety, tolerability and side effects. Each step in the process for Ocata will need to be precise and deliberate, and management must design and execute each stage of their clinical trials with keen forethought.
Shareholders have often expressed frustration with Ocata's current market cap of approximately $211 million, as it pales to peer companies such as Geron (NASDAQ:GERN) at $481 million, Pluristem Therapeutics (NASDAQ:PSTI) at $216 million and Mesoblast Limited (OTCPK:MBLTY), which has a market cap of $1.1 billion.
Granted, not all apples to apples, but when comparing these companies and their clinical progress, Ocata has demonstrated a clear advantage in both the intellectual property portfolio as well as current collective data from current clinical trials. But at what point might shareholders expect to see the company's market value appreciate and allow some of the frustration to abate?
Financials Are Always Key
With Ocata now securing the uplist, the company will need to demonstrate that additional financing will not be a drag on future valuation. The CEO has guided during recent company presentations that shareholders can expect a joint venture in the second quarter of 2015. If a deal is announced, and the terms do not include a dilutive mechanism, then my expectation is that the market value of the company's stock can rise to levels corresponding with some of its peers', several which have been cited above.
Except for safety and tolerability issues, I view the largest risk to shareholders is the current uncertainty about future financing. If Ocata addresses this issue in certain terms, institutional investors might be beholden to undertake a position in the company. Couple the potential institutional investment with the relatively low share count and float of 34 million shares, and the recipe can be bullish in the near term. To the contrary, if the company permits continued uncertainty as to its future financial health, I do not see how shareholders will be rewarded in the near term, except for trial-based positive developments only.
Current Company Financial Position
As of the most recent quarterly filing from September 30, 2014, Ocata had approximately eight million dollars in cash and cash equivalents, and maintained an equity line of slightly over twenty million dollars from its Lincoln Park share purchase agreement.
The average cash burn rate for the prior several quarters has been roughly seven million dollars per quarter. This is an actual cash burn rate, leaving accounting treatments aside and recognizing true cash expenditures only. We do not yet have a record of how well the new CEO can reduce spending to reflect tighter controls where possible, but with an expected quarterly burn rate of seven million dollars, Ocata has a small amount of breathing room to finance itself through the third quarter of 2015. However, the Lincoln Park facility is dilutive in nature and could cause a price overhang, as Lincoln Park would have the opportunity to sell shares into an active market.
It is for the reasons cited that management must quickly address the current uncertainty that the market holds for the future financial health of Ocata. If management can eliminate the doubt, the company can be very well positioned for an increase in share price, based on its strong intellectual property portfolio, as well as its compelling early trial results that have been published in well-respected medical journals.
Setting The Stage
My belief in Ocata has not wavered, because I embrace the science, the medical team and the new leadership at Ocata. When Paul Wotton took over as CEO late in 2014, I looked at this investment as a "new opportunity". Clearly, Wotton has already delivered on several of his primary goals.
First, he successfully implemented a reverse split to get the corporate structure back to a respectable outstanding share count of less than thirty five million shares outstanding.
Second, he has successfully re-branded the company from Advanced Cell Technology to Ocata. More than a name change, this step was necessary to advance the company during its next generation of growth. Although many of the past transgressions that plagued the company will still reside in its quarterly filings, Ocata will have the opportunity to build a new brand and allow its accomplishments to remain unblemished by prior decisions.
Third, Wotton has delivered on his goal to uplist the company in the first quarter of 2015. The 8-A filing on February 23rd, accompanied with the commencement of trading on February 26th, is a significant milestone in the corporate history and was quickly delivered by Wotton.
Fourth, although not materially official, the company has presented in at least two corporate road shows the intent to initiate a joint venture/partnership in the second quarter of 2015. Indications have been that Ocata will partner off some of its non-core assets and intellectual property to boost capital without diluting potential profits from its core studies.
Within his first eight months of taking the leadership position at Ocata, Wotton has certainly set the stage for a promising future, accomplishing in less than one year what prior management was not able to accomplish in a decade.
Setting Sights Forward
As investors set their sights forward, it is vital to comprehend the recent milestones that have transpired at Ocata in a relatively short period of time.
A rebranding of the company
The hiring of talented management personnel
The reverse split and rebalancing of the corporate structure
An uplist of the company stock to Nasdaq Global Market
An announcement of a pending joint venture in Q2 of 2015
The release of significantly positive trial data
Although the road is certainly nowhere close to being completed, Ocata is continuing to position itself for growth through a rebirth of corporate identity. As of today, Wotton and his management team have delivered yet another key piece to fulfilling the development plan by announcing that two additional patents were granted to Ocata, which may have significant value to the future of the company. These patents offer broad protection for hemangioma-derived mesenchymal stem cells that can offer a broad range of possibilities for the company, either in-house or on a licensing basis. Read about the patents here.
Although many of these recent milestones might not have occurred within the same timetable as retail investors might have been hoping for, the reality is that NEW management is delivering on its critical mission to deliver shareholder value in a timely and efficient manner.
Valuation
The trials being conducted by Ocata are revolutionary in scope. Setbacks can and will occur as these trials progress. Providing a "fair" valuation is difficult. But shareholders should have confidence that once management addresses its financial necessities, a better valuation may logically follow occur. With a potential key partner in the wings to provide financial stability, coupled with the ability to protect its patent portfolio, the easiest road for companies wishing to enter the field of stem cell therapy might find that the cheapest road to success would be through Ocata, making the choice of paying license fees in lieu of potential infringement damages. A higher valuation can be argued on the merits of licensing opportunities.
The market should also value the medical team at Ocata, recognizing leaders in the field such as Dr. Lanza and Dr. Langer, both of whom have been recognized worldwide for their contributions to the study of cell therapy.
Further, Ocata has identified an addressable market in excess of three billion dollars for Dry AMD alone. Although pharmaceutical companies maintain that billion-dollar opportunities exist in other areas for treatment of Dry AMD as well.
Summing It Up
For those that have remained focused on the long-term potential for Ocata, I believe that we have just witnessed the first major step in management's promise to increase shareholder value. Once the terms of the joint venture are announced, coupled with the comfort of securing additional financing, if needed, I expect that the market will finally reward shareholders for their long-awaited and often torturous commitment to Ocata.
