Fibrocell Science ($FCSC) Rodman & Renshaw update October 2011


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Fibrocell Science, Inc. (OTCBB: FCSC) is a cell therapy company focused on the development of a line of autologous tissue regeneration products for aesthetic, medical, and scientific applications. Using Fibrocell Science's patented process, a patient’s own fibroblast cells are harvested using a minimally invasive skin procedure, then processed, multiplied, purified, cryopreserved and re-injected as personalized therapy. Fibroblasts are cells that contribute to the production of collagen essential in the formation of connective tissue fibers. These matrix fibers are critical to the strength and elasticity of the skin.

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Fibrocell Science ($FCSC) Rodman & Renshaw update October 2011

  1. 1. ® First Take Fibrocell Science, Inc. (FCSC) Price: $0.55 (10/04/2011), Price Target: $3.50, Market Cap(MM): $51.8, Rating: Market Outperform Elemer Piros, Ph.D., Senior Biotechnology Analyst 212-430-1754 Suy Anne Martins, M.D., Ph.D., Associate Biotechnology Analyst 212-430-1778 Ready, Set, Go – Product launch UpdateKey Points q Management provided an update on the launch of LAVIVTM, the company’s cell therapy q The product was approved by the FDA on June 21 and officially launched on September 15 q Thirty dermatologists have been trained – 43 tissue samples have been submitted for processing q Between now and the end of the year, Fibrocell plans to train 200+ dermatologists q The company placed a lot of emphasis on additional indications, besides the initial indication for augmenting nasolabial folds q We expect a measured/controlled launch with the philosophy of building a satisfied customer/physician base, rather than reaching 1,000s of them in the first quarter q There appears to be no manufacturing capacity constraints for the foreseeable future q Reiterate Market Outperform rating with a YE12 Target Price of $3.50/shareLaunch Update with Unprecedented DetailsFibrocell management hosted a much awaited update on the commercial launch of cell therapy LAVIVTM. On a previouscall (just before launch, on August 23), management offered limited details on the launch plan without a formal Q&Asession. In contrast, during yesterday’s call we learned almost everything we wanted to about the commercializationstrategy. There was lot of airtime given to, what we believe is the crucial value driver for Fibrocell, additional, evenpotentially reimbursable, uses for the product. The market opportunity can be measured at multiple-fold (reaching over $1B)of the original aesthetic indication, the augmentation of nasolabial folds.The Embedded Pipeline in LAVIVTMWrinkles are not created equal.However, it is not difficult to imagine that a satisfied patient/physician would try to use theproduct in other areas of the face, besides the wrinkles adjacent to the lips (nasolabial folds, the approved indication).Fortunately, the process allows for extended use in other areas without additional biopsies. A reservoir of cells, taken fromthe original biopsy, is frozen at Fibrocell’s laboratory for future uses – the cells have been shown to be viable for over fouryears, to date. Should an additional need arise, whether it is “full facial treatment” or treatment of acne scars, or the back ofthe hand, the cells are ready for further expansion.While Fibrocell is not promoting these additional aesthetic uses, thephysician can apply at the patient’s request the cells at other than the approved area.We believe the apparent longevity ofthe treatment (6-12 months or beyond?), coupled with the relative simplicity for “reordering” could make LAVIV™ anattractive recurrent opportunity for dermatologists and patients. For the product to be successful, and to generate repeatsales from physicians/patients, training has to be impeccable, treatment of cells has to be flawless and delivery logistics hasto be seamless. The company is making an effort to achieve superb customer experience augmented with an initialsampling and discounting strategy during the next 6-12 months. For definitions and the distribution of analyst ratings, and other disclosures, please refer to pages 3 - 4 of this report.
  2. 2. Fibrocell Science, Inc. October 5, 2011 TM Fibrocell has made a commitment to formally develop LAVIV for treating acne scars. The company has robust Phase 2/3 data to take to the FDA to discuss next steps during 4Q11. The acne scar indication has limited competition – the only available modality is laser treatment. Based on the information on the Phase 2/3 trial, remaining development could be relatively quick (12-18 months?) and inexpensive ($5MM-$10MM?). TM On a therapeutic front (potentially reimbursable), Fibrocell is exploring the use of LAVIV in restricting burn scars and vocal cord repair. There are initial data from investigator-sponsored studies indicating significant medical benefit of the technology in these settings. What makes the centralized processing of cells from verified sources of biopsies especially attractive, that the various indications could be marketed by different entities. Segmentation by indication coupled with differential price structure is much more feasible for cell therapy as opposed to selling a small molecule drug by different partners for different indications. We expect both geographical (Far East?) and TM indication-specific partnering deals for LAVIV . Attractive Valuation We rate Fibrocell at Market Outperform with a YE12 Target price of $3.50/share. We estimate that TM LAVIV may reach $1B in annual sales by 2019. At steady state, we assume net margins to be approximately 25% of sales. Assuming a minimum of 12 years of data exclusivity based on the biosimilar rule, a discount rate of 15%, a cash position of $33MM by the end of 2012, and 157MM fully diluted shares by YE12, we arrive at a total NPV of $549MM, or $3.50/share. We are including a 25% premium in our NPV analysis of the wrinkle reduction market, to account for potential of some off label uses of TM LAVIV . We see potential upside to our Target Price from a successful launch beyond our estimates and potential label expansion into other aesthetic and therapeutic indications.RODMAN & RENSHAW EQUITY RESEARCH 2
  3. 3. Fibrocell Science, Inc. October 5, 2011 RODMAN & RENSHAW RATING SYSTEM: Rodman & Renshaw employs a three tier rating system for evaluating both the potential return and risk associated with owning common equity shares of rated firms. The expected return of any given equity is measured on a RELATIVE basis of other companies in the same sector, as defined by First Call. The price objective is calculated to estimate the potential movement in price a given equity could achieve given certain targets are met over a defined time horizon. Price objectives are subject to exogenous factors including industry events and market volatility. The risk assessment evaluates the company specific risk and accounts for the following factors, maturity of market, maturity of technology, maturity of firm, cash utilization, and valuation considerations. Potential factors contributing to risk: relatively undefined market, new technologies, immature firm, high cash burn rates, intrinsic value weighted toward future earnings or events. RETURN ASSESSMENT q Market Outperform (Buy): The common stock of the company is expected to outperform a passive index comprised of all the common stock of companies within the same sector, as defined by First Call. q Market Perform (Hold): The common stock of the company is expected to mimic the performance of a passive index comprised of all the common stock of companies within the same sector, as defined by First Call. q Market Underperform (Sell): The common stock of the company is expected to underperform a passive index comprised of all the common stock of companies within the same sector, as defined by First Call. RISK ASSESSMENT q Speculative - The common stock risk level is significantly greater than market risk. The stock price of these equities is exceptionally volatile. q Aggressive - The common stock risk level is materially higher than market level risk. The stock price is typically more volatile than the general market. q Moderate - The common stock is moderately risky, or equivalent to stock market risk. The stock price volatility is typically in-line with movements in the general market. Rating and Price Target History for: Fibrocell Science, Inc. (FCSC) as of 10-04-2011 04/18/11 06/22/11 09/14/11 I:MO:$3 MO:$4 MO:$3.5 3 2 1 0 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 2009 2010 2011 2012 Created by BlueMatrix RATING SUMMARY Distribution of Ratings Table IB Serv./Past 12 Mos Rating Count Percent Count Percent Market Outperform(MO) 143 57.40% 36 25.17% Market Perform(MP) 53 21.30% 7 13.21% Market Underperform(MU) 5 2.00% 0 0.00% Under Review(UR) 48 19.30% 3 6.25% Total 249 100% 46 100% Investment Banking Services include, but are not limited to, acting as a manager/co-manager in the underwriting or placement of securities, acting as financial advisor, and/or providing corporate finance or capital markets-related services to a company or one of its affiliates or subsidiaries within the past 12 months.RODMAN & RENSHAW EQUITY RESEARCH 3
  4. 4. Fibrocell Science, Inc. October 5, 2011 ADDITIONAL DISCLOSURES Rodman & Renshaw, LLC. (the "Firm") is a member of FINRA and SIPC and a registered U.S. Broker-Dealer. ANALYST CERTIFICATION I, Elemer Piros, Ph.D., hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. None of the research analysts or the research analysts household has a financial interest in the securities of Fibrocell Science, Inc. (including, without limitation, any option, right, warrant, future, long or short position). As of Aug 31 2011 neither the Firm nor its affiliates beneficially own 1% or more of any class of common equity securities of Fibrocell Science, Inc.. Neither the research analyst nor the Firm has any material conflict of interest with Fibrocell Science, Inc., of which the research analyst knows or has reason to know at the time of publication of this research report. The research analyst principally responsible for preparation of the report does not receive compensation that is based upon any specific investment banking services or transaction but is compensated based on factors including total revenue and profitability of the Firm, a substantial portion of which is derived from investment banking services. The Firm or its affiliates did not receive compensation from Fibrocell Science, Inc. for any investment banking services within twelve months before, but intends to seek compensation from the companies mentioned in this report for investment banking services within three months, following publication of the research report. Neither the research analyst nor any member of the research analysts household nor the Firm serves as an officer, director or advisory board member of Fibrocell Science, Inc.. The Firm does make a market in Fibrocell Science, Inc. securities as of the date of this research report. Any opinions expressed herein are statements of our judgment as of the date of publication and are subject to change without notice. Reproduction without written permission is prohibited. The closing prices of securities mentioned in this report are as of Oct 04 2011. Additional information is available to clients upon written request. For complete research report on Fibrocell Science, Inc., please call (212) 356-0500. Readers are advised that this analysis report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data. Past performance is no guarantee of future results.RODMAN & RENSHAW EQUITY RESEARCH 4