New To Biotech Investing? Here Are Ten Due Diligence Questions To Up Your Game.

One of our prospective investors emailed me with 10 very insightful questions that can help less experienced investors analyze investment opportunities. This list of questions serves as a great example for new investors learning how to analyze investment opportunities (biotech in particular). 

Christopher - first and foremost, thank you for conducting such thorough diligence on Cytonics. This not only benefits you, but also other investors as well. 

Without further ado... here they are:

1. My main concern is that the future of the CYT-108 product and the value of the company is treated too much like a "sure thing" and that makes me very uncomfortable. My understanding is that the FDA process is fraught with peril, but I honestly don't know much about it, so feel free to correct me. And as far as company valuations, there is tremendous risk and I feel like the company downplays these too much.  Drug development is far from a sure thing, and all of our statements that are subject to uncertainty are worded as hypotheticals using language like "would, "should", "anticipated," etc. This language is reflected in the quotes that you selected (taken from our presentations and investor deck) below:

"We have completed our preclinical studies and will submit this data to the FDA in Q4 of this year. Once green-lit by the FDA, we will begin our Phase 1 study in Q1 2023"

"We will continue to look for exit opportunities as the safety and efficacy of CYT-108 is proven in Phase 1/2 human clinical trials"

"Ahead of the deal being announced, we would list Cytonics stock on a public stock exchange (e.g., NYSE, NASDAQ), allowing our investors to sell their stock into the public market at a premium to what they paid."

"Our investors will realize a return on their investment in one of two ways"

"This would effectively make the Preferred Series C shares being sold in this round tradable on the open stock market, allowing our private investors to sell their stock at a premium to what they paid"

"Our private investors will realize a return on their investment via a liquidity event (i.e. an IPO) ahead of the announcement of a licensing deal."

When asked directly, I am extremely transparent about the risk of investing in early-stage biotech research and development. I have gone as far as to tell people not to invest. In fact, the wording in your original question is actually one of my one-liners, verbatim: "the FDA process is fraught with peril".  Biotech is a high-risk / high-reward game, and it is not unreasonable to expect 10-20x multiples at IPO. Of course, this is no guarantee and should not be taken as investment advice.

2. APIC is described as a "critical and commercial success", but given the size of the market and the "conservative" estimate of 2% market capture for CYT-108, why are there only 8,000 patients for APIC after 7 years on the market? With 27 million with OA, 2% would be 540,000 possible customers. Is APIC much more expensive than CYT-108 will be? Given the drastic cost savings mentioned for CYT-108 over joint replacement, I wonder why APIC hasn't gained more traction. I suspect I'm missing something obvious! Your quotation is actually slightly incorrect, and the actual language that I used is material. What you meant to write was "APIC is described as a '[clinical] and commercial success." The "clinical" portion of that quote (said by me, Joey Bose, CEO) is actually more important, because it is a testament to the efficacy of our core technology (the A2M protein as a treatment for osteoarthritis). Your analysis of the commercial success of APIC is correct in that sales have been limited due to production and cost constraints. The APIC therapy also requires patients to come to the office for ~2 hours to receive their blood draw, followed by the proprietary A2M enrichment process, and injection into the arthritic joint. 

As a laboratory-manufactured product on an industrial scale, CYT-108 will overcome these practical and economic impediments. CYT-108 is a synthetic variant of the naturally occurring A2M protein, and will be capable of global distribution as an "off the shelf" product that will be ready for injection, at consistently high concentrations, as soon as the patient comes into for treatment. Additionally, the economies of scale that CYT-108 will capture will probably make it less costly than APIC. We have out-licensed APIC manufacturing and distribution to two independent entities, one in the human market and the other in the veterinary (specializing in horses). Equine physicians and horse owners/trainers are loving it, which is another testament to A2M as an effective treatment for osteoarthritis! Importantly, this further de-risks the development of CYT-108 (our engineered variant of the naturally occurring A2M protein).

3. Is the chairman still a practicing doctor? Is it a concern for investors that he may not be as available to consult for the company because of this?  Yes, but he only conducts 1-2 surgeries per month (to maintain is license and hospital affiliations). I (Joey Bose, CEO) speak with him multiple times a week and he attends all Board meetings.

4. What is J&J’s current or ongoing involvement in the company? Are they merely a passive investor or are you getting assistance or advice from them? Johnson and Johnson, by way of their corporate venture capital division (JJDC) owns 14% of Cytonics. At the moment they are a passive investor. However, they receive all of our investor outreach and are kept in the loop on our developments. I have a direct line of communication with a member of their Senior Counsel. Once we are in the clinic, J&J will be the first strategic that we show the data to and solicit interest in a partnership/licensing deal from.

5. If you leave aside all the costs with developing CYT-108, is the company actually profitable? I’m wondering if the APIC product can prove the company’s ability to bring a profitable product to market. That could be lost in the noise of the massive R&D expenditures. Our quarterly operating costs, excluding research and development, are approximately $100,000 per month (a combination of consultant fees, accounting, my salary, legal, insurance, and federal taxes). Our average APIC revenue (including the upfront license acquisition fees that have been amortized by our licensing partners) is approximately $110,000. So, we are basically break even. Keep in mind that our strategy is not to bring a profitable product to market. We plan on selling the company, or out-licensing the rights to CYT-108 once we have a positive Phase 2 dataset. 

6. Why is royalty revenue down so much from 2020 to 2021? COVID. 

7. How many employees do you have? Crunchbase says 51-100. If so, where is the R&D taking place? That's a lot of employees that need to be working somewhere! I have no idea where Crunchbase found that number, because the only employee is me (Joey Bose, CEO). We contract all other work out on a 1099 basis. All of our Directors work for stock options only (the Founder and Chairman included), our Chief Scientific Officer is paid an hourly consulting fee, and all other service providers (accounting, legal, etc.) are independent. Lean and mean.

8. I'm trying to understand whether CYT-108 is actually just slowing degeneration of cartilage or actually causing it to be regenerated. The graphs and charts in the investment deck refer to slowing degeneration, but then I run across quotes from Joey like this: "When no cartilage is present ("bone-on-bone"), it is difficult to regenerate since there is no tissue to proliferate." So is regeneration happening? If so, why is there no data on that regeneration? CYT-108 shifts the balance of cartilage degradation and synthesis in favor of regeneration, so it slows and eventually halts the degradative processes. This allows the cartilage to regenerate via its natural restorative mechanisms. Keep in mind that these experiments are conducted in very short time frames to efficiently assess the efficacy of the drug before we move into human clinical trials, so by measuring a reduction in damage we feel confident that over longer treatment windows we will be able to observe cartilage creation. Even if the cartilage does not regenerate fully, inhibiting the proteases that chew up the cartilage could have a significant impact on the longevity of quality of life. 

9. One of the mantras of the company seems to be "we've identified the root cause of OA". These "hyperactive proteases" are mentioned in some research I found, but it seems more like they are mediating the tissue destruction but not actually causing it. Am I missing something? I'm often skeptical in science if people say they've found the "one root cause" of something as body systems are so incredibly complex. Proteases are involved in a complex feedback loop that involves other proteins. Ultimately, the origins of a disease must be reduced to some molecular factor (whether that be a gene, strand of RNA, or protein/enzyme). That molecular factor must be addressed to rectify the disease. If you remember in my presentation, I say that osteoarthritis is a more complex disease than rheumatoid arthritis, which is why rheumatoid has been much easier to develop treatments for (with TNF-alpha inhibitors) compared to OA. The exact word I used is "multi-factorial" when describing the root cause of OA. There are multiple proteases that are upregulated within the joint cavity that are directly responsible for cartilage destruction. I can send you a schematic of the full feedback loop if you are interested (email me: joey.bose@cytonics.com).

10. In a previous comment, there is mention of this exit strategy I quoted below. It almost sounds like the announcement of a licensing deal is deliberately held back until after the IPO? Is that correct? 

"Prior to signing a definitive licensing agreement, we will generate "buzz" in the capital markets (with the help of an investment bank) while we solicit interest from licensing partners. This will educate investors on our technology and prime the market for our big splash on a stock exchange prior to the deal with Big Pharma. The value of the public stock will be assessed based on the specifics of the licensing deal, which involves a large upfront payment to acquire the exclusive development and sales rights"

Correct, it would make the most sense to IPO before announcing a licensing deal, and then release the press shortly thereafter. This is an example of a possible exit strategy meant to demonstrate our foresight and is not a definitive plan. Our exit strategy will begin to take a more concrete form once we have human clinical data and solicit interest from strategics. In a perfect world, a Big Pharma buys out all of our shareholders in a private acquisition after Phase 2 is complete. 

Bonus question: If your company is acquired, what will you do next? I think you are referring to me, personally (Joey Bose, CEO). My personal ambition to to become a serial biotech entrepreneur, and go on to form my own biotech or join another early-stage drug development operation. I would like to world on cancer immunotherapies next. I've also considered about moving to the buy-side of biotech financing, such as healthcare venture capital. 

Please feel free to email me with questions: joey.bose@cytonics.com

Learn more about Cytonics: invest.cytonics.com