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Coming of Age: Experts Reflect on the Extraordinary Promise of the Cell Therapy Sector
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keay82Without innovation and risk-taking, modern medicine would be missing staples of the physician's armamentarium: antibiotics, radiation therapies, vaccines. The idea of taking a tonic to cure what ails you is thousands of years old, but the science behind that tonic may be revolutionary. Enter stem cell technologies. Given the promise backing the science—and the sector's position on the cusp of breaking out—companies with cell therapies got plenty of attention from investment analysts and experts in 2013. Read what those experts, including George Zavoico of MLV & Co., Steve Brozak of WBB Securities, Jason Kolbert of the Maxim Group, and Kevin DeGeeter of Ladenberg Thalmann & Co., had to say about prospects for stem cell companies in this special retrospective article from The Life Sciences Report.

Once upon a time the magic pill was penicillin. It was Marie Curie's miraculous radium. It was Jonas Salk's polio vaccine.

These days it is the stem cell.

New ways to treat and cure disease often meet with skepticism, but the ones that work eventually secure the respect of investors, practitioners and patients, moving into both the medical paradigm and the marketplace. If the researchers working in the stem cell field—and the analysts covering the field—are right, regenerative medicine is knocking on the door of the paradigm. Once it wins entry, the rewards for investors could be extraordinary.

The Life Sciences Report interviewed a number of analysts and experts covering the regenerative medicine field in 2013. These experts described how stem cells could transform the treatment of many modern plagues, including heart disease and cancer, spinal cord injuries and central nervous system disorders, inflammatory and autoimmune diseases. The innovative biotechs that analysts discussed were primarily small- or micro-cap companies, with the potential to return multiples on investment.

The experts also reflected on the bigger picture, sharing insights that might help investors navigate this new and complex realm.

We'll start with the why. Why should investors include stem cell companies in their portfolios? Steve Brozak, president of WBB Securities, didn't mince words about his enthusiasm for the sector.

"For the first time in the history of medicine, instead of providing a drug treatment that 'addresses a problem,' we can actually harness the body's own immune system to provide the treatment," Brozak told The Life Sciences Report in January. "It's always been feasible theoretically, but now we're starting to see that it is possible. The cells provide treatment rather than molecules: That's the differentiator. There is still a place for traditional treatments, but that model will no longer be tenable."

Asked whether cell technologies might offer the greatest growth potential in all of life sciences for investors, Brozak was equally passionate: "I believe that cell technologies have the potential to be the greatest breakthrough in all of healthcare, and in all of medical understanding as we know it. I'm not telling you that it's going to be a smooth path, because nothing ever is. But yes, that's a very easy statement to make."

"I believe that cell technologies have the potential to be the greatest breakthrough in all of healthcare. —Steve Brozak"

Gil Van Bokkelen, CEO of cell therapy company Athersys Inc. (ATHX:NASDAQ) and past-chairman of the Alliance for Regenerative Medicine (ARM), explained the promise of stem cell therapies this way in a February interview: "Administering cells can be a dynamic, druglike event, where the cells don't permanently engraft but are around for days to weeks to help with tissue repair and healing, then clear the body as would a drug or traditional biologic. Then there is the potential to actually augment, replace or regenerate certain types of tissue. These are an incredibly powerful set of capabilities that, frankly, you could never reasonably expect to achieve using traditional, pharmaceutical-based approaches in most areas.

"The stem cell field is unquestionably undervalued right now," Van Bokkelen went on to say. "But I think that will change as more evidence comes to light. It's going to be based on clinical data and tangible partnerships, which are what I think will be the biggest drivers."

Geoff MacKay, current chairman of the Alliance for Regenerative Medicine and CEO of Organogenesis Inc., a private cell therapy company, is also understandably optimistic about the sector. In an April interview, he attributed the relatively low valuation of companies in the cell therapy space to the industry's youth.

"Very few companies are coming out of phase 3 and into the realm of being valued based on revenue and profit. But there is reason to be confident," MacKay said, citing emerging investments by big pharmaceutical companies in the space, and the recent acquisitions of smaller, private cell therapy companies by larger companies. "With all the clinical activity and early investment by a critical mass of pharma, we have the beginnings of an industry that's transforming itself." And the current successes of a handful of companies in the sector, such as regenerative medicine's big player, Mesoblast Ltd. (MSB:ASE; MBLTY:OTCPK), "are signs of a growing confidence in the industry."

"Once a company has a label and a claim, as well as supporting intellectual property, it then has a real commercial product. —Jason Kolbert"

Despite their potential, most experts concede that companies in the stem cell space have lagged in terms of valuation, getting little respect from a market more focused on big pharmas with products on the market and/or a pipeline stuffed with therapies in phase 3 studies. In an August interview, George Zavoico, senior analyst and managing director with MLV & Co., attributed some of the Street's disinterest to the fact that many of these companies "were going for small, niche disease indications that didn't have particularly large market potential.

"Only recently have some of these companies begun targeting broader indications," Zavoico said, listing intermittent claudication, failed bone marrow transplantation and preeclampsia as examples. "While many of these trials are still in phase 1, some have progressed into phase 2 and phase 3. When these studies come to fruition, and if the results are positive, I can see this sector getting far more respect, with a corresponding increase in valuations."

It's not just the market that has been slow to pick up on stem cell companies and their therapies. Big pharma has yet to enter the stem cell space in any meaningful way. Kevin DeGeeter, director with Ladenburg Thalmann & Co., observed in his May 2013 interview that this could be due, in part, to the wide variety of approaches and indications being addressed.

"The overriding issues for big pharmas have tended to fall into three major categories," DeGeeter said. First, there is the question of whether cell therapy companies can "scale up production to serve large markets in a cost-effective way." That's a particular issue for companies focused on autologous cell therapy products (using cells derived from and then readministered to the same patient).

In addition, "regulatory hurdles have been an unknown," DeGeeter explained. Because "the mechanism of action in cell therapies often is not as clearly delineated as in traditional small molecules, and even in biologics such as monoclonal antibody products, [there is some] question of how regulators will weigh the risk/benefit issue of a cell therapy in the case of an adverse event."

And last, there is "essentially a question of inertia" with the larger players.

Still, DeGeeter thinks big pharma's entry into the stem cell field is "just a matter of time. The midsize biotech may be more fertile ground than big pharma, and it will be interesting to see which will ultimately be first to leap into the realm of cell therapy."

But companies in the cell therapy space have gotten a boost from other quarters, noted Joseph Pantginis of Roth Capital Partners in his November interview. Though the sector remains "volatile. . .one thing [has] provided a lot of buoyancy to the space," Pantginis said. The boon has been "cash flow from agencies and groups such as the California Institute for Regenerative Medicine, which is throwing millions of dollars—$20M grants here, $40M grants there—to various companies working in regenerative medicine."

"Big pharma has yet to enter the stem cell space in any meaningful way. —Kevin DeGeeter"

Though market and big pharma disinterest are headwinds, Jason Kolbert, managing director with the Maxim Group, doesn't believe there's any need for investors to worry about legal issues when it comes to monetizing stem cell therapies, such as whether a company will be able to patent a particular therapy. The legality of patenting genes used in targeted therapies was the subject of a Supreme Court case decided in June; the court determined that while genes themselves were "products of nature" and therefore could not be patented, products derived from those genes, such as DNA sequences and synthetic genetic materials, could be patented.

"While [an] individual cell may exist in nature, the concentrated dose—the final product being delivered to patients—does not exist in nature," Kolbert explained in an interview in May. "A company can't necessarily patent a mesenchymal cell, but certainly the process, the method of use and, in some cases, the composition of the final product can be patented."

Stem cell companies themselves, however, may challenge each other in courts to lay claim to proprietary therapies or cells. Should such a challenge occur, Kolbert thinks that market forces—and the strength of a company's product—will determine the winner.

"It ultimately comes down to which process is faster and cheaper, which process has gone through a regulatory approval process, and as such can have a label and can make certain claims. . .once a company has a label and a claim, as well as supporting intellectual property, it then has a real commercial product," Kolbert said.

And the outlook for 2014? Kolbert reflected on that in his December interview.

"What the industry lacks right now is pivotal studies," Kolbert observed, echoing the comments of his fellow analysts. "I don't think U.S. investors are willing to acknowledge the commercial viability of cell therapies and ascribe valuation based on phase 2 data."

But several companies plan to enter the phase 3 arena in the new year, and data from a number of phase 2/3 studies, if positive, will lead to additional phase 3 trials, Kolbert said. Investors will find value in those companies that not only have the data, but also "good balance sheets [and] partners with viable business models."

"I believe, as an analyst, that the way you bring the most value is by identifying a paradigm shift, and I believe that cell therapy represents such a shift," Kolbert asserted. . .a shift that promises rewards for investors, patients and doctors seeking the cures.

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DISCLOSURE:
1) Tracy Salcedo-Chourré compiled this article for The Life Sciences Report and provides services to The Life Sciences Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Athersys Inc. Streetwise Reports does not accept stock in exchange for its services.
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