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In my last two articles; "Advanced Cell Technology: A Balanced Perspective Of Risk and Reward" and "StemCells, Inc., And Neuralstem, Inc.: A Side-By-Side Analysis", I first took a broad, balanced view of the investment risk and return profile of Advanced Cell Technology (OTCQB:ACTC) based on recent developments, and in my second article, I took an even broader view of StemCells, Inc.'s (NASDAQ:STEM) neural cell platform in comparison to Neuralstem, Inc.'s (NYSEMKT:CUR). Keeping with the theme of providing a side-by-side comparison of two developmental stage biotechs in the race to use regenerative medicine to treat incurable disease, we will next analyze and compare ACTC's RPE (retinal pigment epithelium) program based on hESCs to STEM's neural cell program for the treatment of Age-Related Macular Degeneration (AMD, for short). The goal will be to determine the best investment based on known variables with each company specific to this indication. The analysis will include the potential of the science, trial status, and the financial condition (cash position) of each company.
With ACTC, the science starts and finishes with two rockstar bookend scientists, Dr. Robert Lanza and Dr. Robert Langer. Robert Lanza is the chief science officer for ACTC, and Robert Langer is an influential ACTC board member. Combined, their accomplishments would take up an entire book (or volume of books) and go well beyond the scope of this article, but it is safe to say, if I was making investment decisions based solely on the scientist, these guys would get my money every time.
ACTC has a number of promising preclinical programs, but given the debate around ACTC not having any real competition for its AMD program, I'm going to focus on that particular indication. It should be noted that the same RPE program is being used for Stargardt's Macular Dystrophy (SMD, for short), a juvenile form of macular degeneration, and a Phase I trial for SMD is also ongoing. However, AMD is the trophy. It is a huge $30 billion market afflicting more than 30 million people worldwide, with no current medical treatments available to stop or reverse the progression of the disease, which eventually leads to blindness. Also, before going into the science itself, I want to acknowledge that ACTC's other programs and its substantial patent portfolio, consisting of over 150 patents and patent applications related to stem cell therapy, have considerable unknown value.
To quote ACTC's website, which states it best, "The RPE is a highly specialized tissue that is located between the choroids and the neural retina. RPE cells support, protect and provide nutrition for the light sensitive photoreceptors." In simple terms, as AMD progresses, RPE cells die off. ACTC uses terminally differentiated (final state) RPE cells derived from human embryonic stem cells to replenish the dead RPE cells. ACTC prominently displays their scientific papers on their website, including preclinical papers highlighting their RPE program for additional information.
STEM, on the other hand, uses tissue-derived human neural stem cells to support its AMD program. Like ACTC, their preclinical studies showed considerable therapeutic potential for treating retinal degenerative diseases, as the graph below demonstrates.
STEM's human neural stem cells preserve visual acuity in RCS rats, as shown by optokinetic tests measuring visual function over time.
STEM's preclinical studies were performed in collaboration with Casey Eye Institute at Oregon Health & Science University. The cells were transplanted in the sub-retinal space of the RCS rat (a well-established animal model of retinal degeneration), and were shown to protect the retina from progressive degeneration and to preserve visual function long term. The results were initially published in the European Journal of Neuroscience. For additional information, a summary of the paper can be downloaded from STEM's website here. The results were affirmed in a separate paper in September, 2013. To paraphrase the researchers, "The study confirmed our preliminary hypothesis that neural stem cells restores a function normally performed by RPE cells."
From a science perspective, I would argue both companies have demonstrated strong therapeutic potential in preclinical studies.
ACTC's AMD trial started in April, 2011. The open-label, multi-center trial is taking place in four prestigious locations; Jules Stein Eye Institute, UCLA School of Medicine, Bascom Palmer Eye Institute, Mass Eye and Ear, and Wills Eye Institute. The trial will have 5 cohorts, with the 4 low vision cohorts consisting of 3 patients, and the better vision cohort will contain 4 patients, as follows: Cohort 1 - 50,000 cells, Cohort 2 - 100,000 cells, Cohort 3 - 150,000 cells, and Cohort 4 - 200,000 cells. The exclusion criteria requires visual acuity of the treated eye to be no better than 20/400 and visual acuity of the untreated eye no better than 20/100. For the better vision cohort, the visual acuity of the treated eye to be no better than 20/100 and the visual acuity of the untreated eye no worse than 20/100. Lastly, the patients have to be 55 or older.
The trial, to date, has been promising. First and foremost, a Phase I trial is about demonstrating safety, and so far, ACTC has not reported any safety issues with the procedure. However, in addition to safety, there have been strong hints of efficacy. In May, 2013, ACTC formally announced one of the patient's vision improved from 20/400 to 20/40. The announcement was made after the Chief Scientist, Dr. Lanza, let it slip in an article. Earlier in the trial, after only two patients were treated, ACTC published an article in the Lancet, which suggested the procedure was safe and the transplanted cells appeared to be attaching and surviving in the treated eyes. The company has recently indicated that updated trial data is forthcoming.
STEM's trial, on the other hand, is designed to treat AMD at an earlier stage, before the RPE cells die off. STEM's trial started June, 2012, over a year after ACTC started their trial. Since the procedure is designed to treat AMD at an earlier stage, exclusion criteria was less restrictive. The trial will have two sequential cohorts with 16 patients total. Visual acuity of less than or equal to 20/400 will be enrolled in Cohort I, and visual acuity of 20/320 to 20/100 in Cohort II. Cohort I will consist of four patients who will undergo transplant of 200,000 cells, followed by four patients with one million cells. Cohort II will consist of 8 patients with 1 million transplanted cells. The patients have to be 50 or older. The trials are taking place at three prestigious eye centers; Byers Eye Institute at Stanford, New York Eye and Ear Infirmary, Retina Foundation of the Southwest.
STEM has been less forthcoming with their trial results, which is a negative for short-term traders and investors, but a positive for the credibility of the company. As a reminder, the main focus of a Phase I trial is to demonstrate safety. So far, STEM's trial has been successful in that regard. In September, 2013, STEM announced the treatment of the first one million cell high-dose patient, indicating no safety issues were observed in the lower-dose patients. In February, 2014, STEM announced the completion of the first Cohort. With the announcement, STEM announced it is expanding the trial site to a total of five and expects the Phase I trial to be completed by mid-year, at which point it will initiate a controlled Phase II efficacy trial. Interim follow-up data on the first cohort will be provided later this year as well.
When looking at the trial results to date between the two companies, two main themes jump out. First, ACTC has been active in waving "tantalizing" hints of efficacy in front of shareholders. I use the term deliberately, because it was a dominant word used during many conference calls by prior management. STEM, on the other hand, has allowed their trial to proceed without much fanfare.
The second theme is that STEM has a much better trial protocol. The trial requires less patients that are younger and at earlier stages of the disease, with more transplanted cells. So, from my perspective, ACTC is winning the PR battle, but STEM is quietly winning the race.
As stated many times, with developmental-stage biotechs, cash is king. In the case of ACTC, cash is becoming in short supply. The last 10-Q showed cash of a little over $5 million, however, that was at the end of September, 2013. Since then, there's been an SEC settlement, ongoing litigation expense and ongoing trial expense, not to mention operating and R&D costs. ACTC still has the Lincoln "ATM" line to draw on, but like all ATMs, it has its daily limits. In the case of the Lincoln Park Capital facility, that limit is less than $200,000 every other day for regular purchases based on the current stock price, and twice that for accelerated purchases. With a cash burn of approximately $6 million in the last quarter and growing, that's not going to get them very far. Dilution is coming soon.
In comparison, STEM had cash of over $20 million on their balance sheet at quarter ending September 30, 2013, and a cash burn for the quarter of approximately $7 million. However, their other trials will be costly; primarily their spinal cord trial, and the company filed a prospectus in February for up to $27 million in common stock sales over time.
Dilution is a fact of life with developmental stage biotechs, and neither ACTC or STEM are immune. I would again argue STEM is in a much better position, given their current cash position. Both companies hope to enter Phase II trials this year, which will be much more expensive than Phase I. The goal, as always, is for the progression of the science to outpace dilution. With both ACTC and STEM, I think the chances are good.
First, at a minimum, STEM is clearly a tough competitor based on their preclinical studies, earlier treatment of the disease (before ACTC's replacement RPE cells are needed), accelerated trial protocol, and capital resources. For investors to think otherwise is a mistake. One of the lead scientists that was involved in both ACTC's and STEM's preclinical studies indicated STEM's results were the best he had ever seen. For STEM, management's focus on safety with a Phase I trial is the right approach. Efficacy will come (or not) during proof of concept Phase II trials, as the FDA intends.
As I stated in my prior articles, market cap matters. STEM has a market cap of $81 million compared to ACTC's market cap of $190 million, and ACTC has less cash and more capital-constraining legacy issues, which have not been repeated here (see my prior ACTC article). I am long both companies. I believe in the science of regenerative medicine, and I think both companies have winning IP. If an investor doesn't believe in the science, they shouldn't invest. But the decision shouldn't be made because at a point in time, an "all-in" investment was made with one company. Those who go for broke usually end up there. In a two-horse race, a prudent approach may be to put money on each, thereby hedging your odds.
Since I haven't talked much about risk, I will conclude with this. Investing in developmental stage biotechs is highly speculative and risky. The high majority of times, if you buy and hold, you will lose, and often lose big. The road to commercialization is long and full of peaks and valleys. Take profits when offered, and most importantly, diversify.