San Diego’s Cytori Gains Cash; Loses a Patent

7/29/09

Cytori Therapeutics, (NASDAQ:CYTX) a San Diego company developing therapies from fat, is bulking up its cash position. Since March, the regenerative medicine has company raised more than $15 million through private equity sales. The latest deal—inked with Seaside 88 of Florida in June—gives Cytori an infusion of many thousands of dollars every two weeks for up to six months. The actual amount Cytori receives from Seaside is linked to its stock price.

These moves should ease investor concern about Cytori’s ability to survive the worst recession since the Great Depression. At the end of the first quarter, Cytori warned that its ongoing need for outside financing, coupled with a worldwide credit crunch, raised “substantial doubt as to the company’s ability to continue as a going concern.” By the end of March, Cytori had reduced its headcount to 85 from 126 employees and suspended or eliminated most development projects to conserve cash. The company has an accumulated deficit of $165 million through the first quarter, during which it posted a $6 million loss.

The latest rounds of financings leave Cytori’s coffers far from fat. But they should provide the company with enough cash to fund operations through the end of 2010, according to Zacks Research. That should give Cytori the running room it needs to progress toward FDA approval of its lead product, a device that can isolate and process regenerative cells from a patient’s fat tissue, readying it to be returned to the patient during the same procedure.

The device is approved in Europe, where Cytori is currently conducting a 70-patient study of its use in breast reconstruction following partial mastectomy surgery. Fat is suctioned from a patient’s midsection, processed, and injected into the breast, where it grafts to existing fat tissue, the company says. A second clinical study underway in Europe looks at the use of fat-derived cells in 27 heart patients with chronic myocardial ischemia, or angina. Cytori believes the fat-derived cells may promote the growth of new vessels to increase blood flow in the heart. Results of the six-month safety and feasibility study are due during the first half of 2010.

The company traces its roots to UCLA, where its founder and president, Marc Hedrick, was a plastic surgeon. Working with a team from the University of Pittsburgh, Hedrick and colleagues reported in the journal Tissue Engineering in 2001 that they had converted fat from liposuction patients into bone, cartilage and muscle. Cytori exclusively licensed that discovery and others from the University of California, which claimed a stake in the invention because of Hedrick’s work.

Cytori says its products are covered by other patents and do not use the discovery, which turns out to be a good thing. Last week, a federal appeals court ruled that the University of Pittsburgh—and not UCLA—owned the discovery because idea of isolating fat stem cells that can be differentiated into other cell types first occurred to researchers at Pitt. In so ruling, the court removed Hedrick’s name from the patent and effectively terminated Cytori’s right to use the invention, known as the ‘231 patent. The names of other UCLA researchers were also stricken.

Cytori spent more than $5.2 million since 2006 to defend the patent, a substantial sum given the company’s financial position. Although it was not a defendant, Cytori was obligated to support the litigation under the terms of its licensing deal with the University of California, company spokesman Tom Baker said. Hedrick, however, was a defendant; he stood to receive seven percent of the royalty payments made to the University of California by licensors—in this case, Cytori. (The company says Hedrick’s royalty agreement predates his employment there.)

The decision has no effect on products or clinical applications under development, Cytori says. However, the litigation did force the company to discontinue production of fat stem cells it sold through a partner for research purposes. All rights under the ‘23l patent now belong to Cytori rival Artecel of Sunnyvale, CA., which holds an exclusive license from Pitt.

Denise Gellene is a former Los Angeles Times science writer and regular contributor to Xconomy. You can reach her at dgellene@xconomy.com Follow @

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