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It is the ongoing aspiration of virtually every small pharma or biotech investor to find an overlooked but promising small capitalization company and secure a wise entry position well before the masses are interested. The small pharmaceutical sector is one of the best for finding these promising companies with potential gains of many multiples beyond their current valuations. There are good and bad apples in the barrel with some being more obvious than others. When performing initial research into the many divisions of the small pharma sector, investors soon begin to realize that there are many possibilities with promising and scary outcomes depending on the choices made. With new drugs and medical devices being developed by these small cap companies with valuations from only $1 million to over $500 million, the choices are seemingly endless with varying levels of legitimacy, product development and targeted market sizes. Even with the publicly available information that investors can locate for researching the choices, they often lack enough information to garner a confident investment decision.

I wish to present to investors a small sector within the small pharmaceuticals with huge upside potential due to the unmet needs targeted and due to the early stage development of the sector as a whole - the stem cell companies. Stem cells are early stage undifferentiated cells capable of becoming any type of tissue in the human body depending on how it is coerced to develop. The cells can theoretically be utilized to regenerate damaged or missing tissue to help treat Alzheimer's disease, spinal cord and other types of injuries, stroke, burns, heart disease, diabetes, osteoarthritis and even rheumatoid arthritis. The possibilities are endless with huge unmet needs being targeted and large marketing potential for the successfully developed and marketed therapies. The sector is still predominantly in early stages of development with very few regulatory approvals to its credit. However, I believe this to be a sector of huge potential for those seeking early entry into credible and overlooked companies. CNN's Dr. Sanjay Gupta has even expressed his opinions on his blog about the growth and new hope in stem cell therapies. Showing his level of hope for the therapy, especially in repair of heart tissue after a heart attack, he stated, "But now, there is growing optimism that stem cell therapy may help patients with damaged hearts return to a fully functional life, based on results from early studies." I strongly recommend investors with a growing interest in the stem cell sector to read through the remainder of his comments as he and an interviewee provide for good insight into where the sector is likely heading, at least for cardiovascular treatment.

Once investors begin their own research into the possibilities, it becomes fairly evident which ones are progressing and which ones are mired in technological and financial difficulties. With a limited number of companies construed as true stem cell companies, I aim to present what I believe to be the most promising of the sector with potential for solid gains. As the companies develop and mature, they will likely validate themselves and the sector, as a whole, will likely attract additional investor attention and money. The ones presented below have had recent success with an exciting and promising few months behind it, more specifically in Q3 2012. The list should be construed as a good starting point for interested investors. With a smaller number of representatives than many, the sector is just beginning to enter the next stage of development with development-phase companies beginning to progress into marketing-phase entities.

Osiris Therapeutics (OSIR) leads off the list of presented companies as it has the first and only approved stem cell therapy by an internationally recognized regulatory authority. On May 17th the company announced it had received Canadian approval for its lead product candidate, Prochymal. Osiris received marketing approval for Prochymal to treat GvHD - a complication of bone marrow transplantation that is lethal for 80 percent of children affected, often within weeks of the diagnosis. On June 14th Osiris received another approval for Prochymal to treat GvHD, this time in New Zealand, further validating its potential.

Leading off Q3, the company continued to impress with promising phase 2 results announced on July 2nd for Prochymal to treat patients experiencing first-time acute myocardial infarction, commonly known as a heart attack. The trial enrolled 220 patients who were given single infusions of either Prochymal or a placebo intravenously within a week of suffering a heart attack. Patients receiving Prochymal had significantly less cardiac hypertrophy relative to patients receiving placebo (p < 0.05) and also experienced significantly less stress-induced ventricular arrhythmia (p < 0.05). The press release defined the criteria stating, "Cardiac hypertrophy and ventricular arrhythmia are indicators of pathological remodeling following heart injury and provide insight into the mechanism by which mesenchymal stem cells attenuate heart injury following a myocardial infarction." To put the effectiveness of the therapy into perspective, typically a (p ≤ 0.05) indicates statistical significance noting that the positive outcome was a result of the therapy and not due to chance. Further evaluation of the clinical data indicated that seven patients who were treated with the placebo eventually had additional heart failure requiring treatment with intravenous diuretics, compared to none of the Prochymal patients for a (p=0.01) significance. Patients receiving placebo also required re-hospitalization for cardiac issues sooner than the patients receiving Prochymal to the tune of a median of 27.5 days versus 85.5 days, respectively.

Osiris reported Q3 results on November 5th. As of September 30th, the company had cash and equivalents of $39.4 million. It reported revenue of $2.2 million as a result of a 6-fold increase in its Biosurgery products from the same period in 2011. Net cash used for operations in the quarter was $1.6 million with an additional $3 million used for research and development. No mention of the current production or marketing of Prochymal was made in the press release which are probably still in the early stages of implementation. Investment potential in Osiris is promising relative to the rest of the sector obviously due to the upcoming marketing of Prochymal. Although the GvHD indication is small, it will still generate some revenue to help defray the costs associated with the development of the rest of its pipeline. The phase 2 success of Prochymal for heart attack patients is evidence for the possible use of the therapy for yet another targeted group along with the possibilities of many others. With the rest of the sector in purely development mode, Osiris will soon be marketing the first approved stem cell therapy in the world. This helps to validate not only the company's approach and pipeline, but also the technology for the sector as a whole.

Aastrom Biosciences (ASTM) had a fairly quiet Q3 but makes the list as a result of late Q2 preclinical results and due to its current low share price hovering just above its 52-week low. The company's current focus is on using its stem cell platform to target patients with the vascular and heart diseases critical limb ischemia (CLI) and dilated cardiomyopathy (DCM). Aastrom announced in June the results of a preclinical study in animals of its patient-specific ixmyelocel-T cell therapy to treat DCM. The study gave promising results indicating that ixmyelocel-T helped to protect ischemic hearts from damage in an animal model of heart failure. The general conclusion was that "animals treated with ixmyelocel-T demonstrated a reduced mortality compared to control (22% versus 44%, respectively) and decreased infarct size and increased survival when compared to a vehicle control group."

Ixmyelocel-T is also Aastrom's lead product candidate, but for another indication. Now in an early phase 3 trial, termed the REVIVE trial, it is being evaluated for its potential to treat patients with CLI with no options for revascularization. Enrollment began in February with final data collected in early 2015. The trial's primary endpoint is amputation free survival (AFS) at 12 months with secondary evaluations for percent of patients with adverse events, percent of patients with wound closure by 12 months, and percent of patients experiencing major cardiovascular events (OTCPK:MACE) by 6, 12 and 18 months.

Aastrom presented Q3 results on November 8th. The press release made a brief mention of the REVIVE trial stating that it "accelerated patient enrollment and continued to increase the number of clinical investigators and sites in the Phase 3 REVIVE-CLI clinical study of ixmyelocel-T in patients with critical limb ischemia."

The company's financials remain marginal, like most development phase biotechs, with the company having $21.1 million in cash and equivalents as of September 30th. With the REVIVE trial fully underway throughout Q3; the cash burn rate has become more evident. For the quarter, Aastrom used $6.1 million for research and development and $2.1 million for general and administrative expenses. A $40 million offering earlier in the year helped to shore up the company's financials for the interim. Now trading just above its 52-week low, promising developments in the near future could make this an opportune time for a long position. However, investors should consider the risks and watch the share price closely as a close below the current 52-week low is a bearish sign. A replay of the earnings conference call can be accessed until 11:59 pm (EDT) on November 12, 2012 by calling (855) 859-2056. The conference call ID is 43908162.

NeoStem, Inc. (NBS) investors have had a wild ride in 2012 with a 52-week stock range of $0.30 to $0.90. The company is a multi-faceted cell therapy company with clinicals underway through its stem cell therapy, AMR-001, by its Amorcyte division and increasing revenue generation from its contract development and manufacturing organization (CDMO), Progenitor Cell Therapy (PCT) division. PCT manufactures not only stem cell therapies for other companies, but also other types of cell therapies such as those for immunotherapy biotechs. Like Osiris, NeoStem started out Q3 with exciting news that also separates itself from much of the remainder of the sector. On July 16th the company announced yet another manufacturing services agreement, but this time it would be for an advanced clinical in the form of a pivotal phase 3 trial with SOTIO, LLC, presumably for its dendritic cell prostate cancer vaccine. With multiple high-profile companies putting their trust and money in PCT's capabilities, the revenue generating capability of the division continues to grow and offset costs associated with its own clinical trials now underway. Recent new clients include an agreement with Baxter International (BAX) to produce a phase 3 CD34+ stem cell therapy to target chronic myocardial ischemia and an expanded partnership with ImmunoCellular Therapeutics (IMUC) to produce the company's lead product candidate, ICT-107, for its phase 2 trial to treat the brain cancer, glioblastoma multiforme.

A credit to PCT's expertise and competency are the capabilities of two of the companies with which it now has manufacturing agreements. SOTIO already has cell therapy manufacturing capabilities at its disposal through its Prague facility, described by the company as among the largest in Europe. Baxter also has an impressive manufacturing entity through its Biopharma Solutions CMO unit. On April 11th, Baxter's Biopharma Solutions CMO unit was named "Best Contract Manufacturing Organization" for the third consecutive year at the annual Vaccine Industry Excellence (VIE) Awards at the World Vaccine Congress in Washington, D.C. This recognition of Baxter's capabilities also gives additional creditability to NeoStem's PCT division due to the obvious trust Baxter places in the company for its critical phase 3 candidate.

Not to be overshadowed by NeoStem's PCT division, Amorcyte stepped up to the plate on August 15th with a press release noting that the data monitoring committee recommended continuation of its phase 2 trial of its lead product candidate stem cell therapy, AMR-001, to prevent major adverse cardiac events following acute myocardial infarction (AMI). Enrollment in the trial initiated in January with enrollment completion expected in 2013 with 6-month data readout in 2H 2013. NeoStem intends to initiate a phase 1 trial of AMR-001 to treat patients with congestive heart failure, a target patient population four times that of the AMI indication, in early 2013. These events and others should continue to garner additional attention for the company next year and beyond as interim and final data come to light and the therapy possibly keeps validating its therapeutic potential.

NeoStem's investment potential is in its capability to set itself apart from much of the remainder of the sector through its PCT CMO division. With promising clinicals underway, the revenue generated from PCT will help to offset the development costs of AMR-001, a capability that most of the remainder of the stem cell sector does not have. Growth in the division will likely only continue as success and validation of stem cell therapies and immunotherapy vaccines will help to keep those two sectors growing and needing reliable sources of cell therapy products. With Q3 results released November 13th; interested investors should begin performing their own research into the company's possibilities. With regard to the PCT division, potential investors should note the comments on the PCT CMO in the 10Q, "Clinical Services, representing process development and clinical manufacturing services provided at PCT to its various clients, were approximately $2.9 million for the three months ended September 30, 2012 compared to $1.0 million for the three months ended September 30, 2011, representing an increase of approximately $1.9 million or 188%. The increase in clinical services revenue is due to an increased overall visibility of PCT and penetration into the cell therapy marketplace along with a general increase in the development of autologous cell therapies in the United States due to enhanced investment and expanded marketing programs in 2011 and 2012." Interested investors should review the quarterly statements since NeoStem acquired PCT in January 2011 and evaluate the growth in the CMO division in order to confirm growth as well as the sustainability of the growth.

NeoStem is still operating at a loss, but its revenue growth should inevitably conquer the costs if the current growth rate continues. The CMO revenue is substantial as it sets the company apart from much of the rest of the sector with solid earnings. It also helps to protect against downside in the event that regulatory or safety concerns slows the stem cell sector growth as it also serves the cancer immunotherapy (vaccine) sector, thereby giving it some added diversity.

Neuralstem, Inc. (CUR) was fairly quiet during most of the quarter but did have its day in the spotlight midway through. On September 13th the company announced publication of a study using its stem cells to treat surgically paralyzed rats. In the study, the rats' spinal cords were severed and then subsequently injected with Neuralstem's NSI-566 spinal cord stem cells. According to the publication, the paralyzed rats "recovered significant locomotors function, regaining movement in all lower extremity joints, and that the transplanted neural stem cells turned into neurons which grew a "remarkable" number of axons that extended for "very long distances" over 17 spinal segments, making connections both above and below the point of severance. These axons reached up to the cervical region (C4) and down to the lumbar region (L1). They also appeared to make reciprocal synaptic connectivity with the host rat spinal cord neurons in the gray matter for several segments below the injury."

Although an early-stage study and only evaluated in animal models, the news catapulted Neuralstem's shares by more than 90% above its previous day's close with a closing price still up over 38% on the day. The euphoria over the possibilities the results could represent in future advanced clinical trials is an indicator, in my opinion, of the possible investment potential in the future for many of the sector's companies as their clinicals advance and marketing potential is more fully realized. However, as I explained in an earlier article, Neuralstem and most of the rest of the true stem cell companies are still development-phase entities. As such it still relies on investor capital for its funding, which somewhat limits upside potential in the interim due to stock offerings and other sources of financing. Neuralstem's recent offering should minimize the need for additional funding for the midterm. Its growing product line and investor interest due to the regeneration of the rats' spinal cords will likely keep it on investor watch lists for years to come.

Due to the development-phase status of the stem cell sector, I believe Osiris and NeoStem offer unique possibilities for differing reasons with revenue generation already underway, although neither is operating in the black as of yet. Aastrom's high profile phase 3 REVIVE trial interim data will likely be presented in 2013 and could be a huge share price mover if results are promising. Neuralstem's excitement could very well continue into 2013 with its own company updates, and the looming possibility of clinical trials for its NSI-566 spinal cord stem cells in human patients. Each of the companies presented, along with others in the growing sector, present differing levels of risk and potential reward depending on the companies' development status, pipeline progression, financial condition and targeted patient groups. Interested investors should perform in-depth research and consider the possibilities of both upside and downside potential. 2012 has been an exciting and breakthrough year for the stem cell sector. The growth and excitement for the sector and its hopes will likely continue, as will investor and analyst interest. Although the sector as a whole will likely benefit from the increasing interest, the companies presented above may very well lead the sector with possible gains for those taking wise and educated entries. For added comparisons on valuation (as of market close November 17th) versus revenue and development status, please see the chart below. Note: P1, P2 and P3 indicate phase 1, phase 2 and phase 3 clinical trials currently underway, unless otherwise indicated.

Ticker

Market

Capitalization

Current Clinical Stages

Of Development

Most Recent

Quarterly Revenue

OSIR

$308 Million

P1-1, P2-3, P3-3Approved 1 (in Canada)

$2.2 Million for Q3 from Biosurgery products, Grafix and Ovation. No mention of revenue from Prochymal as of yet.

ASTM

$63 Million

P1-0, P2-3*, P3-1

*all 3 phase 2 trials completed

$0.0 for Q3, $2.0 million for nine months ending September 30th.

NBS

$98 Million

P1-3*, P2-1, P3-0

*please see pipeline information

$4.4 Million for Q3. $11.6 Million for nine months ending September 30th.

CUR

$71 Million

P1-2, P2-1, P3-0

Please note large # of therapies in preclinical development

$171,000 for Q3, $302,000 for nine months ending September 30th.

ACTC

$150 Million

P1-2, P2-0, P3-0

Three preclinical trials underway.

$68,184 for Q3

ATHX

$54 Million

P1-2*, P2-2, P3-0

*completed and data released.

$1.0 Million for Q3, $6.4 Million for nine months ending September 30th.

BLFS.PK

$21 Million

No clinicals as this company provides biopreservation media products for the industry.

$1.1 Million for Q2, $1.9 Million for the six months ending June 30th.

STEM

$67 Million

P1-0, P2-3, P3-0

$264,000 for Q3, $1.2 Million for the nine months ending September 30th.

PSTI

$191 Million

P1-3*, P2-2, P3-0

*two completed, one going

$195,000 for Q3

CYTX

$214 Million

Multiple Phase 1 and Phase 2 trials for cardiovascular disease and soft tissue defects. The company also has products to support cell therapy development.

$1.3 Million for Q3, $4.7 Million in product revenue for nine months ending September 30th, $2.4 Million in milestone-related revenue.

Source: The Stem Cell Sector Further Validates Itself With A Successful Q3