Weighing The Benefits Of Osiris' First Cell Therapy Approval

by: A. John Hodge

During the last five days Osiris Therapeutics (NASDAQ:OSIR) posted a 20% gain following exciting news. The company received marketing clearance from Health Canada for its stem cell therapy Prochymal. This makes Prochymal the world's first approved stem cell therapy. The approval has created instant optimism within the industry and, judging by the stock's reaction, it is obvious that investors believe this could be an instant game-changer for the company.

It could also open doors for other companies along with establishing OSIR as a leader in this growing industry, especially considering it now has a jump start in the industry. This is a very exciting time for the stem cell therapy industry, with the first in class being approved.

Prochymal was approved for the treatment of acute graft-vs-host disease (GvHD) in children. This is a complication that arises from stem cell or bone marrow transplants, which leads to the death of up to 80% of children of whom it affects. The rates of this particular disease are quite high, with 30-40% among related donors and recipients to 60-80% between unrelated donors and recipients. Up until this point, a common form of treatment has been a steroid, such as Prednisone in conjunction with other drugs, but no specialized treatment designed to target the disease has existed.

GvHD is considered a rare disease, which has led some investors to ask how much upside exists for the treatment of this particular disease. However, this is a drug that is being tested to treat a number of conditions, and due to the recent approval (while still in clinical testing) we could see new doors opened that will likely dispel most of the naysayers.

Back during the early years of development with Provenge, Dendreon (NASDAQ:DNDN) led the charge in developing the first cancer vaccine. But today there are numerous companies in the space, both large and small, and most are showing significant upside, as other companies have learned from the mistakes of Dendreon. With cell therapy, I don't believe Prochymal's approval will lead to nearly as much optimism as when Provenge was approved, but we may see smaller companies with late-stage cell therapies such as: Advanced Cell Technology (ACTC.OB), Pluristem (NASDAQ:PTSI), and NeoStem (NBS) progress more rapidly throughout trials, and with a sense of urgency, now that we have witnessed the first approval of a cell therapy.

While one can bet on new therapeutic products, a safer way to play this field may be to invest in the companies that sell shovels and picks to the miners. Which in this case is the manufacturing of these stem cells from the patients. Setting up a dedicated manufacturing facility is not only expensive, but also time consuming as permissions from state and federal agencies are required for GMP production of products. For this simple reason, companies like Baxter (NYSE:BAX) and Hospira (NYSE:HSP) have relied on the manufacturing capabilities of other companies.

NeoStem and its PCT business is the leader in the manufacturing of cell therapies. It has an unmatched 50,000 square feet of personalized cell manufacturing capabilities, has manufactured 30,000+ cell therapy products, and delivered 5,000+ cell therapies to patients for more than 100 clients (according to its corporate presentation). NeoStem operates in several segments of business and the manufacturing business, also called the PCT business, is where it manufactures cell therapies for other companies.

Most notably it developed the cells for Provenge during phase III trial, but now has clients that range from the largest of companies, such as Bayer (OTCPK:BAYRY) and Johnson & Johnson (NYSE:JNJ), to even the smallest, most speculative of companies. This segment of its business has been manufacturing cells for 30 years and has the most experienced staff, as it was among the first in the industry that has evolved to manufacture all cell types, a service that no other company in the business can match.

There are some companies that have elected to manufacture its own cells. Pluristem, a company with a technology that includes deriving stem cells from a placenta, recently announced that it's scaling up its manufacturing facilities. This is a move that most companies in the space are electing not to pursue for, if a company's candidate is not awarded an approval, then it's left with the burden of huge costs in creating the facilities along with a staff of specialists that have the knowledge to manufacture a wide range of cell therapies.

Some companies such as Aastrom Biosciences (ASTM) have also elected to manufacture its own cells, but only its own cells, and not on a large scale. Therefore, NeoStem's competition as a contract manufacturing business for personalized cell therapy is currently minimal and no real players appear on the horizon to complete. It could be possible that once small and large pharmaceuticals do decide to attempt scale ups for manufacturing purposes, the costs/benefit analyses could likely reveal that its long-term financials would be best served by outsourcing to an established company such as NeoStem and using the savings for other purposes within the company such as marketing or additional trials. Overall, the cost savings and speed of execution are huge advantages in NeoStem's favor as it has a large expertise built over more than two decades combined with an economy of sharing costs between its various clients.

Osiris Therapeutics' recent marketing approval in Canada for its drug was indeed groundbreaking. One question that has arisen is what effect, if any, will its approval of the first cell therapy have on the industry? At this point in time, we don't know. In my opinion, I think the approval can have a positive effect on two areas: optimism within the industry from both companies and investors, along with more companies willing to pursue cell therapies at a more aggressive rate. I think both could have an impact on the manufacturing side of the business, since it is a necessary and important aspect of developing cell therapies.

While we can't predict with certainty which of these products will be the next successes, it is clear that companies providing support services such as manufacturing of these cells are going to gain significant part of this developmental pie. NeoStem - with a significant lead in this area, both in expertise and capacity, may become instrumental in most of these products.

Disclosure: I am long NBS, JNJ.