Mr. Market's Stem Cell Roulette

by: Bio Insights

Historically, stem cell stocks were terrible investments that have done nothing but drain investor value through a bunch of share dilutions and other financing efforts from the ambitious companies. A percentage of readers would read this and immediately add: "Yes, and stem cell stocks are still terrible investments!"

Although debates in the investment community about stem cell stocks usually resemble debates on an incredibly sensitive topic (which means it ends up in some sort of endless loop of circular reasoning until someone quits), there are some newly built roads in stem cell R&D that give credence to a pro-stem cell investors' case.

Slow Research And Cash-Starved Labs

Dr. James Thomson's lab at the University of Wisconsin-Madison figured out how to isolate and grow human embryonic stem cells in 1998. Scientists have tinkered with them before, but the ability to grow them made all the difference. President Bush moved quickly to set very strict limits on federal funding for embryonic stem cell research (in 2001). As a result progress was very slow, but things improved as Bush eased on his stance over his two terms. Anyone offering private funding during these years would've been absolutely overwhelmed with requests from labs that wanted to play with their own line of cells.

After Obama came into office, we saw a quick repeal of limits on stem cell public funding (in 2009) which gave stem cell labs access to the ~$31 billion worth of grants the NIH dishes out every year. This truly opened the floodgates. We are now seeing a wave of biotech companies with custom stem cell lines and ambitious programs in just about every therapeutic market. All they needed was money.

Clearly Dr. Thomson's breakthrough in 1998 is going to pave the way for a world of difference in patient care, but when will it be? Perhaps more importantly to investors - who will be first?

The Depressing Story Of Geron Corporation

A lot of investors thought Geron Corporation (NASDAQ: GERN) was going to be the one. Very few companies can survive for 22 years without any revenue whatsoever, but Geron's involvement in the stem cell field kept up a powerful sense of hope that it would work.

Things started to fall apart in 2011, and Geron's stem program was ultimately proven to be a complete waste of time and money. Geron was given the honor of running the very first FDA-backed embryonic stem cell clinical trial (for spinal cord injuries). "For financial reasons," Geron ended up canceling the trial and firing almost half of its employees. As you might've known, GERN stock took a serious beating. They're trading ~78% lower than they were five years ago.

Geron ultimately burned away roughly $725 million of shareholder wealth in just the last five years - most of it on hopes of stem cell therapy. It's probably going to happen again.

Three Chances To Win Big

Here is a look at three stem cell "lottery-ticket" stocks I've run across. They're promising a lot of gain later and asking for a little money now. They're offering a small chance at huge life-changing gains at the cost of a high chance of the slow deterioration of your long position from share dilutions and dying expectations.

Pluristem (NASDAQ: PSTI) - It's been a good trading year for PSTI, up 63% YTD. The stem cell stock has gotten especially popular due to stories about three individual cancer patients who received and recovered the company's PLX cells. With its statements, the company was basically implying that the PLX cells can cure a variety of bone marrow diseases, including cancer. The problem I have is that there's no telling how many of these patients were given PLX cells and not mentioned.

Pluristem is putting their cells through a handful of programs that includes muscle injuries and peripheral artery disease. This is more or less a typical shotgun approach that stem cell companies use in the hopes of hitting something, and doesn't warrant any preferential treatment over other stem cell companies.

Neuralstem (NASDAQ: CUR) - This company has seen extremely good performance lately. The stock is almost 90% higher the last month, erasing big declines from August. Neuralstem, like your typical biotech, is cash hungry and is comfortable with share dilutions to take advantage of rallies in the stock.

Neuralstem is targeting ALS, also known as Lou Gehrig's Disease. This is a disease of the nervous system. To me (and probably others), it's unsettling to know Geron's completely failed stem cell program also targeted damage to the nervous system. Remember that Geron looked like a CNS-treating goldmine until it suddenly didn't.

Osiris Therapeutics (NASDAQ: OSIR) - This is another very old stem cell company, but there are a few aspects that I really like. First, the company is actually running at a profit because of already marketed products. This doesn't give OSIR as much temptation to do constant drains on investor value via share dilutions. Its stem cell therapy Prochymal was also the first approval in the world (an honor granted by the Canadians), for the treatment of graft versus host disease.

For Prochymal, there is also a developmental program for Crohn's disease, and there's a failed program for diabetes. The diabetes program was particularly sad, because prochymal wasn't able to beat a placebo arm in the efficacy data of phase I studies. I don't know whether to shrug it off and point to potential in graft versus host disease or to just stay away from stem cell companies. I guess I'll take the latter.

Maybe some people are naturally inclined to chase the idea of picking the stem cell stock that became the next Celgene, but history tells us that stem investing is more like a game of (Russian) roulette.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.