I shouldn't do this but what the hell we deserve a little confidence. Enjoy all
Is this a good time to invest in biotech? I’d say that de- pends on the investment, not the category, and today I’m going to violate my normal instincts and re-recommend an outlier in our portfolio.
A few weeks ago, I met with Dr. Simon Craw, execu- tive vice president of International Stem Cell Corp. (OTCBB: ISCO), in New York over an excellent tuna burger at Union Square Cafe on 16th Street, one of my favorite Danny Meyer restaurants.
I have been, to put it mildly, skeptical about the future of Craw’s employer. But two days earlier, I had a long phone conversation with Dr. Ruslan Semechkin, chief scientific officer of ISCO. The conversation was amus- ingly challenging because Dr. Semechkin has a strong but pleasant Russian accent, and telephones make all conversations between people who have different native languages difficult.
Semechkin was about to present results from experiments on African green monkeys with induced Parkinson’s dis- ease to attendees at the American Academy of Neurology in Philadelphia. Semechkin had induced Parkinson’s in the monkeys and then operated on them to inject human neural stem cells into their midbrains.
The idea was that the stem cells would be welcomed by the monkey brains and begin producing dopamine, a neurotransmitter. Dopamine is primarily associated with two things — first, as a kind of brain candy that makes you feel rewarded and plays a big part in addictions, and second, as part of the midbrain motor-control system of body movements.
Among other things, Parkinson’s patients have uncon- trollable tremors, and their body movements slow down to the point that they can become immobile. Parkinson’s afflicts more than a million Americans. Journalist and es- sayist Michael Kinsley has written insightfully about the disease, and his latest article in the April 28 New Yorker explores the often overlooked mental predicaments of Parkinson’s. It’s a fascinating read.
Semechkin told me that ISCO’s experiments with the monkeys had been a success. I won’t go into all the tech- nical details, like how you measure a monkey’s progress on certain scales, but I will tell you about a video Craw showed me over lunch.
(Craw had the cod, by the way, and was very pleased when the waiter told him it was from Massachusetts. As
a proper Brit, Craw was keenly aware that fish presented as “cod” that comes from the Pacific is not at all the same thing. “We almost fought a war with Iceland over cod,” he reminded me.)
On his iPad Air, Craw conjured up two videos. In the first, a pleasant-looking and spookily human-like monkey could barely hold a banana it was eating because of tremors. In the second, the same monkey seemed perfectly normal, happily peeling his banana and jumping around the cage as if a disease called Parkinson’s had never existed.
Now I’ll cut to the chase. If those videos are truly repre- sentative of what ISCO has been able to do, and if it lasts, and if it could work on humans, I witnessed something of a medical miracle.
First of all, everyone in the stem cell business has had
a lot of trouble, to put it gently, getting stem cells to differentiate into the cells a researcher wants, like into liver cells, heart cells or neurons. The problem is purity, because stem cells tend to retain a “memory” of what they have been. ISCO has a patented technology that was published in the journal Nature last year.
ISCO can take what is called a human pluripotent stem cell, one that can become anything, and stimulate it so it finally morphs into specific cells that produce dopa- mine in the midbrain area, where Parkinson’s works its tragedy. Although many companies can produce stem cells, producing specific cells that have high purity is a challenge, at best. ISCO seems to have control of that problem, and I am wondering why other firms are not beating down ISCO’s door for a licensing arrangement. “Actually, we have been approached by several firms for that,” Craw said.
Second, the neural stem cells implanted in the monkey’s brain did exactly as hoped. They were absorbed by the monkey brain and began producing dopamine. One can achieve that result with a drug called levodopa and/or deep brain stimulation, but it is an effect that diminishes with time.
Experiments with stem cells injected into human brains have been going on in China for some time. In most cas- es, the injections are made up of fetal tissue that happens to contain stem cells. By and large, the experiments didn’t work, but they did show later in autopsies that the effect ISCO is creating in the monkeys might last 10–15 years.
Interviewing researchers within a company about their efforts has to be taken with a bit of skepticism because they are usually true believers. That’s why they’re doing what they’re doing, and their future economics are tied to successful outcomes. But I was impressed that both Se- mechkin and Craw are not trying to oversell their work, and they’re appropriately humbled by the difficulties they face. Parkinson’s animal studies with stem cells are not new, but we may be witnessing a far better result than previously achieved.
ISCO has a long path ahead of it to prove anything.
Its next step is to get an IND — Investigational New Drug — approval from the FDA so that Phase 1 trials can begin on actual humans. Craw says ISCO should be able to get the IND application filed by early next year and get into a Phase 1 study before the end of 2015. The company already has a prominent researcher at Duke University lined up to do the Phase 1 trial on 12–15 humans. Finding volunteers that meet protocols should not be difficult. That trial is intended only to establish whether the “drug” involved creates any toxicity or side effects. If it does not, ISCO will likely be on to a Phase 2 study that establishes dosing and efficacy and compares results to a control group. But because of the nature of this particular Phase 1 study, involving actual transplan- tation of the stem cells in actual brains, ISCO will get something of a Phase 2 trial out of it too. The results on patients will be quite obvious.
Meanwhile, ISCO is hardly a well-financed company, and trials cost a fortune. I was at an ARC Fusion Dinner of about 50 biotech leaders in San Francisco two weeks ago at which tech startup genius Juan Enriquez and genomics guru Eric Schadt spoke. In a question-and-answer ses- sion following a discussion called Should We Build a Better Human? that was based largely on stem cell research, a scientist/entrepreneur in the audience noted that a typical Phase 3 study now costs $120 million. That’s five times what ISCO is worth.
International Stem Cell generates about $6 million a year from a skin cream business and a subsidiary that produces primary human cells including stem cell lines for researchers. They then proceed to lose about $6 million a year overall. That’s small change in the biotech business. The company finished 2013 with about $2.3 million in cash. ISCO has a credit line agreement that allows them to withdraw up to $10 million in exchange for stock at whatever the stock is selling for at the time. At current prices, that would create about 60 million new shares of ISCO. There are about 156 million shares outstanding.
ISCO’s dilution problems going forward are com-
pounded by its low share price hovering around 16 cents. This newsletter recommended the stock at 73 cents a share almost three years ago when it looked cheap. A year earlier, the stock sold for more than $2.50 a share.
As I’ve mentioned many times, I think penny stocks are a fool’s game, and I do not trust the transparency of stocks that do not list on a major exchange. But I also think we have an unusual situation with this company. Although the odds are very much against a company in the stem cell business succeeding with a breakthrough therapy, about one in 10 Investigational New Drug Applications to the FDA actually do end up getting through all the necessary trials and getting approval. The killer app is that they tend to fail late in the pro- cess, so the statistics for success once a drug reaches Phase 3 trials, when hopes and stock prices are soaring, are still about one in 10.
I see a lot of downside in International Stem Cell, includ- ing future dilution, but I think the company represents one of the ideas this newsletter has been built on: that most of our investments will falter but a few will become such huge hits that they will more than make up for the negative ratio. I’m more cautious about that approach than the previous editor, and I have sought to diversify the portfolio. Nonetheless, I’m willing to take a chance on International Stem Cell Corp.
So here’s my recommendation for the moment: I’d buy ISCO if it is not in your portfolio, but do not invest more than 1% of your portfolio in the stock. Or just take $160 and buy a thousand shares and assume you’ll lose it. Be careful, because this is a thinly traded company and it won’t take much buying to cause the stock to shoot up. If it reaches 20 cents, don’t buy it for now, and see if it comes back down. Then be patient — two–three years patient. The people at International Stem Cell have a shot at success, and they have a real desire to get the stock upgraded to a Nasdaq listing. That will involve a reverse split if it happens, which is likely to be beneficial to the price in the long run.
And there’s one other possibility here for investors — a buyout. The technology ISCO has developed looks mighty cheap when you could buy the entire company for $25 million.
Meanwhile, I intend to cover the trials of the company going forward.
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