With legislation passed this week, Japan has made a forward thinking decision to push the envelope on regenerative medicine in the hope that the country can become a global leader in this burgeoning area and benefit from the potential savings that efficacious stem cell therapies may one day deliver to its health care system. Although the underlying rules and regulations still need to be worked out, the underlying theme of the legislation is that if a given cell therapy can demonstrate a strong safety profile, it can go to the market treating patients without the usual requirement to demonstrate efficacy. The onerous requirement to demonstrate efficacy or more simply put, "this cell therapy works", is usually accompanied by multiple, double blinded, placebo controlled clinical trials which are expensive, time consuming and often technically difficult to execute without unanticipated delays. Many a small biotech with a promising idea has failed to navigate the long and winding road required to bring a novel therapy to the market. That is why this legislation is a very big deal and, in this article, I attempt to rank three leading stem cell companies based upon how well positioned they are to see a significant benefit from the new legislation. In simple terms, this significant benefit is a potential faster ramp up in revenues than existed before the legislation was passed.
First of All, Why is Japan Doing this?
There are two main reasons:
I) Japan is the proud home to the inventor of the Induced Pluripotent Stem Cell (IPSc), an artificially derived stem cell derived from a regular human cell through genetic manipulation. While IPSc are the bleeding edge of regenerative technology, Japan sees the potential to become a global leader in what could become a new paradigm in medicine.
These excerpts from a recent article in the Japan Times illustrate the point (U.S dollar equivalents added):
Japan's regenerative medicine market will total ¥1.6 trillion ($15.85 Billion) in 2030, up from ¥26 billion ($260 Million) in 2012, with products made from human cells increasing in variety and the commercialization of those from artificially derived multipurpose stem cells, the industry ministry forecast Friday. The estimate took into account the number of potential patients in the country and the per capita cost of such treatment.
Globally, the ministry projected that the market will grow to ¥17 trillion ($168.44 Billion) in 2030, compared with ¥340 billion ($3.37 Billion) last year.
The ministry also said the cost of clinical trials for regenerative medicine products may be reduced by some 60 percent and that production outlays could be slashed by around 20 percent, providing regulatory reforms are introduced to enable authorities to approve products in clinical trials more swiftly, a process that at present takes about seven years.
II) Japan has an aging population that will put a much larger burden on its health care system in the upcoming decades. The hope is that by enacting policies that are friendly to regenerative medicine the country will be able to more quickly harness the power and potential of regenerative medicine and, hopefully, have a huge long term impact on health care costs and the growing budget deficit.
What Attributes Position a Stem Cell Company to Benefit from the Japan Legislation?
I see three aspects to this question.
I) Safety - Most importantly, those companies that already have extensive safety data, or can demonstrate such, will obviously benefit as this is the primary requirement of the legislation that leads to a fast path to the market. It would seem logical that autologous cell treatments (where the patient's own cells are used) will have an easier case to make than allogeneic cell treatments, where cells are derived from a donor. Finally, the less manipulation cells go through before they enter the patient would seem like another factor that may come into play.
II) Scarcity of Capital -Smaller stem cell companies, where capital has and continues to be a scarce resource, should benefit to a larger extent over larger, more well financed stem cell companies. This legislation will level the playing field, to a great extent in Japan, by reducing the costs of bringing a therapy to market.
III) Presence in Japan - Although any company can make its way to Japan, having an existing presence or relationships there would give them a head start.
Ranking Three Stem Cell Leaders
Throughout the globe, there are many companies, large and small, trying to make their mark on this space. I will focus on three leading companies and rank, on a scale of 1-10, the three factors mentioned above on a relative basis to each other. The companies are Meosblast (OTCPK:MEOBF), Athersys (ATHX) and Cytori Therapeutics (CYTX).
Mesoblast - Mesoblast is the granddaddy of the stem cell field by virtue of its size, clinical pipeline and financial resources. This Australian company has a market cap of about $1,700,000,000 and an enterprise value of $1,450,000,000 so investors are really paying up to own it. Mesoblast's proprietary technologies include Mesenchymal Precursor Cells, culture-expanded Mesenchymal Stem Cells, Dental Pulp Stem Cells, and expanded Hematopoietic Stem Cells. Mesoblast's allogeneic or 'off-the-shelf' regenerative medicine products focus on repair of damaged tissues and modulation of inflammatory responses in conditions with significant unmet medical needs. It uses the allogeneic model and many cell types that have shown no safety issues but still involve the use of donor cells and an extensive process to expand the cells. Recently, Mesoblast has entered into a collaborative agreement with JCR Pharmacueticals in Japan to develop and market Mesoblast's culture-expanded MSCs in connection with the use of hematopoietic stem cells derived from peripheral blood, cord blood or bone marrow in the treatment of hematological malignancies. JCR is developing and marketing the culture-expanded MSC product JR-031 for the treatment of steroid-refractory GvHD in children and adults following bone marrow transplantation.
Athersys - Athersys is a microcap ($110,000,000 market cap, $85,000,000 enterprise value) with a platform based solely on Multipotent Adult Progenitor Cells (MAPCs). In a published report it was demonstrated that these cells can be expanded into millions of doses without losing efficacy. The off-the-shelf product of expanded MAPCs is called Multi-Stem. Regarding safety, although it is an allogeneic product it has shown no adverse safety issues and the cells dissipate from the body, over time:
During several years of preclinical work, MultiStem has demonstrated the potential to address each of the fundamental limitations observed with traditional bone marrow or hematopoietic stem cell transplants. These limitations include the historical requirement for tissue matching between donor and patient, the typical need for one donor for each patient (a reflection of the inability to expand cells in a controlled and reproducible manner), frequent use of immune suppressive drugs to avoid rejection or immune system complications, and a range of other potential safety issues. We believe that MultiStem represents a potential best-in-class stem cell therapy because it exhibits each of the following characteristics based on research and development to date: (1) it may be produced on an industrial scale, in a well validated and reproducible manner; (2) it may be administered without tissue matching, making it analogous to type O blood; (3) it exhibits a consistent safety profile; and (4) it appears capable of delivering therapeutic benefit through multiple mechanisms of action. Based upon work that we and independent collaborators have conducted over the past several years, we believe that MultiStem has the potential to treat a range of disease indications, including ischemic injury and cardiovascular disease, certain neurological diseases, autoimmune disease, transplant support (including in oncology patients), and a range of orphan disease indications.
Regarding Japan, Athersys seem to be highly focused to the opportunity as is demonstrated by this Q&A on a recent conference call:
Jason Kolbert - Maxim Group LLC, Research Division
And I sense your excitement about Japan. Is there going to be a window to include Japan in any of these trials, in terms of kind of opening up the pathway should this legislation actually be enacted and happen?
Gil Van Bokkelen - Co-Founder, Chairman and Chief Executive Officer
Yes, it's a great question and it's something we're actively exploring. I mean, we've already made, as I mentioned, a trip out to Japan to meet with the regulatory authorities there and actually had a series of meetings and discussions with them about various issues. And we're going back to Japan in early December to continue that discussion and explore with them what the options might be and the ways that we might be able to advance our clinical programs. As I mentioned, as I know you know, Jason, there's tremendous interest nationally in Japan in the area of regenerative medicine. And there's a particular interest in an area like stroke, just because it's such an enormous health care and clinical burden and quality-of-life burden in Japan. So it would make sense that there would be a lot of interest in the possibility of exploring our clinical activity in an area like stroke into Japan. But really, a final decision on that is going to depend on a number of things that we intend to discuss with the regulatory authorities there. I think that -- and we'll have clarity around, I think, in the weeks ahead. But I think that our long-term plan is certainly to expand our clinical activity in the stroke program, as well as other programs. In Japan, now that it looks like this initiative is coming to reality, I mean, literally, it seems like they're just a short time frame away from actually having it pass legislatively. And then they're going to get busy working on the fine details of the framework, which, our understanding is it will take about a year to actually define that. But that's not going to stop things in the meantime. People will have the ability to begin planning and thinking about how they can take advantage of this new framework and we intend to be right at the front of that process.
Cytori Therapeutics - Cytori is also a microcap with a market cap of about $186,000,000 and an enterprise value of about $200,000,000 (taking into account the recent Lorem Vascular transaction). Cytori appears most relatively well positioned to benefit from the new Japan legislation based upon the factors I mentioned above. Japan has been has been a primary market for the company and Cytori has an operational medical subsidiary in the country. Cytori already derives the bulk of its commercial revenues from the country. As far as safety is concerned, the company's technology has already treated thousands of patients in company sponsored clinical trials and in dozens of independent investigator lead trials, many of which took place in Japan. Furthermore, the autologous model of removing a cocktail of cells from a patient's fat and reinserting them into the same patient, without the need for culturing, is just intuitively the safest procedure possible. Having said that, there is no evidence to date to suggest that any cell therapies mentioned above have any safety issues
Having presented the attributes of the new laws above and after examining these three leading pure play companies, the table below is intended to rank them based upon their relative positioning to gain from the new legislation.
While it may seem counter intuitive to penalize Mesoblast for being well financed, the reality is that this Japan legislation reduces the entry costs to the market, a benefit that is much more pronounced to smaller companies in the sector.
There is much involved in researching these companies, other than the singular focus of this article. Investors should visit their respective websites to learn more about pipelines, finances and business models. However, although I've noticed that some of the companies mentioned above have rallied today as I wrap up this article, investors are still underestimating an opportunity that may have tremendous ramifications to the immediate and long term value of these companies.