Stem Cell Hype Has Yet To Breed Profits

by: Apsara Biotechnology Research

Over the past few years, stem cell therapies have emerged as an intriguing new frontier in biotechnology research as scientists have begun exploring ways to monetize stem cells' unique plasticity. Researchers hope that the technology could engender progress in treating a multitude of injuries and diseases including Lou Gehrig's disease, Parkinson's disease, spinal cord injury, etc. Yet, as we often see in emerging technology sectors, many early investors in publicly traded stem cell companies have suffered tremendous losses.

As we have explained in our previous articles, despite BioTime's (NYSEMKT:BTX) old Hextend business continuing its rapid descent into irrelevancy and seeing its two promoted replacement business models - a research grant collector and/or a "picks and shovels" play on the stem cell industry - fail, its stock continues to sport a $200 million market capitalization. This alone has been bizarre enough. But BioTime's lofty share price is even more strange when one considers that the rest of the stem cell industry has been in a brutal unrelenting decline while BioTime has risen out of the ashes.

At Geron (NASDAQ:GERN), BioTime CEO Michael West's old company, the trial of stem cell products for treating spinal cord damage dragged on until November 2011, when the company finally ceased patient enrollment for its stem cell study and exited stem cell research to refocus on cancer programs. Geron's CEO, John Scarlett, admitted to the New York Times that the therapy had shown "no signs" of helping patients. Shares hit a new all-time low following the news.

At West's second company, Advanced Cell Technology (ACTC.OB), the company continues to do what it has always done best, issuing 240 million new shares in December of 2011. Officer Robert Lanza followed this by dumping 7.6 million of his shares in January this year. Work also continues on a stem cell therapy for eye problems, though with the stock losing more than half its value in 2011 to fall to under ten cents per share, investors are clearly skeptical.

Things are no better at Osiris Therapeutics (NASDAQ:OSIR), where the company's stem cell therapy, Prochymal, has now failed yet another trial. In its most recent test, Prochymal was unable to slow the progression of Type 1 diabetes. We can now include diabetes in the list of medical conditions which Prochymal has failed to successfully treat, which also includes graft-versus-host disease, Crohn's disease, heart attack, and knee cartilage repair. Osiris shares continue to fall, and reached a new all-time low late last year.

StemCells (STEM) also had a rough year, rewarding shareholders with a 90% haircut in 2011 as the company endured a 1:10 reverse split, staff cuts, and multiple stock offerings. The company's stem cell trial for spinal cord injuries continues, though with the company rapidly burning cash, we wonder if the company will follow Geron's lead in shutting down its test. StemCells' shares, which traded at more than split-adjusted $100/share a decade ago now, trade for less than $1.00.

Based on the developments among key publicly traded companies, the stem cell industry appears to be in a state of rapid decline. The old industry bellwether, Geron, has given up. Osiris' long-running quest to find some use for its stem cell therapy, Prochymal, continues to look even more implausible, while StemCells staggers on the verge of liquidation. It's no wonder that BioTime's stem cell research products division is failing to generate much revenue; stem cells are looking less and less likely to provide any medical breakthroughs in the foreseeable future. It is hard to sell "picks and shovels" if there is no gold in the ore being mined.

As we can see in the chart below, over the past five years stem cell companies have been unspeakably awful investments. The best of the bunch, Osiris and Geron, have fallen approximately 80% since January 2007, with the rest having fared even worse.

As biotech commentator Adam Feuerstein wrote:

Geron's decision to shut down its embryonic stem cell research programs is a blow to the controversial research field and a painful reminder that only dreamers and fools invest in embryonic stem cell stocks. For 21 years, Geron has lured investors with the promise of turning embryonic stem cells into new tissue or organs that one day might help paraplegics walk, cure diseases like diabetes and Parkinson's, and prevent heart attacks. But other than participating in some of the pioneering stem-cell lab research in the late 1990s, Geron's efforts in the field have proved futile.

Between the numerous ongoing trial failures, mounting financial losses, and the health risks, including the death of a baby caused by stem cell experiments, it is becoming increasingly probable that the field of research will prove nearly fruitless within our investing time horizons. It is quite possible that we will soon add stem cells to the long line of interesting technologies such as siRNA, combinationatorial libraries, and nano tubes that had great scientific papers and well-respected researchers behind them and which were met with great fanfare, but which have amounted to poor returns for investors.

BioTime's problems are not limited to being in the wrong field of research at the wrong time. Not only has BioTime picked the wrong horse, stem cell research, but quite possibly the wrong jockey, CEO Michael West, as well. BioTime fans such as Mr. Cox like to emphasize Mr. West's long track record of scientific achievements. Mr. West is undoubtedly one of the pioneers of stem cell research and he has performed and overseen a great deal of cutting-edge scientific research.

However, Mr. West has been making scientific discoveries that were allegedly supposed to bring economic benefits to shareholders for many years now. Yet shareholders have never struck it rich with West leading the ship. Mr. West's first company, Geron, went public around $8 a share in 1996. It would run up to more than $75 per share on promotion fueled mania in 2000 before subsequently crashing. Shares now fetch $1.37; investors who bought the IPO have lost more than 80% of their money, and anyone who bought into the stock at higher prices has fared even worse.

Investors in Mr. West's second company have fared even worse. Mr. West took the reins at Advanced Cell Technology (ACT) in 1998. The company generated a storm of publicity when Mr. West proclaimed that ACT had been able to achieve successful therapeutic cloning of human embryos. West featured his work in high-profile outlets such as Meet The Press, CNN, US News & World Report, and even went so far as to declare that his team's work was ushering in the "dawn of a new age of medicine." But not everyone agreed with West's grandiose statement.

As we have seen before for Mr. West, he had overly hyped ACT's achievements, in our opinion. Nature magazine reported that:

Scientists, meanwhile, dismissed [ACT's] finding. The ACT team hadn't gained new insight into the human developmental process, says George Daley, a stem-cell researcher at Children's Hospital Boston in Massachusetts. "I was not in a position to defend the cloning that they were doing because it was ineffective in what they were trying to do," he says. "It was more for publicity than for science." [emphasis added]

In this case, West's promotional strategy ended up harming ACT, according to the Nature article:

The announcement ended up hurting the company, however. ACT was trying to raise a needed round of venture-capital financing when the cloning news broke. The negative attention combined with the political uncertainty around stem-cell funding killed the deal, says Greg Bonfiglio, who was with Anthem Venture Partners of Santa Monica, California, at the time, and would have been the lead investor on that round.

Having scared away the private investors by creating an unnecessary controversy over his ineffective science, West and company were forced, with ACT on the brink of bankruptcy, to launch a reverse merger with Two Moons Kachinas, an unprofitable Native American doll selling operation, to gain access to the public markets. Nothing much good comes out of the average reverse merger, and ACT was no exception. ACT shares debuted at $7 and almost immediately went into a sickening decline. Shares would fall to less than $1 each by the time West left the company and now are worth a mere 8 cents.

With West's poor track record of converting scientific research into tangible results for shareholders, it is a bit surprising that he was able to excite investors a third time. But BioTime, which by 2007 had become a moribund biotech with a stock trading at a mere 40 cents, was desperate for anything that could lift its fortunes. And solely viewed from the perspective of share performance, hiring Michael West was a great decision. However, like with his previous two companies, that share performance may quickly reverse itself once investors realize how cloudy BioTime's future prospects appear.

Disclosure: I am short BTX.

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