Dutton Report 9-16-05 Downgrade to Neutral
Rating: Neutral
MultiCell is Changing the Color of Its Spots – Evolving from a Services to a Therapeutics Company
MultiCell’s Marketing Strategy Is Apparently Not Going Smoothly –
Revising Our Estimates and Investment Rating from Speculative Buy to Neutral
On September 7, 2005, MultiCell Technologies Inc. (MultiCell) announced the establishment of a newly created entity,
MultiCell Immunotherapeutics Inc. (MCTI). MCTI will be the new name of the company now called Astral Therapeutics
Inc. MCTI will be engaged in the development of immunoglobulins that are engineered to bear specific disease-associated
peptides. All of MCTI’s current products are preclinical in their development process, and it is our understanding that the
intellectual property surrounding the Company is applicable in a number of disease states, including multiple sclerosis,
diabetes, cancer and infectious diseases. It is also our understanding that once MultiCell fulfills its initial funding
obligations, the Company will own approximately 67% of the outstanding capital stock of MCTI, while Alliance
Pharmaceutical Corp. (OCTBB:ALLP), which sold the assets of Astral to MCTI, will own approximately 33%.
MultiCell’s initial financial obligations total approximately $2.4 million and the issuance of a warrant for approximately
400,000 shares of MultiCell common stock with an assumed exercise price of approximately $1.20. Approximately $2
million of this obligation will go directly into MCTI coffers for research and development and general corporate purposes,
with $1 million of this amount being paid immediately and the remainder paid over approximately one year. We believe
MCTI’s research and development costs to date have been approximately $12.1 million.
In regard to MultiCell’s service business as an OEM supplier to pharmaceutical companies for drug discovery indications,
we now believe the Company’s new business strategy of selling its line of immortalized nontumorigenic hepatocytes in
shrink-wrapped vials is not going as well as expected. We believe this shrink-wrap selling strategy, similar to Microsoft’s
(NASDAQ:MSFT) packaging of their Windows® software product, is a huge improvement over MultiCell’s previous
strategy of licensing pharmaceutical and biotechnology companies and others the right to grow and use the Company’s
hepatic cell lines in-house for essentially an annual one-time sale. Because the annual fee for this license was large,
XenoTech LLC, a privately owned company and MultiCell’s marketing and distribution partner, found the sales cycle to
be very long, as most prospective customers felt they had to perform their own in-house due diligence. Additionally, we
MultiCell Technologies Inc.
Page 2 of 6
believe the decision maker for the product’s purchase had shifted to management from the scientists, with the sales
agreement often ending up with the customer’s attorney.
We believe MultiCell/XenoTech’s new shrink-wrap strategy allowed the Company to significantly lower the average
selling price (ASP) of the product because they now have a recurrent sale. We also believe the decision maker for product
purchasing has reverted to the appropriate party, i.e., the scientist.
However, we now believe that the execution of this strategy is not progressing as well as expected, with XenoTech still
attempting to negotiate licenses with customers and not fully embracing the shrink-wrap strategy. We believe XenoTech
owes MultiCell a minimum royalty payment in November 2005 of approximately $425,000 to maintain distribution
exclusivity with MultiCell. This may give MultiCell the opportunity to revise the relationship, which may take several
forms – from doing nothing to making the relationship nonexclusive to selling the service component of the business to
XenoTech altogether.
We believe the important point for investors is our belief that the new shrink-wrap sales strategy is not working as well as
expected at this point, and we are, therefore, decreasing our revenue projections in anticipation that revenues will continue
to be flat until a clear and convincing trend toward the new sales strategy appears. We are lowering our projected revenues
from approximately $2.8 million to $400,000 for FY2006 and adding a minority interest expense line to account for
MultiCell’s share of expenses for MCTI going forward. Additionally, we have lowered our investment rating from
Speculative Buy to Neutral.
Conversations with the management of MultiCell leads us to the conclusion that the Company is attempting to transform
itself from one whose primary focus is on services as an OEM supplier of immortalized hepatocytes to a therapeutics
company. With MultiCell making this enormous strategic decision, we wonder why the Company chose not to focus on
deriving therapeutics from proteins obtained from their own in-house immortalized hepatocyte lines versus obtaining
outside technology. MultiCell’s hepatic immortalized cells have the ability of serving as “biofactories” for the production
of proteins normally produced by the liver. These include the clotting factors, alpha-1 anti-trypsin and growth factors.
Similar to the purchased MCTI technology, we believe products from this technology will not produce revenues for some
time, as they would need to go through the regulatory approval process, etc. However, the markets the products would
participate in are very large, and we believe there is an unmet need. A variety of therapeutic proteins are currently
manufactured recombinantly. It is well know that patients become tolerant to the recombinant compounds over time and
require larger and larger doses. This should not be a problem with proteins from MultiCell’s immortalized cells, as the
proteins are manufactured by a human, nontumorigenic liver cell, just as in the human being.
MultiCell chose, instead, to pursue the therapeutics strategy by obtaining outside technology. We believe one reason
MultiCell chose to take this position is the potential synergies between the MCTI technology and the Company’s current
position in stem cell technology. In December 2003 MultiCell obtained the exclusive worldwide rights to a patent filed by
the Company’s Senior Vice President and Chief Scientific Officer, Ron Faris, Ph.D., involving methods for the
identification and extraction of stem cells from adult liver tissue. Liver stem cells may be useful in the treatment of liver
diseases and blood clotting disorders. MultiCell’s adult stem cell technology has two distinct advantages over embryonic
stem cells: its noncontroversial, nonfetal origin, and its lack of animal protein contamination.
While we believe it is admirable for MultiCell to want to transform itself into a therapeutics company with its associated
higher valuations, we believe the Company has huge hurdles to overcome before it is able to convince the investment
community to reward them with these higher multiples. In our opinion, these hurdles include a public relations campaign
to disseminate word surrounding “MultiCell Therapeutics,” potentially divesting itself of its OEM services component,
putting together a solid scientific team with experience in drug development, and achieving success with its lead product
for whatever indication the Company chooses in human trials.
MultiCell Technologies Inc.
Page 3 of 6
Our revised investment rating of Neutral is, therefore, based on two assumptions: (1) stagnant revenues over the near
term, as the Company sorts out its difficulties with marketing strategy for its hepatocyte cell line, and (2) the hurdles that
need to be addressed and overcome that are common to any very early stage biotechnology company. |
