StemCells' Recent Decline Offers New Entry Point For Investors

| About: Microbot Medical (MBOT)
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StemCells (STEM) saw its shares rise over 100% on July 17 after positive results from an Alzheimer's stem cells test. Shares shot up to $1.82 during the day's trading session before ultimately closing at $1.80. Shares then saw spikes later on in the week and briefly touched $2.31 and ultimately traded at their highest points since September 2011. Shares now trade at $1.72 and sit below the price, offering long-term investors a good entry point.

In my last StemCells article, I wrote about how the company could be a great long-term play on the growing stem cell research programs. The company has several products in its pipeline in trials. The company's pipeline looks like:

  • Spinal Cord Injury - Clinical Development
  • PMD - Clinical Development
  • AMD - Pre-Clinical
  • Alzheimer's - Pre-Clinical
  • Stroke - Pre-Clinical
  • Liver Metabolic Disorders - Pre-Clinical
  • Hepatitis C - Research

The company reported its second-quarter earnings last week. StemCells received revenue from two sources: products sales and licensing/grants. In the second quarter, the company saw $38,000 from licensing and grants, and product sales of $211,000. Product sales increased 14% from the previous year period. StemCells reported a small profit of $834,000. The surprise profit was due to a decrease in estimated fair value of warrant liabilities. StemCells posted earnings per share of $0.03 in the quarter.

Analysts had been looking for negative earnings per share of $0.25. StemCells earnings beat was really due to some balance sheet efforts, so it's hard to see the comparable between analysts and the company. StemCells did show signs of improvements with both operating expenses (down 24%) and research and development costs (down 26%).

A look at StemCells pipeline progress as of the end of quarter two:

  • Interim safety data for chronic spinal cord injury trial
  • Phase I/II dry AMD patients enrolling soon
  • Preclinical data released from Alzheimer's Disease tests
  • Presented Phase I PMD trial, results currently under peer review for a journal publication

StemCells is working on managing its cash burn, a notorious problem for biotechnology companies that are not making a profit. In the second quarter, StemCells used $5.08 million in cash. Through the first six months of the fiscal year, StemCells has used $10.72 million, which is down 18% from the previous fiscal year. StemCells anticipates using $18-$20 million in fiscal 2012.

One of the big keys to this for StemCells has been winning awards and grants to help fund current programs in the company's pipeline. In July, StemCells was awarded $20 million by the California Institute for Regenerative Medicine. The money is to be used for preclinical testing for the company's HuCNS-SC related to spinal cord trials. The money will be awarded over a four-year period, with the company submitting an IND with the FDA as the ultimate long-term target.

Recently, the company was awarded a key patent in Japan. Patent number 5007003 gives StemCells "enriched CNS stem cell and progenitor cell populations, and methods for identifying, isolating, and enriching for such populations." The patent was awarded through 2020 and adds to an extensive list of patents that StemCells has in its relative fields of study.

Several key risk factors should be thought about before anyone invests in StemCells. First stem cell treatments may never gain key regulatory approval. StemCells trades with a small market capitalization of $43 million. The company receives minimal revenue and may have to issue more shares at some point to help fund tests, which will dilute current shareholder's stock positions. The stock, which saw a 100% one day increase, could see a similar fall if reported test results are negative.

StemCells shares are still up 112% during 2012. Shares are down from their highs of the year and offer a good entry point here at this level. Shares are good for long-term investors who are looking for a potential home run pick. Owners should have good risk toleration as the company could never see products on the market. I believe the risk/reward potential is good and will be looking to accumulate shares at under $2. Momentum traders can also get behind the company as shares could see another huge one-day gain as results are release from small Phase I and II trials.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STEM over the next 72 hours.