3 Biotech Companies To Consider For Stem Cell Exposure

 |  Includes: BAX, CLBS, CMI, HALO, JNJ, OSIR
by: Cris Frangold

Stem cell research has been a hot area, especially over the past several years. Stem cells play a key role in regenerative medicine, and can be used to heal such things as broken bones, heart damage, and deafness. In this article, I will examine three companies that are making moves to increase their capabilities in stem cell research and development. These companies are offering new treatments and becoming more competitive. While NeoStem (NBS) is pushing its AMR-001 stem cell drug through phase 2 trials, Osiris Therapeutics (NASDAQ:OSIR) recently had its stem cell treatment Prochymal approved. Meanwhile, Baxter International (NYSE:BAX) has also been developing its stem cell treatment platform. I will examine these developments, and also discuss how they could impact the stock of each company.

NeoStem recently eased the minds of investors who were worried that its Chinese Suzhou Erye generic pharmaceutical business did not fit its biotech profile by selling its 51% stake in the company. NeoStem will receive $12.28 million in cash at the close of the deal while eliminating more than $37 million in debt, with the net effect of strengthening its balance sheet by over $50 million. This sale and refocus of the company's resources are but two of the reasons I am bullish on the company's potential. There are also several additional reasons why an investment in NeoStem should be seriously considered.

NeoStem's Progenitor Cell Therapy (PCT) business has recently acquired another late stage client, SOTIO, for whom it will manufacture stem cells for its Phase 3 trials. This is the latest addition to a prominent customer list that includes Baxter International, Johnson & Johnson (NYSE:JNJ) as well as others. This business is the leader in the contract manufacturing of stem cells, and enables the company to leverage more than ten years expertise and the investment in state-of-the-art manufacturing facilities to create a stable revenue stream.

The second reason for consideration is the AMR-001 stem cell drug that is now in Phase 2 trials. AMR-001 is an autologous stem cell therapy that increases the chances of survival for those who suffer from chronic myocardial ischemia ((NYSE:CMI)), a severe coronary artery disease which causes long term damage to the heart. This is an encouraging sign that stem cell treatment could lead to a major step forward in the regeneration of damaged tissue. Interestingly, Baxter has been developing its own CD34+ stem cells for use with patients who also suffer from CMI in which the stem cells are being supplied by NeoStem's PCT division. The Baxter treatment is in Phase 3 clinical trials, and studies have shown that it has been able to repair heart muscle. The difference is that the Baxter treatment is injected directly into the heart whereas the NeoStem treatment, which utilizes both CD34+ and CXR4+ stem cells, are infused in the artery in the region of the infarction. Each company's upcoming clinical data will determine which of the two approaches is most effective, although each is showing promising results so far.

Finally, NeoStem also has another promising platform that is developing treatments based on the technology of very small embryonic-like-stem cells (VSEL). This could be the regeneration treatment of the future because it appears to have few limitations on its application of tissue regeneration. VSEL cells are believed to possess the capability of liver regeneration, treating osteoporosis via bone regeneration, treating chronic wounds, and regenerating motor neurons among other things. The approach also eliminates the moral dilemma associated with embryonic stem cells because the cells are derived from bone marrow. NeoStem has received long-term grants from the Department of Defense, as well as the National Institute of Allergy and Infectious Diseases for funding research in developing the technology.

The complicated, expensive, unpredictable and time-consuming FDA regulatory process continues to make investment in the biotech space risky. However, NeoStem's revenue from the PCT business, including the successful Baxter trials, limits some of the risk by incorporating some stability into the company's business model.

Another interesting company in the stem cell treatment space is Osiris Therapeutics. Osiris recently made history by developing the first U.S.-company approved (in Canada and New Zealand) stem cell treatment, Prochymal, which treats children afflicted with Graft vs. Host disease from bone marrow transplants. This fatal disease was hitherto untreatable and kills 80% of children afflicted, often in a matter of weeks.

Osiris additionally focuses on developing stem cell treatments that create the equivalent of living skin based on the capability of stem cells to grow into any other type of specific cells. The company calls this novel treatment "Grafix". Potential uses for their stem cell treatment have a wide range of indications from treating chronic wounds to burns. Chronic wounds, like diabetic foot ulcers that fail to heal, have few viable treatments today and could lead to serious complications. According to the National Institutes of Health (NIH), patients with chronic wounds in the US alone number 6.5 million. The company uses adult "mesenchymal" stem cells that are especially suited to creating living skin tissue. You can think of these cells as blocks from a Lego set, which can be rearranged into a large number of different types of cells.

To complement surface tissue repair using Grafix, Osiris also has a platform addressing tissue regeneration of a different type, bone repair. The company calls the treatment, Ovation, and is developing the therapy to contain the components necessary to successfully graft and repair bone injuries. These components are an extracellular matrix to provide 3-D support for tissue repair, regenerative growth factors and anti-inflammatory cytokines, and endogenous mesenchymal stem cells to coordinate the tissue repair process.

There are a number of additional products in the development pipeline including treatments for heart tissue repair and the creation of insulin for diabetes. The only investment problem that I can see is the availability of cash. The company burns about $5 million quarterly, and it currently has $41 million, compared to $60 million in the previous year's same quarter. Because Osiris is developing many treatments where none are currently available, successful approvals could lead to blockbuster products. As the patent cliff looms for the large pharmaceutical company, Osiris could make a valuable acquisition since it is developing mature products with proven capabilities.

Once again, I would urge you to keep the risks of biotech investing in mind. However, if you have an appetite for risk and an urge to invest in the stem cell treatment space, Osiris could be a nice fit for your portfolio.

If you are averse to pure biotech plays, yet believe in the future of stem cell treatment, a relatively low risk alternative for you might be Baxter International. Baxter is a large health care company that is now developing its stem cell treatment platform. The company is a global medical products company that operates in over 100 countries and produces treatments for a number of diseases including hemophilia, immune disorders, kidney disease, and cancer. Results for the second quarter show a net income of $661 million with earnings per diluted share of $1.19, up 7% from last year's figures of $615 million and $1.07 per diluted share. Excluding the impact of currency translation, sales growth was 4%. Analysts had forecast an EPS of $1.11 per diluted share. Looking ahead, the company expects an EPS of $1.12 to $1.14 per share against the consensus analysts' estimate of $1.16. The guidance for the full year 2012 is $4.50 to $4.56 per diluted share. The financials were mentioned for Baxter and not the other two companies because it is currently the only one operating with a profit, but the $32 billion market cap does limit upside potential if it has future success in its stem cell research.

Baxter is a stable stock because the demand for its profitable products tends to stay steady even under depressed economic conditions. However, the company has not been particularly agile in moving into the developing markets. The company had a recent setback when the FDA asked for more data on the long-term use of its experimental drug, Gammagard HyQ. The drug is a combination of Baxter's Gammagard IVIG product and a recombinant human hyaluronidase from Halozyme Therapeutics (NASDAQ:HALO). It is intended as a treatment for patients with primary immunodeficiencies. The delay has left investors with some concern about the company's antibody therapy business.

Despite the recent setback, Baxter is a solid investment as there are significant entry barriers to some of their businesses, such as plasma derived therapy. Stem cell treatment will likely be only a small part of its business at best, so don't look for the kind of returns that you would receive from a biotech that develops a blockbuster product. On the other hand, you would see some benefits from the successful development of stem cell treatments while avoiding the downside largely, as Baxter is big enough to absorb moderate losses and to fund the necessary development and commercialization. I believe Baxter could be a good investment option if you are looking for a safe and lower risk dividend stock with modest capital appreciation with some exposure to the stem cell sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.