Broadly speaking, regenerative medicine is an innovative new area of medicine that is focused on the development of new therapies that enable healing and repair of the body in ways that overcome the limitations of conventional medical treatments. Regenerative medicine uses a range of approaches, including cell based therapies, stem cells, tissue engineering and others, that represent an exciting alternative to traditional pharmaceuticals and current standards of care that, in many cases, still only treat symptoms - as opposed to addressing the underlying cause of the problem – whether from disease or injury.
In short, regenerative medicine, as the name implies, seeks to repair, regenerate or replace damaged or diseased tissue that is at the root of the problem, in order to restore function and homeostatic health. It has been a couple of decades in development, but recent advancements in research and growing acceptance in the medical community and among patient groups now position the field of regenerative medicine at a tipping point that could revolutionize medicine across the complete spectrum of indications. In particular, areas where traditional approaches have failed to address unmet needs from inflammatory and autoimmune diseases to neurological injury and disease, to cardiac conditions and back again. In the Ten Commandments of building a diversified portfolio, holding a regenerative medicine company – or two – is a principle of the investing handbook.
While there are numerous companies advancing interesting regenerative medicine programs, several have emerged as uniquely positioned to have a meaningful impact and build exponential shareholder value in the near term. Each, in their own right, is a standout and contains headroom for market appreciation simply on the merits of what they are already well positioned to accomplish. In this, the first part of a multiple-article exercise, we will examine some of the leaders from an overview perspective to delineate where true value resides. In each case, the companies are dedicated to bringing to market their respective biologics to treat indications with high morbidity and mortality rates or for which current therapies offer little therapeutic option.
Selecting only a few companies is a daunting task, with outfits such as Biotime, Inc. (NYSE: MKT: BTX), Neostem (NYSE MKT: NBS) and Cytomedix, Inc. (OTCBB: CXMI) presenting unique, early-stage growth propositions, but not making the list. Although a fan favorite of many, Advanced Cell Technology Inc. (OTCBB: ACTC) didn’t make the cut because of its relatively high market capitalization compared to peers, large number outstanding shares, and relatively early clinical efforts, while Neuralstem, Inc. (NYSE MKT: CUR) was left-out because of facing stiff challenges in addressing neural indications in the brain and spine.
Mesoblast Ltd. (ASX: MSB), is clearly positioned as a global leader in regenerative medicine, but was not included because the company trades primarily on the Australia exchange and is already valued far above any peers ($1.7 billion market cap), thereby giving it more limited upside than the companies we have selected.
A quick synopsis of the five most intriguing portfolio candidates in the regenerative medicine industry (in alphabetical order):
Aastrom Biosciences, Inc. (NASDAQ: ASTM)(http://www.aastrom.com/) – Ann Arbor, Michigan-based Aastrom is focused on cardiovascular disease. The company is currently evaluating its autologous cell therapy approach (i.e. in which cells are isolated from the patient, expanded, and then readministered) in U.S. clinical trials for the treatment of critical limb ischemia, or CLI, (Phase III trial enrolling now) and dilated cardiomyopathy, or DCI, (Phase IIa completed). Critical limb ischemia, the most severe and deadly form of peripheral artery disease, is estimated to affect about 3.5 million patients in the U.S. alone, with the incidence rate expected to nearly double by 2030 due to the aging population and increased prevalence of diabetes. Importantly, CLI is an extremely expensive disease with the inpatient treatments in excess of $55,000 per patient, representing a multi-billion-dollar market opportunity by itself. With the Phase III already in the works and about $28 million in cash, Aastrom is in a solid position.
Athersys, Inc. (NASDAQ: ATHX)(www.athersys.com) – Cleveland, Ohio-based Athersys is developing MultiStem, a donor-derived “off-the-shelf” stem cell product that can be manufactured on an industrial scale and is administered like a traditional biotech drug. The company is pursuing development for multiple disease indications, including four different U.S. and/or international clinical trials in the inflammatory & immune, neurological and cardiovascular areas, with a fifth authorized to begin in Germany (for solid organ transplants). In partnership with Pfizer, Inc. (NYSE: PFE), MultiStem is in an ongoing Phase II trial for Inflammatory Bowel Disease, which affects roughly 2.4 million people in the U.S., Europe and Japan. Another active Phase II clinical trial involves MultiStem for ischemic stroke, which represents the leading cause of serious long-term disability, and strikes approximately 15 million people each year globally, including 2 million patients each year in the U.S., Europe and Japan. Other clinical programs include treating complications associated with traditional bone marrow or hematopoietic stem cell transplants, such as Graft Versus Host Disease (GvHD) (the company is planning a Phase II/III study after its recently completed Phase I – and has Orphan Drug designation from FDA); as well as treating damage from heart attack (acute myocardial infarction), where aPhase I has been completed, and the Phase II is authorized by the FDA to start). Athersys, who already had about $10 million in cash and equivalents, recently completed a successful offering that was oversubscribed and added more than $20 million to the company coffers to advance clinical trials. Meanwhile, the company has a modest spend rate, yet more clinical programs than most of its peers, and is pursuing massive markets that tread into tens of billions of dollars annually. Several other factors make Athersys a compelling value, including two orphan drug designations by the FDA; the partnership with Pfizer; multiple analyst coverage with “buy” and “outperform” ratings, and an average price target amongst four leading analysts of $6.50 per share (Thomson Reuters First Call). It’s easy to see why the recent offering was oversubscribed with investors.
Cytori Therapeutics, Inc. (NASDAQ: CYTX)(www.cytori.com) – Based in San Diego, CA, Cytori is developing therapies based on autologous adipose (fat)-derived stem cells (ADRCs) to treat cardiovascular disease and repair soft tissue defects. Utilizing adipose-derived stem cells is not an origin point that many companies have focused on, but there are strong possibilities for this method. Cytori is in the midst of several trials throughout Europe and the U.S.: ATHENA, a Phase I/II trial for refractory heart failure in the U.S.; ADVANCE, a Phase II European trial for acute myocardial infarction; PRECISE, which completed a Phase I European trial for chronic myocardial ischemia; and APOLLO, which completed a Phase I European trial for acute myocardial infarction. The company’s Phase IV RESTORE 2 trial was recently completed and designed to evaluate the transplantation of ADRC-enriched autologous fat tissue into and around breast deformities. Through its proprietary offerings, including its Celution product line, Cytori makes its treatments available at the point-of-care for physicians and patients. Another relevant component in valuing Cytori is the fact that late in September it was awarded a contract valued up to $106 Million by Biomedical Advanced Research and Development Authority (BARDA) to develop cell therapies for thermal burns combined with radiation injury. With mid and late-stage clinical trials targeting heart attack patients and ischemic conditions, the potential market is large. With $28 million in cash and equivalents, Cytori has plenty of capital to carry-forward with clinical research.
Osiris Therapeutics Inc. (NASDAQ: OSIR)(www.osiris.com) – Columbia, Maryland-based Osiris currently has two product candidates in clinical trials spanning several indications. Prochymal, an intravenously administered formulation of mesenchymal stem cells, is being evaluated in Phase 3 trials for acute GvHD and Crohn’s disease. Prochymal is currently the only stem cell therapy designated by FDA as both an Orphan Drug and Fast Track product, (although this will likely change as competitor programs advance). Prochymal is also being evaluated in Phase 2 clinical trials for the repair of heart tissue following a heart attack, the protection of pancreatic islet cells in patients with type 1 diabetes, and the repair of lung tissue in patients with chronic obstructive pulmonary disease. The company also has Chondrogen in a Phase II clinical trial for arthritis in the knee and Osteocel-XC in Phase I trials for focal bone regeneration. With some similarities to Athersys, Osiris clearly has a pipeline with a robust potential patient population, including a diabetes population of more than 25 million in the U.S. alone. The FDA designations to expedite developments are also a plus in addition to having several pivotal phase 3 trials ongoing. Osiris also has more than $45 million in cash and investments, and recently obtained approval for treating pediatric GVHD in Canada and New Zealand.
Pluristem Life Sciences Inc. (NASDAQ: PSTI)(www.pluristem.com) – Haifa, Israel-based Pluristem is focused on placenta-based cell therapies. The company’s patented PLX (PLacental eXpanded) cells drug delivery platform releases a cocktail of therapeutic proteins in response to a variety of local and systemic inflammatory diseases. Like the Osiris and Athersys product platforms, PLX is an “off-the-shelf” product candidate that requires no tissue matching or immune-suppression treatment prior to administration. With PLX, Pluristem is targeting Peripheral Artery Disease (PAD), neuropathic pain and muscle injuries, with the initial clinical trials designed for PAD. Early clinical trials are complete and a multinational Phase II/III study of PLX-PAD for critical limb ischemia and a Phase II study for intermittent claudication are set to begin under guidance from the FDA and the European Medical Agencies. As mentioned with Aastrom, peripheral artery disease is an expensive disease to treat that has a quickly-growing patient population. Aside from PAD, Pluristem has gone broad with their technology, which, like Athersys, gives it a particular appeal, as all the eggs aren’t in one basket. The company has a reasonable amount of cash and marketable securities at its disposal, totaling roughly $39 million.
A look at the recent share structure and valuations of these companies (as of November 2, 2012):
With this brief overview, some stark discrepancies immediately surface. For starters, notice how much smaller the market capitalizations are compared to Mesoblast’s aforementioned market cap of $1.7 billion. Also the discrepancy of the valuation of Athersys compared with peers is plainly evident and without solid rationale to be so far out of kilter given the company’s stout pipeline.
From a broad perspective, these companies are all basically developmental (i.e. mid to late stage clinical trials) with negligible revenue. Such is the case with most biotechnology stocks regardless of specialty, yet many traditional biotechs command much higher valuations. Even the mighty Mesoblast only generated $38.3 million in revenue during fiscal 2012 while recording a loss before taxes of $48.7 million for the year. To their credit, the company still has $207 million in cash on hand.
Taking into account pipelines, assets-to-liabilities, partners, stages of clinical development and magnitude of opportunity related to indications, Aastrom, Athersys, Cytori, Osiris and Pluristem possess the largest amount of headroom for near-term share appreciation out of the more than 50 U.S.-listed companies that are focused in the regenerative medicine space.
Many have proclaimed that regenerative medicine is far from commercialization. In reality, however, there are already regenerative medicine products on the market now, such as Organogenesis Apligraf and Gintuit products, Advanced Biohealing / Shire Regenerative Medicine Dermagraft, treatments for orthopedic repair from Sanofi-Genzyme’s Biosurgery division, as well as a few others. Further, many clinical trials are reaching advanced stages, and a few could be shepherded through clinical development in an expeditious manner, as a result of recent FDA initiatives designed to bring innovative products to market faster in areas of serious unmet need. There are certainly regulatory hurdles, but a consistent record of safety and promising signs of effectiveness make it seem like a good bet that at least a few more products will make it onto the market in the reasonably near term. The truth is that the age of regenerative medicine has finally crept upon us and appears ready to gain some steam.
Big pharma is already jockeying for position that should start to translate into valuation impact for smaller companies. In April, Shire (Nasdaq: SHPGY) acquired the assets of Pervasis to bolster its regenerative medicine division. Terms weren’t disclosed, but up to $200 million in potential milestone payments were. In 2011, Shire paid $750 million to acquire Advanced BioHealing to gain access to Dermagraft, a skin substitute that assists in restoring damaged tissue. In February, Baxter International (NYSE: BAX) bought Synovis Life Technologies Inc. for $28 per share, in a deal valued at $325 million to expand “Baxter’s regenerative medicine and BioSurgery franchise.”
As major drug makers have not fared well in recent years at developing therapeutics from scratch, it’s more than likely that most will follow the path of Shire and Baxter to augment their current regenerative medicine efforts by partnering with, or buying, smaller firms. The potential clinical and market impact of the companies mentioned above, would seem to make them valuable as portfolio additions to funds and individuals, especially as major players seek to re-fuel dwindling pipelines and acquire innovative therapies that can generate billions in annual sales. Companies like Johnson & Johnson (NYSE: JNJ) by itself or through its Advanced Technologies & Regenerative Medicine, LLC division, are “keeping an eye out for new technology,” according to Jay Siegel, CBO at JNJ. If they are, investors should be as well.
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