The Next Big Growth Sector In Health Care: Stem Cell Therapy

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Includes: AMD, ATHX, CUR, MEOBF, OCAT, PFE, SCI, TEVA
by: Troy Bayer

Last week, surgeons at Emory University injected a second round of stem cells into the spinal cord of Ted Harada, the amyotrophic lateral sclerosis (ALS) patient whose condition dramatically improved after receiving an initial dosage of stem cell therapy. Harada's surprising improvement, coupled with Dr. Eva Feldman's proclamation that stem cell therapy had essentially halted progression of ALS some of the patients, could create a flood of new investment capital from major pharmaceutical companies. While there is little doubt that stem cell therapy has enormous potential, it remains to be seen how much of the health care market it can capture because the vast majority of stem cell products are still in the clinical trial phase. Through analysis of the various disorders and diseases that stem cell therapies can treat, it can be reasonably concluded that there is at least a $500 billion market for products that demonstrate efficacy and are able to obtain U.S. Food and Drug Administration (FDA) approval.

The largest potential market for stem cell products appears to be for cardiovascular disease and stroke. According to the U.S. Center of Disease Control (CDC), cardiovascular disease and stroke cost Americans up to $444 billion in 2010 alone, a figure that amounts to nearly 20 percent of all health costs. The World Health Organization (WHO) estimates that more than 15 million people suffer from strokes worldwide each year, with one-third of the victims becoming permanently disabled. Several stem cell products aim to treat the neurological injuries commonly caused by strokes.

Athersys, Inc (NASDAQ:ATHX) is one stem cell company attempting to enter this market. Competition is extremely thin as the only FDA-approved drug for ischemic strokes is an anti-clotting drug called tPA. However, this item has a very narrow application window and can only be used within three to four hours after a stroke, without risk of serious complications. The product being developed by Athersys, called MultiStem, does not have this limitation and its application has yielded benefits up to one week after a stroke. Researchers at the University of Texas and the University of Minnesota have both touted the demonstrable benefits of the stem-cell based treatment. Currently, Multistem is undergoing Phase 2 clinical trials to ensure the safety of administering the product intravenously. Athersys is also investigating whether MultiStem could be utilized to treat cardiovascular disease, vascular disease, congestive heart failures, obesity, and repair the damage caused by heart attacks. According to the CDC, annual medical costs for obesity alone could be $147 billion or more .

Athersys has also partnered with Pfizer (NYSE:PFE) to develop and commercialize a variant of MultiStem to treat Inflammatory Bowel Disease (IBD). There is currently no cure for IBD, and many of the available treatments are not entirely effective and simply reduce the occurrence of symptoms. Athersys is currently conducting Phase 2 clinical trials across the U.S. and Europe with over 120 patients. The CDC estimates that the cost of treating IBD is approximately $1.7 billion. While this is certainly a smaller market than some of the more prevalent diseases, it still provides an opportunity for both Athersys and Pfizer. With a market capitalization of just $45 million, Athersys could grow considerably by cornering the billion-dollar IBD industry. Pfizer will most certainly profit from the success of an Athersys IBD product; however, the main benefit to the company is a first-hand, in-depth look at the emerging stem cell industry in general, as well as the establishment of a business relationship with a company whose signature product could be utilized to treat not just IBD, but a wide variety of diseases and ailments.

Another company that has targeted cardiovascular disease is Mesoblast, Ltd (OTC:MEOBF). Mesoblast is partnering with Teva Pharmaceutical Industries (NASDAQ:TEVA) to utilize stem cell therapy to prevent congestive heart failure (CHF) and is currently in discussion to proceed to Phase 3 of clinical trials, the final stage of the FDA approval process. The company also has a product in Phase 2 of clinical trials to treat Acute myocardial infarction. Mesoblast is also using its adult stem cells to treat diseases and ailments such as diabetes, inflammatory joint disease, lung disease, intervertebral disc repair, spinal fusion, neurological disease, and wet age-related macular degeneration ((NYSE:AMD)).

Many of these products are already in the Phase 2 trial stage and the company's repeated successes during evaluation and testing are encouraging enough for the company to develop a manufacturing strategy as its products move closer to commercialization. There are several factors that make Mesoblast attracting to investors. First, the company's use of adult stem cells eliminates many of the political, ethical, and legal concerns linked to stem cell therapy. Second, Mesoblast's close business relationship with Teva provides them access to the major pharmaceutical company's commercialization expertise and global distribution capability. Lastly, like Athersys, the company's stem cells can be utilized to treat a wide variety of diseases and ailments, and are not limited to one sector. Considering Mesoblast has a market capitalization of $1.8 billion, but is trading for just above $6 a share, there is an argument based on the aforementioned factors that the company's stock is undervalued.

Neuralstem, Inc. (NYSEMKT:CUR) made national headlines when the Phase 2 clinical trial it sponsored, administered by Emory University and the University of Michigan, produced a miraculous improvement in ALS patient Ted Harada. Neuralstem's stem cell therapy program relies on using specialized cells housed by the brain and spinal cord, and using the injection of healthy cells to replace and/or repair those that are damaged or diseased. The approximate annual cost of treating an ALS patient is $200,000. Based on the CDC's estimate that 5,000 new patients are diagnosed each year with ALS, and using the minimum life expectancy of three years, the market for ALS treatment is at least $3 billion per year. It should be noted that there currently is no cure for ALS, meaning that Neuralstem's product would have the market cornered if its product proved effective and safe.

Much like its ALS treatment, which injects stem cells directly into the spinal cord, Neuralstem also plans to utilize this procedure to treat acute spinal cord injuries ((NYSE:SCI)). The average medical cost for SCI is $15,000 to $30,000 per year. Using the CDC's estimate that 200,000 people in the U.S. are living with SCI, the market for a stem cell product would be approximately $3 billion.

While Mesoblast is developing a stem cell-based product to treat wet AMD, Advanced Cell Technology, Inc. (ACTC.OB) has its sights set on dry AMD and Stargardt's Macular Dystrophy (SMD). For people over the age of 55, dry AMD is the leading cause of blindness and has a potential $25-30 billion market in the U.S. and Europe. The company also has a pre-clinical program to use stem cells to treat blood and cardiovascular diseases. However, ACT is a risky investment due to its usage of human embryonic stem cells (hESC); a topic of heated debate in the U.S. While the company claims that it obtains the stem cells without harm to the embryo, public opposition to its usage could be strong.

Overall, it is evident that the stem cell industry will inevitably be a growth industry. Nonetheless, significant investor risk remains as most of these companies have yet to commercialize a product, although several have products in Phase 3 of the FDA process. However, the story of Ted Harada is uplifting to the biotech companies investing time and resources in stem cells, and the huge market potential is attracting enough for investors to consider getting into this industry early.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The writer is not a licensed broker or investment adviser and therefore cannot recommend that you buy, sell, or hold any security. While every attempt was made to verify the information in this report, much has been derived from public sources and cannot be guaranteed for accuracy.