Analyzing the
Business and Technology
of Stem Cells

Are Stem Cell Stocks Finally Coming of Age?

April 26, 2013

Biotechnology stocks have been on a tear so far this year, as witnessed by the NASDAQ Biotechnology Index’s (NBI) 26% rise (compared with the overall NASDAQ Composite Index’s much more modest 9% gain). Some analysts are viewing this sustained rally as something of a “renaissance” for the biotech sector, at least according to a recent MarketWatch report.

So far, this year has likewise been kind to stem cell stocks (those perennial ugly ducklings of the biotech sector) as well: our Stem Cell Stock Index (SCSI) of leading U.S. stem cell-focused companies was up 19% for the year as of yesterday, with all but four of the index’s fourteen component companies posting net gains (the losers being Cytori, Pluristem, Cytomedix and Aastrom, down 1%, 5%, 31% and 45%, respectively). Athersys, in particular, has had a breakaway year, up an impressive 109% for the year as of yesterday.

These parallel moves between the SCSI and the NBI are a new phenomenon. Consider that over the 2011 through 2012 period, during which the NBI climbed 43%, the SCSI actually declined 35%. Stem cell companies’ generally very early stages, small sizes, lack of products, and extremely high risk factors have traditionally decoupled their performance from that of the much more mature biotech sector overall.

So does this more recent parallel move between the biotech sector overall and its stem cell sub-sector indicate that stem cell stocks are beginning to come of age in investors’ eyes as fully legitimate biotech investments? Maybe not. After all, it can be hazardous to draw such a sweeping conclusion from a comparison between a very small index (14 components) of very small companies (average market cap = $117 million), such as the SCSI, with a much larger index like the NBI (119 component companies with an average market cap of $4 billion) -- an apples-to-oranges comparison if ever there was one. Further, the recent broad-based parallel movement may be more apparent than real. If instead of year-to-date performance we compare both indexes’ performances over the shorter period (since February 21st) during which the NBI actually racked up the lion’s share of its recent gains (up 20%, compared to its 26% increase year-to-date), we observe an even more impressive performance by the SCSI -- up 38% -- but this gain is attributable to just three double-digit gainers: Osiris (OSIR; up 63%), Athersys (ATHX; up 41%), and Cytori (CYTX; up 13%). Perhaps even more telling: some success stories on a year-to-date basis, such as BioTime (BTX) and International Stem Cell (ISCO), were actually net decliners over this period of the NBI's biggest gains (down 12% and 22%, respectively). The chart below illustrates the performance of each SCSI component stock from February 21st through April 26th as the NASDAQ Biotechnology Index (dashed red line) steadily climbed.

Keen observers of the stem cell sector will note that the recent gainers Osiris, Athersys, and Cytori are among the oldest, largest, and most mature of all U.S. stem cell companies, with revenues from products and/or partnerships averaging $10 million in 2012, therapeutic candidates in Phase 2 or 3 clinical trials, and strong interest from institutional investors, whereas recent decliners like BioTime and International Stem Cell have much, much less to brag about (2012 revenues averaging just $3 million, and zero FDA-authorized clinical trials).

If there's any new pattern emerging here, it is that the very few strongest stem cell companies, such as Osiris, Athersys, and Cytori, are indeed becoming legitimate biotech investments, while all the rest (the vast majority of SCSI component companies) still remain the focus almost exclusively of speculators, day-traders, and casual investors who may be overly susceptible to the lure of the latest hyperbolic press release. The cream seems to be rising to the top, which from a Darwinian perspective is always a good thing.

Of course, it should be borne in mind that it's not too late for one or more of the current 'also-ran' stem cell companies to aspire to rise to the first tier -- all it takes, at this still very early stage in the technology's development, is one really positive Phase 2 clinical trial outcome. But a look at the clinical trials calendar for all SCSI companies indicates that for most of these companies that won't be happening any time soon. Also-ran companies that are hurting for capital (which is to say, all of them) will require inspired leadership and flawless execution to survive the flight of investor dollars to a select few top-tier companies, and to avoid Aastrom's recent fate. And it should also be remembered that a bad outcome from a single clinical trial could plunge any of the current leaders into the bottomless pit.