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The New Kid In Town: A First Look at Capricor Inc.'s Business Fundamentals

Can Capricor's proposed reverse merger see its cardiac stem cell product across the finish line?

September 30, 2013

In a year so far blooming with proposed or consummated stem cell IPOs (including the newest SCSI component, Cellular Dynamics International, and Fate Therapeutics), California-based Capricor, Inc., a privately held developer of cardiac stem cell-based therapeutics for heart tissue regeneration following heart attack, recently announced its intention to conduct a reverse merger with publicly traded penny-stock company Nile Therapeutics (OTCMKTS:NLTX), subject to approvals by the shareholders of both companies. Completion of this merger would grant Capricor much-needed access to public capital markets, necessary to complete its current Phase I/II ALLSTAR trial of its CAP-1002 candidate therapeutic (an allogeneic cardiac stem cell preparation derived from cardiospheres prepared from cadaveric heart; so-called cardiosphere-derived cells, or CDCs).

Capricor’s CDC candidate has provided some much-needed diversity to the quest to develop stem cell therapeutics for heart disease, which is currently dominated by autologous mesenchymal stem cells and other bone marrow products that have, as yet, shown little or no promise in clinical trials. But the company’s privately held status has thus far denied us a look under the hood sufficient to address the question of whether little Capricor has the financial and business resources required to survive CAP-1002’s long march from lab bench to clinic. That changed last Friday, when Nile Therapeutics filed a preliminary proxy statement with the Securities and Exchange Commission in preparation for an upcoming special meeting of stockholders to approve its merger with Capricor. That filing provides us, for the first time, with a useful peek inside Capricor’s business. Here follows the short version of that story.

Capricor has 15 current full-time employees, and has been on an extended growth spurt of late, with R&D expenditures rising from $1.7 million in 2011 to $2.6 million in 2012, with 2013 R&D expenses likely to reach $5 million (based on reported expenditures through June 30th of this year). General and administrative expenses have similarly climbed, from $0.7 million in 2011 to $1.4 million in 2012, and likely to reach $2 million by the end of this year.

Capricor’s net loss for 2012 was $2.1 million, with revenues that year (from grants and investment income) of $1.9 million. The company ended the year with $170,000 in cash.

Since 2006 the company has completed three funding rounds. In 2006 it sold 940,000 convertible preferred shares for $3.0 million, followed by another 737,000 shares in 2008-2009 for $2.8 million, and 1.5 million shares in 2011-2012 for $6 million. Institutional investors include Broadview Ventures, Pet-Cal Biotech Investors LLC, Cornerstone Biotech Investors LLC, Eastport Investments, Inc., Cedars-Sinai Medical Center, and MDBTI/Edward St. John.

In February of this year Capricor won a $19.8 million forgivable loan from the California Institute for Regenerative Medicine (CIRM) to fund Phase II of its current Phase I/II ALLSTAR trial. The loan has a 3.5 year distribution period and a 5 year term (extendable annually up to 10 years). CIRM may cease disbursements during the distribution period if an unspecified no-go milestone occurs. Repayment with interest (the one-year LIBOR rate + 2 percentage points) is due at the end of the loan period. Upon achievement of "certain revenue thresholds" the company may also be required to pay a premium of up to 500%. The loan may be forgiven during the term if Capricor abandons the trial due to a no-go milestone, or after the project period if the company elects to abandon the CAP-1002 project.

Capricor estimates that, following an assumed successful completion of ALLSTAR, a subsequent Phase III trial of CAP-1002 would cost on the order of $100-$150 million and require 36-48 months to complete. While the company is currently searching for strategic partners to join its effort, "at the present time Capricor does not have any agreement or commitment from any collaboration partner."

In short, Capricor has thus far proven itself to be a lean organization devoting the bulk of its resources to R&D to advance CAP-1002 to market, but currently lacks the resources to proceed beyond (or, perhaps, even to complete) its current Phase I/II trial. The access to public capital markets that may be afforded by its proposed reverse merger with Nile might solve that problem, but considerable challenges would still remain post-merger. In the words of Nile’s proxy filing, "trading in Nile’s common stock [is] conducted on the [...] lower OTC Pink tier of the OTC markets. Capricor Therapeutics’ shares after the Merger will similarly be traded on the OTC Pink tier of the OTC Markets [where stocks traded are] often less liquid than stock traded on national securities exchanges, not only in terms of the number of shares that can be bought and sold at a given price, but also in terms of delays in the timing of transactions and reduced coverage of Capricor Therapeutics by security analysts and media." Nile’s shares currently trade at $0.05 per share, and the merged company will need to raise (and maintain) this above $1 in order ultimately to qualify to trade on a national market such as the NASDAQ. A proposed reverse stock split to accompany the merger (up to 1-for-100) will help with this, but ultimately, of course, investors will have the final say regarding the merged company’s fair value, based largely, we hope, on the promise and the outcome of its current Phase I/II ALLSTAR trial.

If recent history in the stem cell therapeutics industry is any guide, investors in a newly minted publicly-traded Capricor can expect to see very substantial dilution of their early investments over the next few years. Whether or not CAP-1002's promise merits this remains to be seen.