Korean Partner Positions Pluristem To Be Cell Therapy Leader

| About: Pluristem Therapeutics, (PSTI)

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In one of biotech's smartest strategic alliances, Pluristem Therapeutics (NASDAQ:PSTI) announced last week an impressive arrangement with South Korean-based Cha Bio & Diostech -- Kosdaq: CHA -- to use Pluristem's PLX cell therapy in studies of intermittent claudication (IC) and critical limb ischemia (CLI) in that country. What Pluristem gets is, in essence, a research "proving ground" at no cost; Cha and the South Korean government foot the bill while Pluristem has access to any data gathered for use in its own clinical trials in other parts of the world.

For this consideration and subject to milestones expected to be reached this September, Pluristem issued 2,500,000 unregistered shares of its common stock at $4 per share in exchange for 1,011,504 shares of Cha stock valued at $10 million. As an added benefit, an ongoing revenue stream will be created for Pluristem as it sells Cha PLX cells on a cost-plus basis.

Upon approval by the Korean Food & Drug Administration (KFDA), both companies are contracted to form a 50/50 joint venture for commercialization to treat the South Korean population. Pluristem dictates all South Korean clinical trial protocol and will retain rights to its patents and manufacturing technology while furthering its scientific and practical knowledge of PLX cells for human treatment. Other indications are expected to be explored, making for a much deeper working relationship beyond peripheral artery disease (PAD).

Cha is a public/private entity funded by the South Korean government to provide healthcare services to the population, and comprises a diversified healthcare firm with a string of hospitals numbering 2,000 beds; its own stem cell institute and company-sponsored university; global research and development outfits in Los Angeles and Tokyo; a regenerative medicine clinic in Boston; a specialty reproductive group also in Los Angeles; and its own contract research organization in Seoul. In all, a self-contained, vertically-integrated research and medical practice conglomerate. Pluristem could not have partnered with a better-funded and prominent company.

South Korea is Asia's 6th-largest economy, which recently revised its 2013 growth forecast upward from 2.3% to 2.7%, thanks in part to a new leader who infused the budget with 17.3 trillion won (about $15 billion) and cut interest rates to 2.5%. Its domestically manufactured products have gained favorable recognition over the years -- the Hyundai, scowled upon by American consumers when it entered the market in the 1990s, is now one of the most popular mid-sized cars available and Samsung Electronics (OTC:SSNLF) is expected to give Sony Corporation (NYSE:SNE) a run for its money with a new smartphone.

Scientifically, South Korea has made great progress since Hwang Woo-suk fraudulently claimed the cloning of a human embryo in 2005, creating a nationwide scandal that crushed the country's technical reputation and practically halted stem cell research under toughened government regulations. Although Woo-suk later attempted vindication with Snuppy, a cloned Afghan hound, the damage had been done and credibility suffered. However, two years ago the KFDA approved the first stem cell treatment for heart attack and last month Medipost, a South Korean company, exported the first adult stem cell drug to Hong Kong for treating knee cartilage defects, putting regenerative medicine back on track for South Korean researchers.

A big attraction for Cha is Pluristem's manufacturing process that has been refined and perfected to produce a commercial-grade product with an efficient infrastructure that starts with harvesting and processing cells in its self-designed bioreactor using technology that allows controllable and scalable cell growth without being labor-intensive. Batches are consistent and cost far less than those traditionally grown in laboratory petri dishes. I believe this is a point often overlooked by investors -- replication in clinical trials is difficult enough without adding the uncertainties of quality differences in dosages. Cha appears to recognize this and it was, according to my conversations with Pluristem, what first drew them to the company.

This arrangement comes at a good time for Pluristem. Last month the company announced the suspension of clinical trials for its IC indication when a subject's allergic reaction led to hospitalization. Management is working with the FDA on resolving the issue and Cha's commencement of IC studies should bridge any gap in gathering important clinical data for the disease.

One clear risk for Pluristem that comes to mind when evaluating this new partnership is whether Cha is trustworthy enough to inspire confidence with American investors who don't have a lot of experience with relationships forged with South Korean biotechnology firms. However, we have good news -- in 2009 Cha formed a similar alliance with Advanced Cell Technology Inc. (ACTC.OB) whereby its stem cell technology to treat eye disorders was out-licensed to Cha, whose end of the bargain, besides funding trials, was to aid in the submission of an Investigational New Drug (IND) application to the FDA, which it did. There are now several Phase I/II trials in macular degeneration ongoing in the US due to Cha's initial support.

Although the overall clinical trial cost savings for Pluristem is difficult to gauge exactly, the price of trials running all the way to Phase III, based on standard industry figures for oncology studies, is approximately $56 million per indication. Considering that multiple studies are expected to run alongside one another, this number also represents a huge informational benefit for Pluristem: Cha essentially becomes an extension of Pluristem's research and development platform -- for free. Clinical trial hits and misses cost Pluristem nothing. At the end, assuming approval and commercialization, Pluristem collects half the profits on drug sales with no outlay for marketing and administrative expense.

This latest development is an enormous boon for a biotech company experiencing some ups and downs recently. I believe Cha chose Pluristem because it is closer than any other cell therapy company to advancing through clinical trials with early data pointing to positive results. With its new partner's resources, government backing to treat the one million or so sufferers of PAD in South Korea, and desire to be a leader in regenerative medicine, Pluristem should not only enjoy masses of clinical data to further its therapeutic indications, but gain in a profitable upside as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.