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It's safe to say that investor interest and analysts' expectations of cancer stem cell (CSC) research are building in momentum. The $220 million market capitalization of pre-clinical stage company Verastem (NASDAQ:VSTM) speaks for itself. The company's in the very beginning stages of the clinical process, and is not expected to begin phase 1 until early 2013. Yet VSTM is valued particularly higher than late stage companies with similar technology such as ImmunoCellular Therapeutics (NYSEMKT:IMUC), among others, and has garnished a particularly high level of interest among the five analysts who began covering the stock.

In this article I am focusing on analyst ratings and the comments made by the analysts who cover the stock to see the reasons behind the bullish sentiment. In addition, we'll discuss the level of momentum that is growing within the treatment of various cancers via CSC.

Verastem is perhaps the newest in a long line of promising companies that focuses on cancer stem cell treatment. The company just recently began trading, after filing for its IPO and raising $55 million during its IPO. It has since gained a tremendous amount of affection among analysts from very prestigious firms such as Oppenheimer, which was the co-manager of its IPO. To better explain the level of optimism for this $230 million company priced at $11.30, see the outlook below from the five firms that cover the stock.

Firm Price Target Implied Market Cap
Oppenheimer $16 $323 million
Leerink Swan $15 $303 million
Rodman & Renshaw $19 $384 million
UBS $20 $384 million
Lazard Capital $20 $384 million

Excitement About Cancer Stem Cells

Oppenheimer, which is considered to be one of the better and more respected financial firms, initiated coverage in March with an outperform rating and a $16.00 price target. Oppenheimer gave several reasons for its belief that VSTM would outperform the market. Below shows a few of the highlights from Oppenheimer's assessment of the company's outlook: (Along with my personal take on the comments)

There is growing evidence that cancer stem cell targeted therapies have a key role in tumor initiation/metastasis.

The statement above is what I have been saying for the last few months. Cancer stem cell targeted therapies are showing the ability to target and treat the disease at the root of the problem, rather than just targeting the large tumors. This form of treatment has shown results that prove CSC treatment is not only more affective in eliminating the cancerous cells, but lowers the chance of recurrence, because it attacks the problem from the root.

Breast Cancer -- Large Market Opportunity

"VSTM first plans to pursue triple negative breast cancer (TNBC), which we believe is a substantially underserved, multi-billion dollar market.

The treatment of breast cancer is a multi-billion dollar market that is in fact under-served. Just look at Herceptin, which returns $5 billion in annual sales, but only targets 25% of breast cancer patients. Breast cancer is one of the most common forms of cancer, with over 200,000 women diagnosed per year. Therefore, if one of VSTM's candidates were to be awarded an approval it would have a large potential market.

However, one area that is seemingly not considered is that VSTM uses small molecules, which is similar to chemotherapy and antibiotics, which is then used for CSC treatment. Cancer has seen few advancements in the last thirty years thanks to radiation, chemo, etc. due to evasion of tumors as they are always mutating. Therefore, I worry about the success of its CSC using single mechanisms that use small molecules. I much prefer the targeting of cancer stem cells via immunotherapy, such as with IMUC.OB, as it has shown in early testing to have the ability to be more effective than small molecules alone in deadly diseases like brain tumors.

Strong Scientific Pedigree

We believe VSTM is an attractive long-term investment and expect the stock to appreciate as clinical progress and high-profile scientific publications further underscore the importance of CSCs."

VSTM does have a very successful and experienced executive staff, which is vital for the valuation of these companies. But with a $220 million valuation, a $323 million target seems a little high for the beginning phases of a speculative company; especially for a pre-clinical trial company that isn't expected to enter trials until Q1 2013. If a $323 million one year target is appropriate for VSTM, then what's an appropriate target for IMUC.OB and its lead candidate ICT-107-- which is a candidate that has shown a 40% three year survival rate in the treatment of glioblastoma, a disease with survival rates measured in months. According to the market, it's worth less than $80 million.

So far, it seems as though the Oppenheimer analyst is giving reasons for its success that revolve around the success and future success of CSCs. He mentions "high-profile scientific publications" which I think shows the firm's expecting an increase in demand at the time that Verastem's lead candidate is undergoing clinical trials, which will cause a bullish reaction among investors.

Exceptional Management Team

The analysts covering VSTM are all quite bullish, but mostly because of the future of cancer stem cell technology, the same technology used by IMUC.OB. In addition to Oppenheimer, Leerink Swan also rated the stock outperform with a $15 price target. The analyst seemed quite optimistic and summed up the reasons for his bullish outlooks with the following quotes:

"Targeting cancer stem cells represents a novel, potentially groundbreaking approach to cancer treatment," Liang wrote in a note to clients.

He added that Verastem has "exceptional" management. He said the company will start trials of one of its drug candidates late in 2012 or early in 2013 and has enough funding to cover mid-stage studies and last into 2016.

In this statement the company's management and funding comes into play, which is vital when determining the valuation of a company. The company was founded by three well-known MIT scientists, and its CEO led a company that was sold to GlaxoSmithKline (NYSE:GSK) for $720 million. It also had previous investors that most likely influenced its high offering, and is well funded by several successful venture capitalists. There is a wide range of knowledge that VSTM executives bring to the table, and with the company raising $55 million during its IPO and having private investors prior to its IPO, the company is well capitalized for at least the first few years.

Investment Decision Analysis

There are several questions that investors must ask when deciding on a speculative biotechnology company as an investment. They must know that the company is well capitalized, that its management has a good track record, whether or not its under or overvalued, but most importantly-- the potential market and the likelihood of its lead candidate gaining approval.

We know that for breast cancer there is a huge market, but what we don't know is the effectiveness of Verastem's lead candidates. It almost seems like a blind investment because you have nothing to insinuate successful trials. And although the analysts covering the stock seem optimistic, I am not sold on the use of small molecules without any clinical data and its success with CSCs.

The feeling of a blind investment is a bit scary to me, especially when a company such as IMUC.OB has a drug with a proven track record that saves lives against one of the most deadly forms of cancer known to man. It has $16 million in cash and is at least three years ahead of VSTM in the approval process; which means IMUC is at the point in clinical trials where VSTM would run out of money, all things considered.

A lot of people don't realize that the history, success, and failures of an executive team are all contributing factors to determine the valuation of a company. However, I think the fact that the company will not begin trials until late in 2012, or early 2013, is very discouraging for investors. With a $15 price target, Leerink Swan is placing a lot of eggs in one basket. A $300 million valuation is high for a candidate that hasn't shown any promising results in clinical trials. There have been a lot of CSC candidates to show promising results in trials, and although I have no reason to believe that VSTM's candidates won't be successful, it's still a very large valuation for a company that is almost entirely speculative.

Acquisitions Creating Red Hot Market

Other drug companies evidently believe cancer stem cell therapy is promising: on Feb. 29, Japanese drugmaker Dainippon Sumitomo agreed to buy a company working in the same field, Boston Biomedical. Dainippon Sumitomo agreed to pay $200 million upfront for Boston Biomedical, and the deal also includes up to $540 million in milestone payments for drug development and payments of up to $1.89 billion after the launch of a drug.

Liang, the analyst at Leerink Swan, added the above statement which insinuates that interest from big pharma could spark additional interest in small CSC researching companies. He mentions valuations and the price that large pharma is willing to pay for these companies, with promising candidates. He specifically mentions Boston Biomedical and the $2.6 billion paid to acquire the company and its two lead candidates, but more specifically, its cancer stem cell research. Here lately, we have seen several large acquisitions such as Micromet (NASDAQ:MITI) being purchased for $1 billion by Amgen (NASDAQ:AMGN). The reason for the increased interest is not only the candidates but the research and patents that these companies possess and the phase II clinical data validating the true potential of these techniques. This is one of the primary reasons that I have been so bullish on ImmunoCellular.

ImmunoCellular has extensive research in cancer stem cell therapy research including 10 patents and nearly 20 pending. The company has a deep pipeline of immunotherapy candidates and many partnerships with some of the more prestigious hospitals and universities in the U.S. I have said before that I wouldn't be surprised to see stem cell targeting companies becoming the next hot buy among big pharma, much like the hepatitis candidates in late 2011 and early 2012. The CSC candidates are showing remarkable results and I think we have already begun to see the first in a long line of acquisitions, which could spark momentum for the industry.

IMUC.OB Vs. VSTM: Is There More Than One Way To Skin The Cat?

Obviously, Liang believes that my speculation could become a reality. The firm used as one of its largest selling points the level of interest being shown among big pharma. As I said, there are several small companies that are focusing on CSCs, but a select few with research along with successful candidates. Verastem has a very successful executive team, it has cash, and it has the pleasure of being associated with the success of cancer stem cell therapy.

I always point to ImmunoCellular during this conversation because of its patent portfolio (which is significant for a small company) and its large pipeline, which includes ICT-107 and ICT-140 for ovarian cancer. Liang believes that as cancer stem cell therapy continues to show promising results it will open the door for smaller companies that will become acquisition targets.

The excitement surrounding Verastem is unlike anything I have ever seen in biotechnology. I have witnessed several companies trade much higher than what I believed it was worth, but these particular companies had late stage candidates. And what's even more unusual is the number of analysts that are covering this small company, five in total. In addition to Oppenheimer and Leerink Swan, there is also UBS, Lazard Capital, and Rodman & Penshaw, which all have price targets of either $19 or $20. I have read through the analysis of each firm and the excitement centers around the areas that we've already discussed, which mostly centers around the potential for cancer stem cell therapy and its potential attraction to big pharma.

There are a few select companies that have caught the eye of investors, and Verastem is one on Wall Street today. One of my personal favorites within this industry is ImmunoCellular Therapeutics, and there are some private companies such as OncoMed that may go public sometime, creating more investment opportunities. The excitement and optimism of analysts matches that of my own, and I think it's obvious by reading the reports on VSTM that analysts aren't necessarily excited about the company, or its treatment under development, rather more about the potential for cancer stem cell treating therapies that's exciting to analysts. The reasons for such high price targets do vary from firm-to-firm, but one consistent is the outlook for stem cell therapy, in which 5/5 have high expectations.

Disclaimer: The material in this article is for informational purposes only and should not be used to make an investment decision without first consulting with financial advisor.

Source: Upgrades Lead To Optimism In Cancer Stem Cell Therapy