Neuralstem's (CUR) trading day on September 13 symbolized the stem sector's current level of risk/reward with a phenomenal day of hope, upside surge, volatility, and end of day disappointment. An early morning press release from the company announced that surgically paralyzed rats that were rendered permanently and completely paraplegic regained a remarkable level of motor function in all their lower extremity joints after being treated with the company's NSI-566 spinal cord stem cells. The announcement noted the degree of observed increased axon length throughout the severed spinal cord region.
The chief science officer, Dr. Karl Johe, went on to state:
Our cells built a bridge that received inputs from regenerating rat axons above the injury. They also sent out new human axons, which made new synaptic connections with the host motor neurons in the gray matter below the injury. The fact that these cells induce regeneration of axons and partial recovery of motor function makes them relevant for testing for the treatment of human spinal cord injury.
The implications for the likely upcoming trials in humans are significant, not only for the hugely-unmet medical need, but also give investment potential in the company -- and even the sector -- a huge boost. If this success can be replicated in human subjects, even an early stage phase I trial would prove to be a huge share price booster not often seen from such early-stage phase I results.
As investors bought into the hype to the tune of over 1 million shares trading hands, they pushed the share price up almost 100% from the previous day's close of $1.00 to a high of $1.96 in mid-day trading. The attention and hype in the company's preclinical trial reached a feverish level, with investors ignoring one key element -- the company's financials.
Neuralstem's financials were in poor condition, as it is a development-phase stem cell company with no current revenue. In its Q2 earnings, the company's financial situation was spelled out, and was much like the rest of the sector's financials. With $2.5 million in cash and equivalents on June 30, the company reported a loss of $4.8 million for 1H 2012. Most notably, it reported its monthly cash burn rate to be about $700,000 -- or $2.1 million per quarter. At that rate, it would be down to less than a half a million in cash by the end of September.
The announcement on the success in the preclinical therapy for the paralyzed rats was an early morning press release. Forward ahead just a few hours to an after-hours announcement that stunned many of the new shareholders who hadn't reviewed the company's financials. After markets closed, Neuralstem announced that it had filed to raise $7 million in a direct offering at $1.00 per share. The funds would be used for general corporate purposes, including research and development expenditures, working capital, capital expenditures, clinical trial expenditures, and other general corporate purposes.
While the impact on the earlier shareholders was less, the new shareholders purchasing at the elevated levels experienced fairly significant losses for at least the interim, as the offering seemed to squelch the stock's momentum. Closing at $1.38, the stocked opened the next morning at $1.15, down considerably from the previous day's highs. While the stock will likely continue to recover, it may not reach the elevated levels it reached on September 13 for quite some time due to the additional share dilution announced at the end of that day and the fact that there are no expected significant catalysts to drive the share price back up for the interim.
Neuralstem's press releases on September 13 summed up the sector's current level of maturation. The earlier release on that day signified the hope and level of success possible for stem cell therapies for patients and a healthcare sector desperate for solutions to many injuries and diseases. While there are many cancers, viruses, and bacteria that can be combated and defeated, severed spinal cords and similar injuries have extremely poor prognoses where the only real hope, in many cases, is relying on the patients' bodies healing themselves. While there are procedures and therapies that can assist, the body often has to take care of itself to the best of its abilities.
With stem cell treatments, physicians can help out the healing process by providing cells differentiating and growing into the needed cell types to greatly facilitate the healing time and efficiency. If successfully implanted, these cells have the potential to heal injuries once thought to be permanent, as indicated in Neuralstem's preclinicals. However, the clinical trial process for stem cell therapies is a very slow and expensive process. While the sector continues to mature and show progress, investment potential has, at times, appeared to be less appealing than with many other sectors, such as weight loss drugs, cancer treatment, and other large market indications. Public offerings occur frequently within the sector, with shareholders having to close their eyes and think longer term while holding their shares, or they may tiptoe around the offerings hoping to buy at whatever dips may occur as the offerings are announced.
While the number of companies focusing on stem cell therapy is slowly growing, the choices for legitimate, investment-grade companies for investment potential are few indeed. With virtually all of them construed as development-phase, shareholders may have to exercise a great deal of self control and patience as they await positive results and especially earnings of any sort in the mid to longer term.
There are two stem cell companies currently generating revenue in some form that are trading at levels offering solid upside. While profitability may be a way off for these, they are likely the best of the group in terms of being the closest to profitability, and may offer the most hope for merger and acquisition potential. These companies may experience growth on the back of Neuralstem's preclinical success, as shareholders new to the sector may begin their research and try to ascertain which company in the sector is worthy of their funds. Although Neuralstem's promising therapy is only in preclinicals, the additional exposure the sector is likely receiving will put many of its companies under the proverbial microscope, with hopefully only the legitimate and more promising ones emerging and gaining shareholder confidence.
Osiris Therapeutics (OSIR) is the obvious first choice for investment consideration in terms of revenue generation, as it has received two marketing approvals for Prochymal, a manufactured off-the-shelf stem cell therapy to treat Graft versus Host Disease (GvHD), in 2012. GvHD is the leading cause of death among patients who receive bone marrow transplants. The affected patients' bodies are treated as foreign, and are attacked by the transplanted bone marrow.
Until Prochymal, there was no treatment for the disease, which may kill up to 80% of children affected after receiving bone marrow transplants. With approvals in Canada and New Zealand, the events marked the first and second marketing approvals for a true manufactured stem cell product. With additional phase II and phase III trials in its pipeline, Osiris is showing great promise and is leading the sector with regard to hope for patients and shareholders.
However, setting it apart from the rest of the sector is its revenue generation from its marketed product line. Although the company isn't yet reporting revenue generated from Prochymal, sales should start in the coming months and will help to shore up the company's cash position, which is better than most of the sector. In its Q2 earnings, Osiris reported $1.6 million in revenue from its Biosurgery product line, with the company still operating with a net loss of about $4.3 million. At the end of June, the company had no debt and about $40 million in cash and equivalents. The 43% quarterly increase for its Biosurgery product line was significant, as it is providing much needed revenue for the company as it begins its marketing phase of Prochymal and also funds the rest of its pipeline research. Giving it an edge over many of its cohorts, the company is growing, maturing, and approaching a phase of growth that may negate additional share offerings in the future and, thus, grow shareholder confidence and value.
NeoStem (NBS) is another company worthy of additional research for investment in the stem cell sector. Its most advanced clinical candidate, AMR-001, is currently in a phase II trial to prevent major adverse cardiac events following acute myocardial infarction (AMI). With a huge indication targeted, the aptly-named PreSERVE trial is scheduled to complete enrollment in 1H 2013, with 6-month interim results likely reported in Q4 2013. Initiating enrollment in January 2012, the trial's Data Safety Monitoring Board (DSMB) recommended continuation of the trial in mid-August after an interim data and safety review. With significant catalysts not likely due for this trial until 2013, the true value for this company may not shine through as a result of this clinical trial until late 2013. However, like Osiris, the company is generating revenue, unlike most of the sector.
NeoStem's Progenitor Cell Therapy (PCT) division is a sector-leading entity in contract development and manufacturing of a host of cell therapy products. With over 12 years of experience in the sector, the company boasts an impressive 65,000 square feet of development and manufacturing space with all the latest technologies necessary to not only produce cell therapies in clinicals, but also in marketing phases of development after regulatory approval.
With a growing clientele of small and large capitalization pharmaceuticals, the company is not only gaining additional experience to go with its already 30,000 cell therapy procedures performed, but is also generating revenue to the tune of $3.4 million for Q2 2012, up 53% from Q2 2011. Revenue was broken down into categories as follows: Clinical Services - $1, 753,700; Clinical Services Reimbursables - $846, 900; Processing and Storage Services - $765,100; and Other - $6,400.
Of particular significance for shareholders was the description of the growth in the Clinical Services category:
Clinical Services, representing third party process development and clinical manufacturing services provided at PCT, of approximately $1.8 million for the three months ended June 30, 2012 compared to $1.0 million for the three months ended June 30, 2011, representing an increase of approximately $0.8 million or 82%. The increase in clinical services revenue is due to an increased overall visibility of PCT and penetration into the cell therapy marketplace along with a general increase in the development of autologous cell therapies in the United States due to enhanced investment and expanded marketing programs in 2011 and 2012.
The investment potential in NeoStem for the midterm is not due to its phase II AMR-001 clinical now underway, but it is rather to its growing presence as a contract cell therapy manufacturing entity. Already garnering attention by being the manufacturer of Dendreon's (DNDN) Provenge® during more than seven years of its clinicals, the company has already announced a deal to produce SOTIO's phase III candidate in its PCT division on July 16 and Baxter International's (BAX) pivotal phase III stem cell candidate for chronic myocardial ischemia on February 28 of this year. Although financial terms were not disclosed for either contract, SOTIO's contribution to the company's earnings should be reflected in Q3, and Baxter's should already be contributing and is likely part of the 82% growth in Q2 2012 versus Q2 2011 in its clinical services division. Baxter's contract could prove to be lucrative as its pivotal phase III trial is set to enroll 450 patients total with about one-third of those receiving Baxter's CD34+ stem cells produced by PCT. However, the more lucrative deal could be following, as this is a pivotal study, indicating its results could lead to marketing approval for Baxter, which may chose NeoStem's PCT as its manufacturer during its marketing phase.
Presented are two promising candidates for investment consideration in the maturing stem cell sector. While Neuralstem has recently captured the spotlight with its promising news on a preclinical candidate, the company is still operating at a significant loss with no revenue in sight. Its $76 million market capitalization is still low, and the company's shares still have upside potential as the hype over its pipeline continues due to the recent exposure. However, at some point, investors will more closely scrutinize the company's current financial position and look ahead to the future to ascertain when it may begin generating its own revenue to support its financials while growing its remaining pipeline.
NeoStem is still operating at a loss, despite its revenue generation due to its PCT division. However, that division's revenue is steadily growing, and will likely continue to do so as the sector grows and its individual entities reach out for assistance in their own clinicals. Long term growth is expected, as these therapies gain their likely marketing approvals and must be manufactured and distributed. With manufacturing facilities in California and in New Jersey, the company is in a prime position to quickly distribute the therapies -- many with short shelf lives and under carefully controlled refrigeration -- throughout the U.S.
Osiris has done a phenomenal job by obtaining two approvals this year for Prochymal® for treating GvHD. Investors fortunate to have good entries into the company's common stock have seen it rise to over $14.00 from its 2012 lows of about $4.50. While not yet receiving sales revenue for Prochymal®, the company's Biosurgery product line is growing and providing revenue as the company gets ready to enter its cell therapy marketing phase. The company's current cash level, lack of debt, upcoming commercialization of Prochymal and growing Biosurgery product line make it one of the better investments in the stem cell sector.
Disclosure: I am long NBS.