After years of monetary pain from being too early investing in developmental-stage stem cell biotech, investors are finally seeing some gains as the science, which showed huge promise in preclinical studies, is now being validated in the clinic. Several companies are wrapping up Phase I safety trials and planning for Phase II, while others have already begun Phase II proof-of-concept studies. Making the right call on the right company at the right time can be highly lucrative. Case in point, my article on StemCells, Inc. (STEM), StemCells, Inc: Expect Positive Trial Results To Drive The Stock Price Higher, accurately predicted the impact of the company presenting trial results at two separate conferences for two different indications in June. As a result, the stock has appreciated over 60% in a month since the article was written. As they say, a picture is worth a thousand words.
StemCells' performance over the past year (and particularly over the past month) is reinforcement that the market, sooner or later, will find value. The goal, as an investor, is to find undiscovered value before the market does. Brainstorm Cell Therapeutics, Inc. (OTCQB:BCLI) has all the characteristics of the next stem cell company to be "discovered" by the market.
The Fourth C Of Biotech Investing
Originally as a banker by profession, I was taught early in my career about the four Cs of lending; Character, Capacity, Collateral, and Capital. As long as those four elements are analyzed accurately, the probability of success (getting repaid) is very high. The same can be said about the three Cs of biotech investing; Cash, Catalyst, and Charisma, which is an approach I adopted after reading an analysis by Jason Napodano.
Cash is important when considering a company's cash runway. Developmental-stage biotech companies are cash-guzzlers. R&D and early-stage trials are like a furnace fueling a company's future potential, but they need a steady infusion of cash to move the science forward. Periodic capital raises are a necessary part of the business. Lower cash balances equal greater shareholder dilution.
Catalysts are drivers of value. When a biotech reports positive results, it feeds hungry investors' appetite for information. It's the alchemy of taking uncertainty and presenting facts that creates real value.
Charisma is more intangible. New science has its own attraction, and attraction has value. There's something about mankind using scientific discovery and creativity to progress healthcare in a new way. Stem cell technology has considerable charisma, which creates value through validation of the science over time.
I add a fourth and, arguably, most important "C" in developmental-stage biotech investing, and that is market capitalization. Once the first three Cs have been established, it's a matter of considering the market cap of a company in relation to its competitors to uncover opportunities. STEM was clearly undervalued in this regard, as my prior articles comparing STEM to Advanced Cell Technology (OTCQB:ACTC) and Neurostem (NYSEMKT:CUR) indicated. Brainstorm has the first three Cs covered. But, it's the fourth C that makes it a no-brainer from an investor's perspective.
Stem cell companies use a variety of techniques and methods to create stem cell lines to develop regenerative therapies to address the needs of degenerative disease and injury. For example, Biotime (NYSEMKT:BTX) and ACTC use human embryonic stem cells (or hESC) to create fully differentiated stem cell lines. STEM and CUR use neural stem cells derived from fetal tissue. Brainstorm, on the other hand, develops bone marrow-derived mesenchymal stem cells (MSC for short) into neuron-supporting cells.
The benefit of using Brainstorm's approach is that the cells are autologous. In other words, they use the patient's own stem cells, which means there is no risk of rejection, and therefore, no need for the use of immunosuppressive agents. This is a major distinction compared to other stem cell approaches. The therapeutic benefit of Brainstorm's MSC cells has been demonstrated in numerous papers for neurodegenerative diseases, such as Amyotrophic Lateral Sclerosis (ALS, also known as Lou Gehrig's disease), multiple sclerosis, and Parkinson's disease.
ALS Trial Update
In June, Brainstorm launched its Phase II trial for the treatment of ALS in the US. Three prestigious medical centers, Massachusetts General Hospital, the University of Massachusetts Memorial Hospital, and the Mayo Clinic, will be participating in the trials. Specific trial protocols are located at ClinicalTrials.gov. A description of the trial is as follows:
This multi-center, randomized, double blind, placebo controlled study will evaluate the safety and efficacy of a single combined intramuscular and intrathecal administration of MSC-NTF cells in early-stage ALS patients. Patients will be followed for approximately three months before transplantation with their autologous MSC-NTF cells or placebo. During this period of time, patient bone-marrow will be harvested and mesenchymal stromal cells will be isolated and expanded. Following treatment patients will be followed for a total of six months at monthly visits.
As I mentioned in my previous article, Neuralstem And Brainstorm Cell Therapeutics: The Race To Treat ALS, several patients during the Phase I trial have gone public with their results. The most recent case was an Israeli soldier, who was given compassionate treatment twice. Both times, the treatment stopped the progression of the disease and there was marked improvement in motor skills.
Brainstorm's Phase I trial took place in Israel, largely obscured from US investors. The Phase II trial isn't expected to be concluded until the end of 2015. However, if Phase I results are any indication, it's highly unlikely the company will be unknown for long. And that's when the market will "discover" Brainstorm's value.
All Capital Raises Are Not Created Equal
Capital for a developmental-stage biotech is a scarce resource, and during the preclinical phase of the company's maturation, often toxic. Stock Purchase Agreements usually come with punitive anti-dilution provisions, which means when a company issues stock in the future at a lower price, the outstanding warrants are reset to the new lower price. In a worst-case scenario, this can lead to dilution hell with no way out.
Tengion (OTCQB:TNGN) is a perfect example. The company has an impressive scientific platform using a patient's own cells to regenerate, repair, or replace diseased organs and tissues. However, the company never managed to get through its start-up toxic financing phase, and is now paying the price. Authorized shares have ballooned to an astonishingly high 10 billion shares. The company pays debt service with company stock, so every time the stock goes lower, shareholders are diluted further. Tengion is in dilution hell.
Brainstorm, on the other hand, continues to get its financial house in order. In April, the company entered into agreements with warrant holders to exchange outstanding warrants to purchase shares of the company's common stock. The warrants included full ratchet anti-dilution protection in the event the company issued stock or debentures at a price below the exercise price. By agreeing to convert the warrants to stock, the company eliminated the liability associated with the warrants. Brainstorm is positioning itself for up-listing to Nasdaq, and this was a positive step in that direction.
In June, Brainstorm raised $10.5 million with a private placement. The price was at a 15% discount to the company's 30-day moving average. Of important note, the financing did not include anti-dilution protections, as was the case with Brainstorm's prior financing arrangement. With the additional capital injection, Brainstorm should have ample liquidity to support its Phase II trial.
Brainstorm has the three Cs of biotech investing covered, based on the most recent capital raise (its Cash position), the start of Phase II trials, and publicity that will surely follow (Catalyst), and the innovative therapeutic approach (Charisma). The one we haven't addressed is market Capitalization. Brainstorm has a market cap under $60 million. I won't get into a market cap comparison with other stem cell companies, because the therapeutic platforms are too diverse. But, in general, Brainstorm appears anywhere from 40% to 80% undervalued in comparison with other developmental-stage biotechs with similar potential. When I evaluated STEM's potential a little over 30 days ago, I considered it a no-brainer. Coincidentally, the market cap for STEM was almost identical to Brainstorm's at the time. I expect Brainstorm's stock performance in the near term (6 to 12 months) to be equally as rewarding.
I'll conclude with my usual disclosure. Investing in developmental-stage biotechs is highly speculative and risky. The road to commercialization is long, and full of peaks and valleys. Take profits when offered, and most importantly, diversify.
Disclosure: The author is long STEM, BCLI, BTX, ACTC, CUR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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