Analyzing the
Business and Technology
of Stem Cells

Is 2013 the Beginning of the End For Stem Cells?

This is shaping up to be both the best of years and the worst of years for U.S. stem cell therapeutic companies, with pioneering efforts finally running out of steam or throwing in the towel even as new initiatives rise up to take their places

October 12, 2013

So far, 2013 has been a wild ride for stem cell therapeutics investors...and not entirely in a good way.

In late May we reported that the SCSI Index of U.S. publicly-traded stem cell companies was up 27% for the year, following on a 2012 calendar year that had itself offered some promising signs of recovery after the crash of 2011 (which witnessed a bruising 41% plunge in the 14 SCSI companies’ market cap-weighted share prices, as we document in the 2012 SCSI Report). The new year’s promising growth trend, coupled with the stellar performance of biotech stocks generally, even raised the encouraging prospect that at least a few of the most reputable U.S. stem cell stocks might be coming of age.

And yet, as followers of the industry have come to learn all too well, when looked at over any cycle time longer than the attention span of the typical pump-and-dump artist, the stem cell therapeutic industry seemingly can’t catch a break in a butterfly net. Consider the lengthening litany of bad news so far this year:

In short, if 2013 is a good year for stem cell therapeutics in general, and the U.S. industry in particular, we’d sure hate to see what a bad year looks like.

So what does it all mean? Are stem cell therapeutics destined to prove to be an over-hyped dud, ranking right up there with and the Segway scooter in the annals of bad investment ideas?

Of course not -- if only because such a sweeping generalization can never be correct. It is neither the case that “stem cells work,” nor that “they don’t work.” The right cell type, applied to the right medical condition, delivered to the right body compartment via the right delivery method, and led by the right management team with the right amount of capitalization behind them will, by definition, ‘work.’ What we see in the butcher’s bill of failures and impending failures listed above is a number of individually unique disasters, each marked by a chronic lack of one or another necessity from our Bill of ‘Rights’ and each, at the end of the day, thereby succumbing to the stem cell entrepreneurs’ version of the Field of Dreams Fallacy (“If you inject them, they will work”).

Most of the missing 'rights' that we are now witnessing the consequences of are, in retrospect anyway, easy to spot. BrainStorm Cell Therapeutics, for reasons best known only to itself, has always elected to run on a severely under-capitalized shoestring, with no obvious effort to generate near-term opportunistic revenues (including vanishingly small grant and contract revenues and zero product revenues), and has thus been unable to invest more than trivial sums in R&D (just $2.1 million last year). Aastrom has similarly proven a very weak grant-winner, and to its detriment also ignored other near-term revenue opportunities. NeoStem has made a series of puzzling missteps over the years, notably including its costly and ill-fated decision to acquire a controlling interest in a Chinese generic pharmaceutical company and the licensing of VSELs. Osiris failed to heed the clear message of one failed clinical trial after another that simply throwing plain-vanilla MSCs at the wall to see what they'd stick to wasn’t a particularly sound development strategy. Cytomedix seemed to have assumed that management experience and perhaps even the particular cell type in question weren’t very important considerations in building a successful stem cell therapeutics company. ThermoGenesis displayed an unwavering commitment to ignoring the lack of scientific evidence for the therapeutic potential of its volume-reduced bone marrow aspirate, and Cytori elected to soldier on with refined fat after losing its license to adipose-derived stem cells.

Hard as such life-lessons may be, they nonetheless benefit us all (in a brutally Darwinian sense, anyway) by culling the old and infirm from the herd. Unsound propositions have hoovered up too much of the oxygen (read: capital) out of the nascent stem cell industry for too long, and now it’s survival-of-the-fittest time. This is how markets are supposed to work, and a properly functioning market is always good (if not always pleasant) news. Stem cell entrepreneurs have long decried the unreasonable unwillingness of venture capitalists and institutional investors to dive head-first into stem cells, but the results some of those entrepreneurs have recently chalked up have made cautious professional investors look wise beyond their years. There’s no chicken-or-egg debate here: failing companies don’t fail because professional investors decline to invest, but rather because their leaders fail to make compelling cases for them as worthy investments.

So, as the weak now begin dropping like flies, should investors looking for The Next Big Thing in therapeutics pull out of stem cells altogether...or should they, instead, find encouragement in this culling of the herd? We would argue the latter, and not based on blind faith.

Paradoxically, this year has also seen more than its fair share of counterbalancing good news, mostly (but not exclusively) on the IPO front: a 'New Wave' of stem cell companies taking up the reins, in many cases offering fresh (and sometimes even scientifically justifiable) approaches, and seemingly sound business plans.

One example is Fate Therapeutics’ (FATE) recent IPO, which came in at the bottom of the company's hoped-for price range but has since managed to keep its head up, earning early investors decent returns. Fate takes a fresh approach to stem cell therapeutics, developing chemical drugs that modulate the behavior of endogenous stem cells, rather than developing cells themselves as drugs. This approach is not without its risks (largely because it is still mostly untested), but any technical approach to stem cell therapeutics more sophisticated than "if you inject them they will work" is a welcome sign.

Similarly, in its own recent IPO, Cellular Dynamics International (ICEL) managed to make a reasonably compelling case for man-made stem cells as tools for conventional drug discovery. ICEL slipped badly in its first day of trading, but has since rewarded calm investors handsomely. The more we know about stem cells, even 'just' as tools, the more likely we are to achieve ultimate success employing them as therapeutics.

bluebird bio (BLUE; annoyingly, the company uses all lower-case letters in its name) offers a new approach that proved warmly welcome in its June 2013 IPO, rocketing the company overnight to an unprecedented $650 million market cap. In yet another departure from the Field of Dreams Fallacy, bluebird takes two things that we know for certain (one, that autologous hematopoietic stem cells can engraft, thrive and function long-term in patients; and two, that protein replacement therapy actually works in properly chosen diseases involving inborn errors of metabolism), and combines them to define a novel therapeutic approach employing hematopoietic stem cells as delivery vehicles for gene therapy. Perhaps wisely, bluebird usually avoids referring to itself as a stem cell company, but that doesn't change the fact that it is. bluebird's approach is yet another example of new ways of thinking about how stem cells may be used as therapeutics, and one that may actually seem plausible. It is joined in this New Wave by another interesting (albeit still privately held) company, Calimmune, which brings a somewhat similar approach to the breathtakingly bold goal of curing (not merely treating) HIV infection. Founded and chaired by Nobel Prize-winning AIDS pioneer David Baltimore, Calimmune has attracted the kind of serious private capital interest that has enabled it, so far, to stay above the public company fray (sadly, for retail investors), and stick to its knitting .

Finally, another of these New Wave stem cell companies, Capricor Inc., looks poised to enter the public market via a reverse merger, as we have recently discussed. While it is far too early to say whether Capricor's unique approach to stem cell therapeutics for heart disease has real value (the company employs putative cardiac stem cells isolated from cadaveric heart muscle), still the introduction of something other than yet-another-plain-vanilla-MSC company is a welcome sign in its own right. As two-time Nobel Prize winner Linus Pauling once wisely observed, "The best way to have a good idea is to have lots of ideas."

Excitement regarding the raft of new choices for stem cell investors must, of course, be tempered by the realization that some of these, too, will almost certainly fail to thrive, whether for management or scientific reasons. But even more importantly, one should not let the New Kids tempt us to overlook those members of the Old Guard who have consistently executed well (thus developing solid management track records) and whose clinical trials, well underway, continue to show promise.

Just one example of an Old Guard company not to be ruled out would be Athersys Inc., which, with Osiris now out of the game, might well be considered the elder statesman of American stem cell companies. Athersys' prospects remain viable and promising. Its big-pharma partner, Pfizer, has stuck with it through thick and thin in its ulcerative colitis trials, even as Pfizer shuttered most of the rest of its stem cell initiatives. The Phase 2 trial's eagerly awaited results are due early next year. Good news this year from Athersys includes its decision to move forward with a Phase 2 heart attack trial, on the heels of a completed Phase 1 trial notable as the first trial of a stem cell therapy for heart attack to actually demonstrate improved cardiac function. And in still more good news, in August the company's long-dormant Phase 2 stroke trial suddenly ratcheted up into high gear, clearly signaling the company's seriousness regarding this indication, as well, for its proprietary MultiStem cells.

Vigorous youth with its novel thinking is a fine thing, but so too is long-accumulated experience and its time-tested wisdom. This year's ongoing shakeout of Old Guard stem cell companies, combined with a very interesting crop of New Kids, offers stem cell investors choices from the best of both those worlds.

2013 isn’t the beginning of the end for stem cells. It’s merely the end of the beginning. And that's a good thing.

Disclosure: the author is long on Athersys but has no other equity position, long or short, in any other company named here. Neither the author nor the publisher, Busa Consulting LLC, has any current or anticipated business relationship with any company named in this analysis.