Neuralstem (CUR), a development stage stem cell and neurogenic drug company, has developed the first promising treatment for ALS, or Lou Gehrig's disease. In a recent clinical study, five of the six ambulatory ALS patients either improved or stabilized. To date, no other ALS treatment has demonstrated such positive results.
Encouraged by ALS trial results, Neuralstem is planning clinical trials on spinal cord injury patients later this year and will begin trials on stroke patients by early 2013. Neuralstem scientists believe their stem cell technology could also successfully treat multiple sclerosis, Huntington's, cerebral palsy, and traumatic brain injury. With all these indications, any level of success with these other incurable conditions could provide tremendous hope and relief for millions of patients as well as substantial returns for Neuralstem investors.
Neuralstem's Competitive Advantage
First, let's take a look at why I believe Neuralstem has developed the best-in-class stem cell technology.
For years, embryonic stem cell companies have been running into a brick wall. They could get the cells to reproduce (necessary for manufacturing enough cells to treat patients), but then they had trouble controlling the reproduction process. This is a problem because you do not want unlimited rampant reproduction of cells once the cells are injected into the patient.
Neuralstem was able to solve this dilemma by controlling when the stem cells differentiate into mature cells. Once that differentiation takes place, the reproduction stops, and the mature cells can go on to do what they need to do. This ability of a cell to do the right job is important, because you don't want to put embryonic stem cells into someone's brain, and have them turn into bone cells instead of nerve cells.
However, this breakthrough is useless unless it can actually help patients. Let's take a look at how Neuralstem has taken this technology and used it to treat ALS patients.
Success With ALS
The company's ALS trial which began in January 2010 at Emory University was the world's first FDA approved trial where stem cells were injected into the gray matter of the spinal cord. This was a revolutionary approach because most scientists and physicians believed that you could not inject stem cells directly into the spinal cord.
Here is how Neuralstem is tackling ALS:
ALS is a disease where all the motor neurons in the spinal cord die. Once the motor neurons die, they can no longer send messages to the muscles, and the muscles then die also. When the muscles that control breathing and swallowing die, the patient dies. Patients usually live for about two-and-a-half years following diagnosis. This is a bad disease with no cure.
Neuralstem is not putting in new motor neurons. Instead, doctors are injecting spinal cord neurons that hook up with and support the remaining motor neurons. For example, a patient who has only had the disease for a short period of time still has lots of motor neurons left. These remaining motor neurons are what the stem cells hook up to and then create new circuitry that lives as long as the patient lives. In essence, Neuralstem is helping the patient's body to rebuild and repair itself.
According to published data, the ALS trial was divided into two sections, six patients who could walk (ambulatory), and six patients who could not walk (non-ambulatory). The non-ambulatory group were patients who had no hope at all, and from my perspective, the FDA just wanted Neuralstem to treat these patients to prove that doctors were not going to kill the patients on the table. In other words, the six non-ambulatory patients were strictly there to test safety. Neuralstem didn't believe it could help these patients, but the company could demonstrate to the FDA that the procedure was safe.
The ambulatory group however still had some motor neurons left, so Neuralstem scientists were hopeful that these patients could be helped with the stem cell injections.
All 12 patients received injections in the lumbar region, or lower back, which is where the motor neurons that control walking are located.
First, the six non-ambulatory patients received full treatments, and the FDA was shown that the treatments were entirely safe. Next, the ambulatory patients were treated, and the results were nothing short of amazing. five of the six ambulatory patients either got better or stabilized.
Remember, stabilization in a degenerative disease like ALS is a very good thing. As expected, the non-ambulatory patients did not get better; they had no motor neurons left for the stem cells to attach to, so the disease progressed as it normally would.
No one has ever gone after the gray matter in spinal cords before. Most physicians and scientists had serious doubts that this could even be accomplished without seriously injuring the patient. Neuralstem has not only proven its safety, but has generated positive clinical results as well.
During this trial the FDA limited Neuralstem's injections to 100,000 cells per injection. Half of the patients received a total of five injections, and the other half received 10 injections. It turns out that the ambulatory patients who received 10 injections got the best results.
In the future, Neuralstem will be injecting 300,000 cells with 20 injections. The company believes the results will be substantially better in the higher doses. Since this technology is so new, the FDA insisted that Neuralstem start off slowly.
One Patient's Story
The Neuralstem patient who improved the most, Ted Harada, had this to say in an article he wrote for his local paper:
I have a lot to live for: a beautiful family, friends and a life I love. Until a few short years ago, I also had hope. All that changed in an instant. My future, my career, my hope of watching my three children grow up, attending their graduations, walking my daughters down the aisle, holding my grandchildren and growing old with my wife -- all of that disappeared with two short sentences: 'I'm sorry, you have ALS. There is no cure.'
In 2010, I was diagnosed with ALS, or Lou Gehrig's disease. I was 38. My left leg fatigued easily. I was short of breath, my energy tapped. I needed a cane to walk. Then came the barrage of tests, the results the same: There is no hope. You are without hope. Then I heard about a clinical trial (Neuralstem) transplanting neural stem cells into the spinal cords of ALS patients. It was the first of its kind. The Food and Drug Administration approved it and I qualified. I was treated at Emory University Hospital in March 2011.
'It's been nothing short of miraculous,' Harada said last year in an interview with CNN. 'I cannot begin to explain the difference it has made.'
Here is the link to a Newsweek article that describes Ted's situation in greater detail. Local Fox TV stations are proclaiming this ALS trial as "one of the most powerful stories we've ever reported." It's no wonder, because Neuralstem has created a treatment that has actually improved the lives of ALS patients.
Economic Potential for ALS
With ALS I expect Neuralstem to generate approximately $100,000 per patient. There are an average of 5000-6000 new ALS patients per year in the US alone which would represent a total addressable market of $500 million-$600 million.
Genzyme has proven that you can get reimbursement for these high cost treatments. Genzyme went after what is called "orphan rare diseases" and was able to receive reimbursement.
Neuralstem has already applied for and received orphan designation with the FDA. There also was a law passed in 2001 that mandates Medicare reimbursement for ALS treatments. Under that law, within one month of diagnosis all ALS patients are automatically eligible for Medicare disability. I expect reimbursement will be no problem for Neuralstem.
The FDA has already approved Neuralstem's bank of stem cells for use in human trials, and this one bank alone will treat millions of patients. Once the FDA approves this bank for commercial use, which the company does expect to happen, Neuralstem will have tremendous efficiency of manufacturing, and its cost basis will actually be very low on a per patient basis. From this original cell bank, Neuralstem will basically be able to treat all patients for all indications with the spinal cord cells.
Major Pharma Pursuing Stem Cell Technology
It's no wonder that most of the major pharmaceutical companies are pursuing stem cell technology in a big way. Johnson & Johnson (JNJ) and its partner Novocell are targeting diabetes and cancer. Pfizer (PFE) is going after inflammatory bowel disease. GE healthcare (GE) and Glaxo SmithKline (GSK) have also jumped on the bandwagon.
Neuralstem's game plan is to use this positive clinical data to leverage negotiation talks with potential partners. I believe that Neuralstem's new clinical ALS data generated serious interest from many of the big pharmaceutical companies.
If Neuralstem announces a partnership or buyout, the numbers will probably not be small. For example, Cephalon, now owned by Teva (TEVA), paid $220 million for a 20% equity stake in Mesoblast, an Australian stem cell company. But even more staggering is the $1.7 billion in milestone payments that Mesoblast could receive from Cephalon. A transaction like this with Neuralstem would not surprise me if it occurred within the next six months.
Neuralstem's Other Big Product: New Class of Antidepressant
Neuralstem's revenue potential goes beyond stem cell therapy. The company owns the patents to a neurogenic drug used to treat depression. Preliminary data indicate that this drug reduces depression symptoms and produces no side effects.
In order to better understand how this drug works, I will need to get a little bit technical here. There is one area of the brain called the hippocampus (where you make memories and do your critical thinking). The reason that you can make new memory throughout your whole life is because in the hippocampus, you have circuits. The hippocampal area contains a large reservoir of neural stem cells that replenish and rebuild the hippocampus throughout one's life.
For now, the most important thing to realize about the hippocampus is that in depressed patients the hippocampus shrinks.
How Neuralstem Discovered This New Neurogenic Drug
About 10 years ago, the Army gave Neuralstem $2.5 million to develop a drug that would prevent hippocampal shrinkage and improve cognitive ability in soldiers who were experiencing severe stress due to extreme battle conditions. It turns out that when soldiers are stressed, particularly due to lack of sleep, they experience hippocampal atrophy (their hippocampus shrinks). The Army wanted a way to deal with this condition because the soldiers did not perform well when afflicted with hippocampal atrophy.
Neuralstem was hired because it was the only company that had proven it was able to grow hippocampal stem cells. In order to develop and test this new neurogenic drug for the Army, an unlimited supply of hippocampal stem cells were needed.
Neuralstem began the development process by testing 700,000 different drug compounds via computer models. From there, Neuralstem scientists selected the best 10,000 compounds and began testing them in the laboratory. Each compound was tested with different dosages, so this was quite a lengthy process. It was all possible because Neuralstem had access to an unlimited number of hippocampal stem cells.
Finally, Neuralstem narrowed the field down to one very potent neurogenic drug. This particular drug achieved what Neuralstem scientists were aiming for, hippocampal growth.
About the same time, the medical community started to become aware of the fact that the hippocampus was shrinking in depressed patients. Scientists began to think that perhaps the reason Prozac and other antidepressant drugs really work is because they are actually regenerating cells in the hippocampus. Animal studies were conducted and this was determined to be the case. MRI scans showed that antidepressant drugs increased hippocampal volume on a percentage basis, low to mid-single digits.
So everybody in Big Pharma started chasing neurogenic drugs as a means of beating depression and other cognitive diseases. Of course Neuralstem had a tremendous advantage here, because it was the only company that had access to an unlimited supply of hippocampal stem cells.
Neuralstem wanted to test its new drug for depression, so the company obtained about $500,000 from NIH, which it invested in animal studies to see the effect of its neurogenic drug on depression and hippocampal volume.
The company discovered that its drug was as good if not better than all the antidepressive drugs on the market. The commercial antidepressants were showing hippocampal volume increases of about 5% or below, whereas Neuralstem's new drug was able to increase hippocampal volume up to 20%. By most other measures, Neuralstem's drug excelled in decreasing depression symptoms.
Neuralstem was encouraged by these results so it decided to do a human study. This was the first human study with this class of drugs, so the FDA needed a strong safety trial first. Neuralstem conducted a placebo-controlled Phase Ia trial with 41 healthy volunteers to prove to the FDA that its small molecule drug was safe.
After that trial, the data was so good in terms of safety that the FDA gave Neuralstem the go-ahead for a Phase Ib trial so it could start dosing actual major-depressive disorder patients.
No Side Effects
Perhaps the most important information that came from that Phase Ia trial was the fact that there were absolutely no side effects. For example, one of the most popular antidepressants, Prozac lists common side effects which include nausea, insomnia, sexual dysfunction, and anxiety. Some of these side effects are worse than the actual depression, so many patients just quit using the drugs.
The company should soon be finished dosing the first cohort of major depressive disorder patients in the Phase Ib trial. These patients took the pill once a day for 28 days in a randomized placebo-controlled trial. The second and third cohorts will take the pill twice a day and three times a day respectively.
In addition to measuring all the kinds of things you measure for depression, Neuralstem is also taking MRI scans to see if it can detect an increase in hippocampal volume. All of these patients will receive MRI scans before, during, and after the trial. Even though this is primarily a safety trial, given the new nature of the drug, Neuralstem will be looking for increases in hippocampal volume as well as improvement in depression measurements.
This human trial will be finished in December 2012, and we will see results soon thereafter. Positive results could have a major effect on the share price.
Economic Potential for Antidepressant Market
In 2010, antidepressant sales were over $11 billion. If Neuralstem's neurogenic drug is able to reduce depressive symptoms, without producing side effects, the company should be able to capture at least 10% of the antidepressant market, or $1.1 billion annually
I expect this drug to be partnered. A royalty rate of 8% would net Neuralstem $88 million annually. With 54 million shares outstanding, we have an EPS of $1.62. With a P/E of 10, that gives us a share price of $16.20. Now you can see why any efficacy data we get in January is so important.
Valuable Patents Create Strong Bargaining Position for Neuralstem
This new neurogenic drug represents extremely valuable intellectual property for Neuralstem. I especially like the fact that Neuralstem's patents include composition of matter and end process.
These patents were issued about a year and a half ago, so there is a lot of life left on the patents. A good drug patent can generate hundreds of millions of dollars per month, so the longer patent life has significant economic value.
Also, because the entire pharmaceutical industry is chasing the neurogenic drug technology right now, Neuralstem should be in a very strong bargaining position with potential partners. This is the cutting-edge, and where everyone is headed.
Neuralstem's goal is to partner with one or more major pharmaceutical companies that will not only address the depression market, but will also address all the other neurogenic drug markets where hippocampal atrophy is an issue, including Alzheimer's, stroke, traumatic brain injury, antiaging, and post traumatic stress.
Neuralstem's New Drug Could Treat Alzheimer's
I believe the next major indication for Neuralstem's neurogenic drug will be Alzheimer's. Preliminary studies have indicated that cognitive diseases like Alzheimer's and dementia are directly linked to hippocampal atrophy. Remember, Neuralstem developed this product for the Army to prevent hippocampal shrinkage and to improve cognitive ability. We know that, at least in animal studies, that Neuralstem's drug increases hippocampal volume by up to 20%. Such a large increase in hippocampal volume implies considerable cognitive improvement. If a drug was able to increase cognitive ability in Alzheimer's and dementia patients, that would be a tremendous medical breakthrough.
The timing couldn't be better for Neuralstem. Within the last few weeks, three major drug companies have reported failures with their newest Alzheimer's drugs. Billions and billions of dollars were invested in these drugs, and recent data shows they just didn't work.
Bapineuzumab, made by Pfizer and Johnson & Johnson, was designed to help Alzheimer's patients by halting the build-up of plaque in the brain. But it failed to improve cognitive or functional performance compared with a placebo in certain patients.
These recent Alzheimer's drug failures could accelerate Neuralstem's talks with Big Pharma, especially regarding the Alzheimer's indication.
Alzheimer's is a huge market. Over 25 million patients are affected by Alzheimer's. The overall costs associated with treating Alzheimer's goes beyond $200 billion a year. The total addressable market for Alzheimer's is about $60 billion per year, assuming a prescription costs $200 per month, per patient. No wonder Big Pharma has pumped billions of dollars into trying to discover a new Alzheimer's drug.
Imagine the Market for a Drug That Makes You Smarter
Depression, Alzheimer's and dementia could be the tip of the iceberg. Imagine if this drug could improve memory and cognitive ability in normal people who are not suffering from Alzheimer's. Since Neuralstem's new drug has no side effects, this could actually become a drug that anyone can use to improve cognitive function. Though it may seem like futuristic science-fiction, this new class of drugs represents potential beyond anyone's imagination.
Risks for Investors
As with any development stage company, there are risks, any of which could have a negative impact on share price.
One risk is that Neuralstem will have to do a capital raise some time in the first quarter of 2013. Right now, Neuralstem has about $5 million in cash, and its burn rate is about $500,000 per month. That gives it at least six months before a capital raise becomes necessary.
Another risk is that the Phase Ib neurogenic drug trial results for depression come back negative. There is also the risk that the spinal cord injury trials or the stroke trials do not produce results as positive as the ALS trial. There is no way for investors to predict the outcome of these two trials.
As an investor, I am willing to accept these risks because with each of these risk comes potential solutions:
- The company's goal is to have at lease one partnership announced before the end of 2012. This would negate the need to raise more cash because a partnership based on either the stem cell technology or the neurogenic drug should bring in upfront payments in the tens of millions of dollars. In my opinion, given the positive clinical data, there is a good chance Neuralstem will complete a partnership deal before needing to raise more cash.
- The Phase Ia safety trial results were successful, so I would expect the Phase Ib safety trials to go well also.
- The spinal cord injury and stroke trials are ways off yet, and I expect share price appreciation based on other catalysts, long before trial results are announced.
Time Frame for Catalysts
In October, the company will announce updated ALS clinical trial data for 18 patients, including the six newest ALS patients. If this news is as positive as the previous ALS data, we could see a sharp rise in share price.
In January 2013, the company will announce the Phase Ib depression trial results for its neurogenic drug. Positive results for safety could give investors up to a 30% share price increase. Positive results for efficacy could easily double the share price.
The third catalyst could be a partnership or buyout announcement late in 2012, or Q1 of 2013. Investors could easily realize a 50% to 100% share price appreciation from today's level if a buyout or partnership were announced.
From my perspective, Neuralstem provides a better investment opportunity than StemCells Incorporated for the following reasons:
- Neuralstem is farther along in terms of clinical development.
- Neuralstem's neurogenic drug provides investors with a second potential revenue source, beyond the stem cell business revenue.
- Neuralstem with its $39 million market cap appears undervalued compared to StemCells Incorporated's $60 million market cap.
Stem cell and neurogenic drug companies are in the early stages of development, just like Internet companies were in the late 1990s. Some of these companies will succeed and some will fail. Given Neuralstem's positive clinical data, huge addressable market, and likelihood of a near-term partnership with Big Pharma, I believe the company has a good chance of becoming one of the big winners.
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