Analyzing the
Business and Technology
of Stem Cells

Aastrom's Perfect Storm

March 27, 2013

In a move presaged by the recent replacement of its CEO, growing short-interest in its shares confirmed by a steadily declining share price, and a recent ‘going concern’ warning, on March 27th Aastrom Biosciences announced the termination of its Phase 3 clinical trial of its Ixmyelocel-T product in critical limb ischemia patients and the layoff of approximately half of its employees.

Aastrom has long been the ‘outlier’ among stem cell therapeutics companies, simultaneously fighting every one of the several headwinds that, individually, also face one or another of its fellow companies. And therein lies a lesson. With steady cash flow to see a company through the lean years of development, a solid business model, a great product candidate aimed at the right indication, and a strong partner behind it, a stem cell therapeutic company just might survive and succeed in advancing its product to the clinic. But with none of the above going for it, all bets are off.

Faced with the same lack of venture capital interest plaguing every other stem cell company, Aastrom went public in a 1997 IPO. In a then-hopeful sign, it managed to do this via the ‘front door’ -- a direct IPO -- rather than the ‘back door’ of a reverse merger with a shell company, unlike fellow SCSI components such as BrainStorm Cell Therapeutics, Cytomedix, International Stem Cell, and NeoStem. But, like these and other stem cell companies, it soon found that becoming a publicly traded company was no guarantee of access to capital: lack of investor appetite caused its share price to decline steadily from its 2005 peak of $32 to penny-stock status today, restricting the company’s ability to raise additional capital by issuing new shares. Indeed, for the past two years, Aastrom’s average annual increase in shares outstanding (9%) greatly lagged the average of all SCSI component companies (25%).

Aastrom is also unusual -- but not unique -- among SCSI components in its lack of ability to raise cash by any other means, as well. Lacking proprietary technologies of interest to other companies, Aastrom generated zero revenues from licenses and royalties for the 2010 through 2012 period (though it should be noted that other SCSI companies did little better, averaging just under $500K in license and royalty revenues in 2012). More puzzling still was the company’s unwillingness, or inability, to pursue grant and contract revenues (zero dollars from 2010 through 2012), unlike competitors such as Athersys, which routinely rakes in $8 million to $10 million annually from these sources. Finally, Aastrom eschewed the strategy (pursued by competitors such as BioTime, International Stem Cell, NeoStem, and StemCells) of pursuing near-term revenues from intermediate products or services such as research reagents, thus generating no significant revenue from sales, either (the average SCSI company generates more than $2 million per year from this source, and the 2012 champ, ThermoGenesis, brought in over $6 million). To the company’s credit, however, it should be noted that no SCSI company with products on the market today has yet managed to turn a profit by this means -- a topic we’ll explore further in an upcoming Organelles report.

With no revenues from any source, plus severely limited ability to issue new shares, Aastrom is, to put it plainly, cash-starved -- indeed, the company received a ‘going concern’ warning from its independent accounting firm in 2012. This is obviously a perilous position for any company developing a cutting-edge new therapeutic technology requiring substantial R&D and expensive clinical trials.

Adding to Aastrom’s woes, its business model is not currently favored by the few serious investors out there. The company’s candidate, Ixmyelocel-T, is an autologous product (produced by taking cells from an individual patient, expanding them in vitro, and returning them to the patient). Autologous cell therapies face numerous objections from investors, perhaps the most damning of which is that every unit sold is an expensive ‘hand-crafted’ one-off, unable to benefit from the economies of scale promised by allogeneic therapies produced by expanding the cells from one donor to produce thousands of identical doses for as many patients. Combine this fundamental business concern with other uncertainties facing all autologous therapies -- the impossibility of producing an unvaryingly potent product, and the inevitability of a long waiting period each patient must face before his individually manufactured cells become available for treatment -- and knowledgeable investors are understandably shy. For this and other reasons we think that autologous therapies face a much higher hurdle (though perhaps not an impossibly high one) to persuading cautious investors than do allogeneic therapies -- a hurdle Aastrom just never managed to leap.

Perhaps the worst threat to Aastrom’s well-being of all has been its chronic inability to lure a strong strategic partner -- an obvious necessity when all other access to capital is barred. In a 2012 blog post, then-CEO Tim Mayleben posed the rhetorical question “When will a large pharmaceutical company embrace stem cell therapy and partner with Aastrom?” and could manage no more reassuring response than “we cannot predict whether or when one of them will decide to work with us.” A commendably honest answer as far as it went, but that it went no farther was telling. Even in this admittedly challenging environment, SCSI component Athersys has its partner, Pfizer, and Cytori has Olympus, but little Aastrom (the 4th-smallest SCSI company by market cap at the end of 2012) has been forced to go it alone against increasingly discouraging odds.

Aastrom’s announcement today is hardly a death sentence, and this commentary is by no means its epitaph. The company still retains one active clinical trial on which it can now focus exclusively, and its downsizing will help to staunch the voluminous flow of red ink the company has been consistently posting. But its new CEO, Nick Colangelo, must find solutions to all of the problems listed above, and must do so soon. Whether, and how, he manges this will undoubtedly have profound implications for the entire stem cell therapeutics industry. We all wish him luck -- and skill.