Date : 24/11/2020

Cynata Therapeutics Limited

ASX :

CYP

Market Cap : $100.72 Million

Buy

52 Week Range : $0.58 - $1.30

Share Price : $0.86

A firm with a diverse product line and a technology that sets it apart. Cynata has zero debt and enough cash runway to meet its next milestone. A "Buy" from us.

Company Analysis

Cynata Therapeutics Limited (ASX: CYP) is an early stage biotechnology company that uses stem cell technology to develop treatments for several medical conditions. Stem cells are bid to play a key role in the future of medicine. Cynata’s stem cell technology is known as Cymerus and it is based on a very versatile stem cell known as mesenchymoangioblasts (MCAs). In a nutshell, they have a wide array of applications and Cynata is leveraging this technology platform to create multiple products to treat a wide variety of medical conditions. Cymerus is also known to have another very important property – the manufacturing process of Cymerus ensures that it can be produced in unlimited quantities without the need for new stem cell donors. In the medical field, this regenerative property is a very unique differentiator and is also an economic advantage over competitors in the long-term.

Cynata, similar to most biotechnology firms, is heavily reliant on its partners. While the firm works towards perfecting their products and seeking approvals, they also partner with leading companies to leverage their technologies to them for a royalty payment. Their first product, CYP-001 has been licenced to Fujifilm for GvHD. As we mentioned earlier, Cymerus has a wide array of applications. The picture below shows what stage each of their products are at:


Source: Cynata Therapeutics Limited

Company Updates

On the 11th of November 2020, Phase 3 clinical trials were announced for Cynata’s product that is being tested to treat osteoarthritis. The trial is being sponsored by the University of Sydney and funded by the grant provided by NHMRC, and it is designed to test 440 patients.

Cynata’s treatment for Covid19 has shown positive signs in the early stages. It is being used to treat ARDS, Sepsis, and CRS – all chief causes of death in Covid19 patients. The trials are on-going and are being conducted in collaboration with Cerebral Palsy Alliance Research Institute and Covid19 Stem Cell Treatment Group.


Source: Cynata Therapeutics Limited

The usual process of manufacturing uses cells from multiple donors to produce limited quantities of MSCs from each donation. The patients then require 8-12 infusions during therapy. Cynata has a patented manufacturing process that gives it an upper hand over peer companies, and it is demonstrated in the picture above. This process ensures that the costs and risks are minimised for both – the firm and the patients, de-risking the company.


Source: Tradingview.com

The stock price has been very volatile in 2020. This is expected though given the early stage of the company’s products. The only revenue that the company generates has been through partnership agreements. This leads to swings in investor mood and momentum.

Industry Analysis

The market for all the medical conditions that Cynata’s products are looking to treat are big. Osteoarthritis is the largest as over 30 million people in the US suffer from it, and there is no cure for the condition yet. Athletes and the elderly have been craving for a treatment method for this very painful medical condition, and this has resulted in several companies aiming to solve this conundrum.

The treatment of Covid-19 is also very lucrative for anybody who can come up with a method of treatment. Currently, there are over 20 million active cases of the virus and it is going to be sometime before we have a vaccine in our hands. The product candidates that treat ARDS, SRS and Sepsis all have big market opportunities, and they have been inflated due to Covid19.


Source: Cynata Therapeutics Limited

Investment Thesis

An early-stage firm in biotechnology such as Cynata does not generate positive cash flows. While the firm progresses in its product development phases of all their candidates, the only revenues that Cynata generates is through royalty payments from its partner companies. Cash flow management is of utmost importance at this stage as the firm has to ensure it raises and has enough funds to take it through to its next milestone. Low debt levels are desired since meeting debt obligations may become a hindrance.

At the beginning of the September quarter, Cynata had a cash balance of $13.6 million. The capital structure is 100% equity capitalisation. The firm has zero debt on its balance sheet. The cash flows during the latest quarter shows $898,000 towards R&D, $155,000 worth of marketing expenses, $283,000 of staff costs, and $268,000 administration costs. The net cash from operating activities therefore stood at a loss of $1.56 million. At the end of the quarter, Cynata hence had a cash balance of $12.3 million.

The predictability of these costs is difficult to determine. During the year, all quarterly performances have shown different levels of net cash from operations. The firm has also previously received government grants and tax benefits. In the latest quarter, R&D and staff costs had increased as the firm added human capital in the manufacturing and clinical departments.

The annual operating costs shows effective management of capital as there is not too much volatility in expenses. As the firm gets closer to manufacturing and the number of clinical trials it is performing increases, the operating costs increases. With $12.3 million in the bank, Cynata has enough cash runway to take it through FY2020.

The partnership with Fujifilm has already brought it revenues for Cynata. A further $2.86 million is expected to be received once the Phase 2 clinical trials are completed. The revenue potential from this agreement is over $100 million – mainly derived from license fees and royalties.

The Phase 3 trials that have begun for the treatment of Osteoarthritis is estimated to take over a year for completion. Hence, there is no revenue forecast until FY2022 even if everything goes well with its leading product candidate. The product that has the potential to treat Covid19 induced medical conditions is in its Phase 2 trial. This has the potential to be fast tracked for its approval. However, we have already seen that the FDA has been cautious in approving drugs for the treatment of Covid19 in Mesoblast’s case (one of Cynata’s competitors). The possibility of a vaccine arriving before the Cynata’s product candidate is approved is significantly high now, then it was a month ago. This decreases the potential for revenues the candidate can bring in by taking advantage of the pandemic.

The only revenues that are expected during this time are from royalties. We estimate the firm to raise capital again close to the end of FY2020 – that is, in June/July. Cynata has demonstrated its ability to raise capital in the past. With significant progress made on its product pipeline during the year, raising additional capital should not be too much of a headwind for the firm.

Recommendation

Cynata is in its very early stage of product development. However, it has several product candidates in its pipeline given the wide array of use case scenarios for its technology. It looks to have solved the problem of quantity in stem cells. While it may not generate positive cash flows immediately, the prospects of the firm are high. Thus, the stock comes with exposure to volatility in the short and medium-term. We recommend members with the risk appetite to “Buy” as it checks the below boxes:

  • A high total addressable market
  • Cash runway to take it through to its next stage
  • Multiple product candidates
  • Potential for commercialisation partnerships
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