Nov. 10, 2014
Summary
STEM's Phase I AMD interim results were disappointing.
A former employee is making serious allegations about improper manufacturing practices in a lawsuit.
After granting STEM $19.4 million in the form of a forgivable loan, the former president of CIRM joined STEM’s board. Questions of graft ensued.
Politics, cost and scalability are working against STEM and their method of deriving stem cells from the brains of aborted fetuses.
StemCells Inc. (NASDAQ:STEM) is a small cap biotech company primarily involved in stem cell research. Its stock is currently trading at $1.16, which is 50% of its recent highs.
Disappointing Results
In June of this year, STEM issued a press release, touting interim results for their Food and Drug Administration (FDA) Phase I clinical trial testing a treatment for Age-related Macular Degeneration (NYSE:AMD). According to the press release: "Interim results for the current AMD trial show a 70 percent reduction in the rate of geographic atrophy (GA) as compared to the control eye…"
Slowing the progression of a disease that currently has no FDA approved cure was initially seen as great news by the market. After rising steadily for a month prior to the news release of promised stellar results, STEM's stock shot up from $1.75 to $2.34. Those gains quickly faded as the public began to realize STEM's results were not as impressive as the company indicated they would be.
It would have been great news to slow the rate of AMD progression by 70% if one of their competitors, Advanced Cell Technology (OTCQB:ACTC), had not completely halted the disease in patients enrolled in their Phase I trial. Many of ACT's patients even experienced persistent gains in visual acuity. In my previous article, I postulated that Phase I results in stem cell trials were likely to persist throughout the ensuing trial phases. That won't be good enough for STEM. They're going to need to show better efficacy to keep up with the competition.
But all hope is not lost. STEM's Phase II trial should commence soon and include patients with better vision and more recoverable photoreceptors. They'll certainly have a better chance to halt the progression of the disease in healthier eyes, but I'm not holding out hope for any meaningful improvement over their disappointing Phase I results.
How much they choose to spend on this expensive and seemingly fruitless endeavor may soon determine the fate of this company.
Serious Allegations
Rob Williams, a former senior manager at STEM, made some serious allegations against the company in a lawsuit filed in July 2014. Specifically, he accuses the firm is manufacturing human cells in a process that puts "patients at risk of infection or death."
Ken Stratton, general counsel for STEM, responded in part, "We believe our processes, procedures and controls, as fully described in our regulatory filings, are appropriate for a company at our early stage of clinical development and comport with applicable guidelines and regulations."
This seems to me more like a confession than a denial. Any way you look at this, it's a weak response to a serious charge that desperate patients, condemned with a prognosis of encroaching, incurable blindness, were subjected to life-threatening risks due to STEM's poor manufacturing practices. Their response is not encouraging, to say the least.
Along with the obvious mortality and morbidity risks that go along with tumor formation, one contaminated assay from STEM could derail the progress of all stem cell companies. The sloppy tactics alleged by the former employee are highly irresponsible on many social and scientific levels.
They haven't been found guilty yet, and perhaps they never will, but let's get back to their weak response. They seem to believe, or want the public to believe, that the FDA's Current Good Manufacturing Practice (cGMP) regulations on processes, procedures and controls change based on the stage of clinical trials. This is absolutely false. Being a small company doesn't absolve STEM of the responsibility to protect their patients. Hopefully, Mr. Stratton just wrote a poorly worded sentence that is not indicative of their true beliefs. I look forward to clarification from the company as soon as possible.
How should they respond? If this lawsuit is simply filled with lies from a disgruntled employee, they should file a countersuit. They should explain to the world that these allegations could not be true and present evidence to back it up. Their weak defense is very troubling. This could have disastrous effects for patients, STEM, the doctors and hospitals involved who trusted STEM's methods and even for the stem cell industry as a whole.
Suspicious Relationship
STEM's relationship to Alan Trounson, Ph.D., former president of the California Institute for Regenerative Medicine (CIRM) - a taxpayer funded organization that governs the allocation of $3 billion authorized to fund stem cell research in California - is raising serious questions. The firestorm began after Dr. Trounson accepted a position on STEM's Board of Directors in June of this year, one week after resigning from his post at CIRM.
This relationship is troubling because in many ways CIRM acts as an arbiter of which small cap struggling biotech organizations are thrown a lifeline and which are condemned to suffer the slings and arrows of raising money on the free market. Notably, when Trounson was at the helm CIRM issued a forgivable loan to STEM for $19.4 million. His new appointment to STEM's board has raised questions of graft.
According to CIRM's new president and CEO, C. Randal Mills, "Finally, in the interests of transparency and good governance we will be conducting a full review of all CIRM activities relating to Stem Cells Inc." The press release went on to state, Dr. Alan Trounson's appointment to STEM's board, "… raises concerns on a number of fronts …"
If CIRM's internal investigation uncovers evidence of corruption and leads to a legal battle, that could finally doom this fledgling biotech company for good.
Political Headwinds
With the Republicans set to take over the US Senate this January, STEM may face some unexpected headwinds. STEM derives their HuCNS-SC® human neural stem cells from the brains of aborted fetuses. Why they chose this route, considering their poor pre-clinical and Phase I results, is unclear. Whatever benefit they thought this method would generate hasn't shown up clinically. There are certainly more ethical choices for a source of stem cells than the brains of aborted fetuses, and they may be in for a rude awakening as unexpected political hurdles arise.
Importantly, the cost and scalability of these human neural stem cells will become major issues if these trials ever progress to a large-scale Phase III.
Outlook
After announcing a $20 million offering in July, I estimate STEM has approximately $27 million cash and cash equivalents on hand. I estimated this using their 10-Q quarterly report which was filed August 12, 2014. This report shows an average quarterly burn rate of $9,867,740 for 2014. At this rate, they'll need to dilute shareholders further in the summer of 2015 in order to keep operating, or they'll have to somehow come up with a joint venture, grant or some other means of non-dilutive funds. At this point, another forgivable CIRM loan is improbable.
If the stock price continues to drop they may get delisted from the Nasdaq exchange. To remedy this, a reverse split is likely necessary in 2015 in order to maintain the stock price at a level that meets Nasdaq's continued listing requirements.
On a more positive note, stem cells in general have shown great promise recently. If STEM could manage to publish their clinical results in a high impact, peer-reviewed journal, its small market cap of $80 million could see explosive growth. STEM needs some positive news to propel a rise in their stock price. They have shown some wild swings in the past. Whether or not they are able to achieve good enough results to warrant publication is a question that may not be answered for several more years, if ever.
More good news that should be considered is that STEM does have other programs in their pipeline, and they completed enrollment in their Phase I clinical trial treating spinal cord injury in April of this year. Results are expected mid-2015 and may warrant a bigger Phase II trial if the company sees promising results.
Conclusion
This stock has stunk like hot garbage as of late, losing 50% of its recent value. The small company is in a precarious financial position, and many dangerous pitfalls lie ahead with only a few rays of hope on the distant horizon. Sadly, in my opinion, even at these low levels, STEM is a resounding sell.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Click on link and register to read comments:
http://seekingalpha.com/article/2664545-stemcells-inc-faces-tough-times-ahead
Summary
STEM's Phase I AMD interim results were disappointing.
A former employee is making serious allegations about improper manufacturing practices in a lawsuit.
After granting STEM $19.4 million in the form of a forgivable loan, the former president of CIRM joined STEM’s board. Questions of graft ensued.
Politics, cost and scalability are working against STEM and their method of deriving stem cells from the brains of aborted fetuses.
StemCells Inc. (NASDAQ:STEM) is a small cap biotech company primarily involved in stem cell research. Its stock is currently trading at $1.16, which is 50% of its recent highs.
Disappointing Results
In June of this year, STEM issued a press release, touting interim results for their Food and Drug Administration (FDA) Phase I clinical trial testing a treatment for Age-related Macular Degeneration (NYSE:AMD). According to the press release: "Interim results for the current AMD trial show a 70 percent reduction in the rate of geographic atrophy (GA) as compared to the control eye…"
Slowing the progression of a disease that currently has no FDA approved cure was initially seen as great news by the market. After rising steadily for a month prior to the news release of promised stellar results, STEM's stock shot up from $1.75 to $2.34. Those gains quickly faded as the public began to realize STEM's results were not as impressive as the company indicated they would be.
It would have been great news to slow the rate of AMD progression by 70% if one of their competitors, Advanced Cell Technology (OTCQB:ACTC), had not completely halted the disease in patients enrolled in their Phase I trial. Many of ACT's patients even experienced persistent gains in visual acuity. In my previous article, I postulated that Phase I results in stem cell trials were likely to persist throughout the ensuing trial phases. That won't be good enough for STEM. They're going to need to show better efficacy to keep up with the competition.
But all hope is not lost. STEM's Phase II trial should commence soon and include patients with better vision and more recoverable photoreceptors. They'll certainly have a better chance to halt the progression of the disease in healthier eyes, but I'm not holding out hope for any meaningful improvement over their disappointing Phase I results.
How much they choose to spend on this expensive and seemingly fruitless endeavor may soon determine the fate of this company.
Serious Allegations
Rob Williams, a former senior manager at STEM, made some serious allegations against the company in a lawsuit filed in July 2014. Specifically, he accuses the firm is manufacturing human cells in a process that puts "patients at risk of infection or death."
Ken Stratton, general counsel for STEM, responded in part, "We believe our processes, procedures and controls, as fully described in our regulatory filings, are appropriate for a company at our early stage of clinical development and comport with applicable guidelines and regulations."
This seems to me more like a confession than a denial. Any way you look at this, it's a weak response to a serious charge that desperate patients, condemned with a prognosis of encroaching, incurable blindness, were subjected to life-threatening risks due to STEM's poor manufacturing practices. Their response is not encouraging, to say the least.
Along with the obvious mortality and morbidity risks that go along with tumor formation, one contaminated assay from STEM could derail the progress of all stem cell companies. The sloppy tactics alleged by the former employee are highly irresponsible on many social and scientific levels.
They haven't been found guilty yet, and perhaps they never will, but let's get back to their weak response. They seem to believe, or want the public to believe, that the FDA's Current Good Manufacturing Practice (cGMP) regulations on processes, procedures and controls change based on the stage of clinical trials. This is absolutely false. Being a small company doesn't absolve STEM of the responsibility to protect their patients. Hopefully, Mr. Stratton just wrote a poorly worded sentence that is not indicative of their true beliefs. I look forward to clarification from the company as soon as possible.
How should they respond? If this lawsuit is simply filled with lies from a disgruntled employee, they should file a countersuit. They should explain to the world that these allegations could not be true and present evidence to back it up. Their weak defense is very troubling. This could have disastrous effects for patients, STEM, the doctors and hospitals involved who trusted STEM's methods and even for the stem cell industry as a whole.
Suspicious Relationship
STEM's relationship to Alan Trounson, Ph.D., former president of the California Institute for Regenerative Medicine (CIRM) - a taxpayer funded organization that governs the allocation of $3 billion authorized to fund stem cell research in California - is raising serious questions. The firestorm began after Dr. Trounson accepted a position on STEM's Board of Directors in June of this year, one week after resigning from his post at CIRM.
This relationship is troubling because in many ways CIRM acts as an arbiter of which small cap struggling biotech organizations are thrown a lifeline and which are condemned to suffer the slings and arrows of raising money on the free market. Notably, when Trounson was at the helm CIRM issued a forgivable loan to STEM for $19.4 million. His new appointment to STEM's board has raised questions of graft.
According to CIRM's new president and CEO, C. Randal Mills, "Finally, in the interests of transparency and good governance we will be conducting a full review of all CIRM activities relating to Stem Cells Inc." The press release went on to state, Dr. Alan Trounson's appointment to STEM's board, "… raises concerns on a number of fronts …"
If CIRM's internal investigation uncovers evidence of corruption and leads to a legal battle, that could finally doom this fledgling biotech company for good.
Political Headwinds
With the Republicans set to take over the US Senate this January, STEM may face some unexpected headwinds. STEM derives their HuCNS-SC® human neural stem cells from the brains of aborted fetuses. Why they chose this route, considering their poor pre-clinical and Phase I results, is unclear. Whatever benefit they thought this method would generate hasn't shown up clinically. There are certainly more ethical choices for a source of stem cells than the brains of aborted fetuses, and they may be in for a rude awakening as unexpected political hurdles arise.
Importantly, the cost and scalability of these human neural stem cells will become major issues if these trials ever progress to a large-scale Phase III.
Outlook
After announcing a $20 million offering in July, I estimate STEM has approximately $27 million cash and cash equivalents on hand. I estimated this using their 10-Q quarterly report which was filed August 12, 2014. This report shows an average quarterly burn rate of $9,867,740 for 2014. At this rate, they'll need to dilute shareholders further in the summer of 2015 in order to keep operating, or they'll have to somehow come up with a joint venture, grant or some other means of non-dilutive funds. At this point, another forgivable CIRM loan is improbable.
If the stock price continues to drop they may get delisted from the Nasdaq exchange. To remedy this, a reverse split is likely necessary in 2015 in order to maintain the stock price at a level that meets Nasdaq's continued listing requirements.
On a more positive note, stem cells in general have shown great promise recently. If STEM could manage to publish their clinical results in a high impact, peer-reviewed journal, its small market cap of $80 million could see explosive growth. STEM needs some positive news to propel a rise in their stock price. They have shown some wild swings in the past. Whether or not they are able to achieve good enough results to warrant publication is a question that may not be answered for several more years, if ever.
More good news that should be considered is that STEM does have other programs in their pipeline, and they completed enrollment in their Phase I clinical trial treating spinal cord injury in April of this year. Results are expected mid-2015 and may warrant a bigger Phase II trial if the company sees promising results.
Conclusion
This stock has stunk like hot garbage as of late, losing 50% of its recent value. The small company is in a precarious financial position, and many dangerous pitfalls lie ahead with only a few rays of hope on the distant horizon. Sadly, in my opinion, even at these low levels, STEM is a resounding sell.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Click on link and register to read comments:
http://seekingalpha.com/article/2664545-stemcells-inc-faces-tough-times-ahead