In this article, I am going to address three major concerns that most people have about StemCells, Inc. (NASDAQ: STEM).
1) Only Good For Long-Term Play
If you think STEM is only good for long-term investors, apparently you have not closely followed it or carefully read it most recent business update.
Near-term catalysts (in chronological order)
1) Complete enrollment of Phase I/II study in Spinal cord injury (SCI) by Q1 2014
2) Provide interim update based on minimum of six month data for the first six subjects in the SCI study in May, 2014
3) Release three-year clinical data from all patients in Pelizaeus-Merzbacher disease (PMD) study in Q2, 2014
4) Release first data in the dry age-related macular degeneration (AMD) study in mid-2014
5) Initiate Phase II controlled efficacy study of SCI in mid-2014
6) Complete enrollment of Phase I/II study of AMD in 2H 2014
7) Initiate Phase II controlled efficacy study of AMD in 2H 2014
8) Provide another interim update for 12 patients in SCI study in 2H 2014
Amid these catalysts, I expect ALL of them to be positive and you can imagine what effect they will exert on the share price in the coming months. Consequently, I would like to believe that STEM is not only a great long-term play, its short-term potential is also nothing short of exciting.
2) Concern of Dilution
As I mentioned earlier, I expect dilution to happen during the 3rd or 4th quarter based on the latest cash position of the company. According to the most recent financial report, the 2013 year-end cash balance is $30.6 million. While the 2013 cash usage turned out to be $28 million, the company expects to see net cash usage between $30--$34 million in 2014 due to increased clinical activities and other factors. Obviously, the company has sufficient cash to fund its operation all the way to the second half of this year without dilution. At the very least, it makes business sense to anticipate that we will first see some of the above near-term analysts prior to the dilution and this is exactly why I concluded that we can expect some solid share price surge in 1H 2014.
Another important point I want to make here is that some people seem to exaggerate the impact of dilution on the share price. For micro-cap biopharms, even a typical market correction that happens during a trading day can have the same negative impact, if not more, on the share price than that of dilution. Compared to negative data readout (especially during Phase II/III), the influence of dilution is negligible. For evidence of this point, look no further than a recent good example of another biotech company: Agenus Inc. (NASDAQ: AGEN). The dilution news that came about at the beginning of this February only had a temporary and very minor effect on the share price. In fact, it actually provided a good opportunity for its shareholders to add more shares at an even more attractive price. Same thing happened to Inovio Pharmaceuticals, Inc. (NYSEMKT: INO) at the end of this February.
As we can see, for great companies with huge upside potential like STEM, dilution really should not be our major concern. Instead, the best practice is to always focus on the science (pipeline) and value behind.
3) Management
Unlike some biotech companies that spend a lot of time and effort promoting their companies and stocks, STEM appears to be one with extremely low profile. But make no mistake about it, this absolutely does not mean that the company has nothing to promote; it just instead chose to focus on their core business- its products and pipeline. As we can see, the company has been making a lot of material and solid progress over the past several years, step by step. This low-key profile particularly convinced me that this is one of those few companies that can finally make to the finishing line (commercialization). Admitted, the stock has experienced relatively poor performance for the past years; however, in its Letter to Shareholders, its CEO have already found out the cause and has been actively working on the issue ever since by being more vocal and explicit about the progress the company has been making. We have seen a lot of pumps and hypes in biotech, and the ability to differentiate between value and bubble determines who can ultimately succeed in his/her investment.
STEM's CEO Martin McGlynn has been with the company since Jan 2001. More than 10 years of tenure so far clearly indicates the trust that the company has in him. Its newly-hired CFO, Greg Schiffman is also "a seasoned veteran in the healthcare industry, with over fifteen years of experience leading the financial operations and strategy of global, publicly-traded biotech and life science companies including Affymetrix and Applied Biosystems. In his most recent role as Executive Vice President and CFO of Dendreon Corporation, Dendreon secured marketing authorization from the FDA and the European Commission for the world's first cell-based, autologous immunotherapy for prostate cancer." What's more impressive is its scientific advisory board which consists of three world-class scientists that will pave the way for the company's future success in product development and commercialization.
On the other hand, it is worth noting that STEM also has the broadest and deepest IP portfolio of any company in the neural stem cell space.
Conclusion
Recently JMY Investments made some good comparisons (I, II)between STEM and its competitors and we both agree that in terms of value, STEM is unparalleled and hence offers the best growth potential.
As Mr. McGlynn stated "this is the culmination of 13 years of painstaking methodical research", with solid science, capable management team plus word-class scientists behind the curtain, coupled with numerous short-term catalysts, I have every reason to believe that STEM is the next blockbuster in the regenerative medicine field. With its super slim $80 million market cap (1/5 of CUR and 1/4 of ATHX as of 3/20/14), I would not consider myself greedy to expect its share price to at least double in the coming months.
Finally, I agree with this genius that among popular stem cell players (CUR, ATHX and the like), STEM stands the best chance so far to succeed in bringing its products to market.
Disclosure: I am long STEM.