Are Stem Cells Becoming The Next Bull Market In The Biotech Space?

by: Amy Baldwin

Stem Cell Stocks Rally Despite Inconsistencies of the Market

The last 12 months has been particularly volatile, as the market trends from one extreme to the other in an economy that can't seem to gain any positive momentum for any extended amount of time. The last three months have been tremendously volatile, as the S&P 500 has lost only 1.25% of its value, but has traded in violent trends, as the perception and outlook of investors seem to change on a daily basis. The markets are currently trading higher, but with weak corporate earnings and gloomy economic data investors must be careful that they don't invest too much on the belief that Europe will resolve its debt issues (the catalyst driving the market higher). And although there have been some bright points such as the services industry, most sectors have performed poorly, as the markets have been driven higher by large cap stocks while small caps lag behind.

Perhaps the most impressive sector has been healthcare, led by the largest companies such as Bristol Myers (BMY), Johnson & Johnson (JNJ), and Merck (MRK). However, one space that is performing incredibly well, and is under-the-radar, is the cell therapy space, due to a number of key developments and optimism surrounding the companies in the space. Of course these are all small companies, yet all seem to be making strides in the right direction with increased government support and data that continues to impress that also suggests future approvals in the U.S. Therefore, I am looking at a few of the companies that are leading the rally, to determine whether or not the rally can continue, and just how much upside exists for the therapies in the space.

Osiris Therapeutics (OSIR) is the leader in the space, and is currently the only company with an approved cell therapy. The stock has returned an incredible 80% over the last three months, which was led by the approval of its cell therapy, Prochymal, in Canada and New Zealand, and thus, giving the company a market cap of $306 million. This approval arguably sparked the momentum in the space, as some had suggested that regulators would never approve a cell therapy because of assumed ethical or even moral issues that could arise. However, the approval of Prochymal is historic, and proves that regulators are willing to accept that there are some deadly diseases that cannot be treated nor cured with any other methods besides the regenerative abilities of a cell therapy.

There are some investors, however, that are bearish regarding the meaning of OSIR's approved cell therapy. The therapy is currently approved for the treatment of graft-vs-host (GvHD) in children, in which there were previously no effective treatments. However, the size of the market in Canada and New Zealand is very small; therefore, these approvals are not going to create hundreds of millions in revenue. Yet in some ways, I don't believe it matters. The approval is more of a first step in a long walk for Osiris, rather than a multi-billion dollar revenue producing therapy. The company could still gain approvals in other regions, and is currently testing the therapy for other indications such as myocardial infarction, Crohn's disease, and type 1 diabetes. Clearly, the opportunity for the uses of Prochymal to expand is possible, which could provide significant revenue in the future; but at this point its approval is more of a stepping stone for the rest of the industry as Osiris has now paved the way for others and increased its chances to gain approvals in other regions, and approvals for the treatment of other diseases. It is safe to say, as a long-term investment, OSIR could return large gains.

Pluristem Therapeutics (PSTI) has rallied 40% during the last three months following encouraging news regarding partnerships and the development of its cell therapies. The $154 million company is one of the more advanced in the cell therapy arena, and unlike OSIR, its lead candidates treat diseases that could potentially return significant revenue. With its strong clinical data, some believe PSTI will lead the charge in changing the perception among physicians, regulators, and the general public regarding the benefits of cell therapies, similar to how OSIR has opened the door for other cell therapy approvals.

The company is in position to begin a Phase II/III study on its therapy for critical limb ischemia (NYSE:CLI), which is a disease believed to affect 3 million people, and also for peripheral arterial disease (PAD), which is a disease dominated by the large more powerful pharma companies in the market. In my opinion, this is where the most upside exists for PSTI, as its PAD cell therapy has little to no toxicity, lower costs, quicker healing time, ease of administration, and most importantly, it can grow vessels and provide the possibility of a cure, which has led to much of the optimism surrounding the stock. Pluristem is also investing in the manufacturing of cells, which is a space with limited competition that is expected to grow larger, and some investors expect that its new facilities will be crucial in the development of its own candidates, and also a service for other businesses.

NeoStem (NBS) is by far the leader in regards to the manufacturing business, and no other company comes close. In addition, its stock has returned the most over the last three months, with a 100% gain. NeoStem is a well-diversified company, and besides recent upgrades, new clients in its manufacturing segment, numerous collaborations, and the sale of its generic pharmacy, the company also has a very promising clinical segment with its Phase II candidate, AMR-001.

NeoStem's large gains were in part because the stock had fallen in the second half of 2011 without a meaningful reason, but also because of its growing manufacturing segment and the sale of its generic pharmacy, which returned a large sum of cash and eliminated a significant amount of debt from its balance sheet. The company is much different from the other companies on this list, because it is so well diversified with 30 issued patents and over 90 pending, and has several segments of potential revenue, along with already returning a large amount of revenue as an established company.

Similarly to PSTI, its clinical segment is creating candidates with large revenue potential, with analysts projecting peak sales of $700 million for AMR-001, which treats patients following acute myocardial infarction. It has been well documented that the candidate is strikingly similar to Baxter's (BAX) very successful Phase III candidate, yet unique because the two therapies treat different conditions of the heart, therefore, leaving open the possibility for multiple indications.

In light of NeoStem's recent success, some have drawn a comparison between it and StemCells, Inc. (STEM), which is a much smaller company, yet a stock that has returned 90% during the last three months. However, STEM's performance differs because its gains have all occurred during the last two weeks after the company announced preclinical data that showed its human neural stem cells restored memory and enhanced synaptic function in two animal models relevant to Alzheimer's disease. Obviously, it is still early in the studies, and results could be much different in a larger trial. However, if this small company does find an answer to the horrific Alzheimer's disease, then it will be worth far more than $45 million. The notion that stem cells could restore memory is a breakthrough that could lead to far more advances in the space, which is one reason that this stock has traded with such momentum.

Each of the four stocks above are contributing greatly to the advances of cell therapy, and each present a significant level of upside beyond its most recent gains. Osiris is the closest to generating substantial revenue by already having two approvals, and is currently testing its therapy on other diseases, thereby leaving open the possibility of future gains. Pluristem has candidates to treat diseases in potentially large markets, and is expanding with its manufacturing facility. Although StemCells is in the early phases of development, it still has a very innovating therapy that, if proven effective, could advance the space even further. However, I believe that NeoStem is the best positioned as it possesses all the benefits of the other companies in this article such as an innovating technology, a diversified pipeline, a candidate with significant revenue potential, a large manufacturing business, and returns double the sales of OSIR, with nearly $80 million during the last 12 months. Also, the company's services business, which has manufactured more than 30,000 cell products, consists of a staff with expertise that cannot be matched in the industry. At this point, it appears the entire space is moving forward, is expanding, innovating, and gaining momentum by the day, and that these four companies stand alone with therapies that should lead to approvals and therapies for patients who otherwise would have few treatment alternatives. Hence, it makes sense that these four stocks would trade with such considerable gains, as investors can now identify the benefits of cell therapies. And as more approvals occur, it could be a space that trades considerably higher regardless of the market's indecisiveness.

Disclosure: I am long NBS, JNJ.