New article 11/18 : Boston Business Journal

Ocata's $379M acquisition leaves many small investors disillusioned

Don Seiffert
BioFlash Editor Boston Business Journal
Nov 18, 2015, 10:47am EST


On a conference call last week, Ocata Therapeutics CEO Paul Wotton told investors that results expected within a few months from an ongoing mid-stage trial “could be a value creating event for the company.”

Regarding the company’s stem cell-based treatment for dry age-related macular degeneration — a market which is expected to hit $9 billion by 2023 in the world’s major drug markets — he made reference to the success it saw in an early-stage trial, and pointed to results expected from a Phase 2 trial next year.

“As I’ve stated before, our goal is to own the eye with respect to our novel therapeutic approach as we are the leading company in the clinic with this type of technology,” he told investors the morning of Nov. 9,

Less than 14 hours later, the Japanese drug firm Astellas Pharma (ALPMF) announced that the board of directors of Ocata (Nasdaq: OCAT) had unanimously approved an agreement to be acquired for $379 million, news that’s left a lot of investors scratching their heads and asking, what happened?

Many investors say the acquisition price — a 79 percent premium to its stock value as of the close of markets on Nov. 9 — doesn’t come close to reflecting the company’s real value. While it’s not unusual for some investors of any company that gets a buyout bid to want the company to hold out for more, the circumstances around Ocata’s recent history — overcoming SEC sanctions regarding illegal stock sales and executing a 100-for-1 reverse stock split to claw its way back from penny-stock territory only to be targeted by short-sellers — make those arguments seem more convincing than usual.

The company’s shares — which peaked at nearly $12 a share in September 2014, shortly after the reverse stock split — were down nearly 70 percent since then, despite no real bad news from the company. What has happened has been an outright attack by the same group of short sellers who earlier targeted Beverly biotech Cellceutix (OTC: CTIX), which appears to be mostly responsible for a 50 percent stock drop since June.

In that light, the proposed acquisition price represents about a 30 percent premium to where Ocata’s stock price was for the first six months of this year, before short sellers started driving it down.

Randall Mathieson, an Ocata investor for six years, told me in a phone interview this week that “anybody that shorts a company that’s trying to cure blindness has something wrong with their moral compass.”

Over the past week I’ve been contacted by 11 current Ocata investors via email, and spoken to a half dozen of them by phone, including Mathieson, who all cry foul over the proposed acquisition by Astellas. Some say they will take a loss at the proposed per-share price of $8.50, while others say what while they’ll make a modest gain, it’s not much more than if they put the money in a savings account for the past few years.

“It’s as though you worked long and hard to set the table for a wonderful meal, then you’re told ‘It’s not for you. You’re getting a cold ham sandwich’,” said Mathieson.

Like many of the investors I spoke to, Mathieson said he didn’t back the company purely for financial gain. He also believes in the potential of stem cells to dramatically improve human health. He himself was diagnosed with what was thought to be an incurable form of blood cancer 10 years ago while he lived in Lynnfield, and told he only had five years to live. He underwent a stem cell transplant at Dana Farber Hospital and the cancer is still in complete remission.

Another investor who lives in Florida, Edward Assad, says when he first got involved he thought the company’s chief science officer, Robert Lanza, was a “genius” and he wanted to “get in on the ground floor of a big thing.” But he also has Parkinson’s and held out hope that the company’s unique stem cell treatments — thought to be potentially application to a huge variety of diseases — might one days cure his disease. In the hands of its new owner, Assad says he doesn’t know what will become of the technology.

William McCormick, an investor in the Chicago area, argues that the proposed price tag values the intellectual property of the company at zero. Ocata currently has $349 million in retained losses, most of which he says can be counted as an asset by an aquiring company. Combined with the $32 million in cash and other assets, the bid offers essentially nothing for the company’s potential stem cell therapy. That technology still needs to be proven in late-stage trials, but considering that an early-stage trial published last fall show it helped improve vision in 10 of 17 patients, he argues that the likelihood of success in the Phase 2 trials is high, and believes the company should have held out for stronger data that could have significantly increased its value.

While there’s no way to know the sentiment of the majority of shareholders (more than 80 percent of whom are non-institutional, meaning they are largely individual, private investors), the backlash has been loud, and raises the question of: What happens if a majority of shareholders refuse to sell to Astellas?

Contacted for this story, Ocata’s management declined to comment on anything regarding the potential acquisition. The statement announcing it said “the tender offer period is expected to commence no later than Nov. 25, 2015, and will expire 20 business days after its commencement, unless otherwise extended... in no event will Astellas be obligated to extend the Tender Offer beyond May 9, 2016.”

In past articles I’ve documented the struggles of the Marlborough-based biotech firm, previously called Advanced Cell Technology and traded over the counter under the ticker “ACTC”. In brief: the company was founded two decades ago and withstood anti-cloning protests in the 1990s before hitting on its current use for the stem cell research pioneered by MIT professor Robert Lanza, which is focused on dry age-related macular degeneration and a rarer potential cause of blindness called Stargardt’s. An SEC investigation into the sale of unregistered shares in 2008 and 2009 resulted in a $4.1 million fine in 2013, and Wotton’s immediate predecessor as CEO, Gary Rabin, stepped down in January 2014 after an investigation that he sold shares without reporting them as recently as 2013.

It’s possible to read the story of the frustration Ocata’s investors feel in several ways. One is that it’s not different from dozens of biotech acquisitions in recent years, where investors believe a company’s potential is worth far more than others in the industry do. But it also points to the fact that the sharp rise in biotech stocks over the past few years has mostly benefitted big institutional investors, leaving individuals who want to join in the profits far behind.

Zachary Hartman, who lives in Atlanta, Georgia, says his stock will have gained about 20 percent in seven years. “In my mind, that’s a bad outcome,” he said. He says he’s “a little more deflated than furious” at the same, saying in an email that “Ocata’s technology, by all accounts, appears to be quite substantial and had the potential to make a serious impact on some major diseases. There has always been competition and the threat of issues. That’s the risk we took on.”

Wayne Brown, who lives in the Pittsburg area, invested in Ocata in 2012. He said the managers of the company, who received shares of the company for free as part of their compensation package, will make out far better than the longtime investors. Wotton, who look over last year, currently owns about 270,000 shares, according to the most recent SEC filings. He stands to get $2.3 million in the sale, and more if he receives any of the 3 million shares that became effective earmarked for employee compensation just days before the sale was announced.

Regarding the way the sale was handled, Brown is blunt.

“We were locked out and set up,” he said.