International Stem Cell Corp (OTC:ISCO) reported Q119 revenues of $2.2m, down 15.8% compared with Q118 as both the biomedical and cosmetic businesses exhibited weakness. Biomedical revenues, which had been up 78.4% in 2018, were down 16.2% for the quarter. The profitability of the biomedical business also declined as revenues fell but expenses grew. The segment provided $0.8m in profits in Q118, but only $0.3m this quarter.
Business description
International Stem Cell is currently commercializing biomedical and cosmeceutical applications for its proprietary stem form of pluripotent stem cells – human parthenogenetic stem cells. It has also recently completed enrolment in its Phase I trial for its lead pipeline program, a cell therapy treatment for Parkinson’s disease.
Sales take a breather in key commercial operations
ISCO’s commercial operations leverage its human parthenogenetic stem cell (hpSC) technology and generate revenues to partially offset R&D spending for therapeutic development. Lifeline Skin Care (LSC) develops and sells skincare products and Lifeline Cell Technology (LCT) produces human cell culture products for testing. Together they generated $11.1m in sales in 2018, up 48.7% compared with last year, and provided $2.4m in operating profit, which was used to fund R&D. This quarter, however, sales were $2.2m and operating profit was only $0.2m.
Parkinson’s disease trial fully enrolled
The company recently announced the full enrolment of its Phase I trial of ISC-hpNSC in Parkinson’s disease (PD). As a reminder, patients in the study are being treated in three cohorts with 30m, 50m and 70m stem cells, delivered via intracranial injection. The single-arm, open-label study is being conducted at the Royal Melbourne Hospital in Australia. Clinical assessments are scheduled at six and 12 months following surgery with complete data expected in H120.
R&D expenses expected to fall over the near term
As the treatment phase of the Phase I trial in PD patients has been completed the company has stated that clinical trial expenses should ‘significantly decrease’. We now expect a decrease to $2m in 2019 from $2.4m in 2018, with some room to fall further. We currently expect expenses to re-accelerate in 2020 after PD data is available and a decision to move forward to Phase II is made.
Valuation: $33m or $4.45 per basic share
We have adjusted our valuation from $43m or $5.75 per basic share to $33m or $4.45 per basic share. The decrease in valuation is mostly attributable to lower estimates for the commercial business. We project that the company will need at least $45m in additional financing before profitability in 2024; this is up from $40m previously due to less forecast cash flow from the commercial business.
Slowing sales
The company reported Q119 revenues of $2.2m, down 15.8% compared with Q118 as both the biomedical and cosmetic businesses exhibited weakness. Biomedical revenues, which had been up 78.4% in 2018, were down 16.2% for the quarter and the reasons for the decline are unclear. The profitability of the biomedical business also declined as revenues fell but expenses grew. The segment provided $0.8m in profits in Q118, but only $0.3m this quarter. The cosmetics business continued its decline and sales were down 14.1% after being down 19.7% for 2018. The operating profit of the total commercial business decreased 73.2% to $0.2m in Q119. For the company as a whole (including its therapeutics development programs), the operating loss was $1.5m for the quarter, up 25.7% from $1.2m in the same quarter last year.
We have made some adjustments to our model, decreasing our 2019 revenue estimate for the commercial business from $13.0m to $9.9m and reducing our 2020 revenue estimate from $14.1m to $10.7m. This is due to an unexpected year over year decline in revenues for the biomedical business and the continued erosion of cosmetics, which we had expected to stabilize. We have kept SG&A roughly the same but reduced our 2019 R&D estimate to $2.0m from $2.5m due to company comments regarding costs following the completion of dosing for the Phase I trial. We may adjust them further in the future as we gain further insight into the PD development program and its future.
The company had $0.6m in cash on the balance sheet at the end of March. Subsequent to the quarter end, the company received an additional $0.8m in funds from its co-chairman and CEO, who already held a $1.0m promissory note from the company, due 15 January 2020. As part of the transaction, the old note has been surrendered and the company issued a new $1.8m promissory note to the CEO (accruing interest at 4.5% per year) with the same due date. We project that the company will need at least $45m in additional financing before profitability in 2024; this is up from $40m previously due to less forecast cash flow from the commercial business.
Valuation
We have adjusted our valuation from $43m or $5.75 per basic share to $33m or $4.45 per basic share. The decrease in valuation is mostly attributable to lower estimates for the commercial business. This was slightly offset by advancing our NPVs as well as the conversion of approximately $1.0m worth of a note payable into shares, which decreased the level of net debt.
One key risk to remember stems from the capital structure, which potentially creates sizeable dilution risk for minority investors. To date, ISCO has relied primarily on funds from management in the form of a combination of convertible preferred shares, warrants and options to fund its growth so that on a fully diluted basis management controls a significant portion of the company. While management has not converted the bulk of its sizeable holdings, investors need to consider the possibility of significant dilution risk at some point in the future. There remain approximately 15.5m potentially dilutive shares from 4.0m warrants, 5.5m options and 6.1m convertible preferred shares in addition to the 7.5m common shares outstanding. Also, investors should note that the convertible preferred shares are subject to anti-dilution provisions under certain circumstances, creating further dilution potential.
