Can Stem Cells Regenerate Your Portfolio? Stephen Dunn Says Yes

TICKERS: ASTM, ATHX, DNDN, NAVB, NBS, CUR, PFE, REGN, RHHBY, SNY, SHPGY, STEM

Source: George S. Mack of The Life Sciences Report  (9/27/12)

Stephen Dunn Once the subject of intense political debate, stem cell therapies may soon be a therapeutic mainstay of healthcare. In this exclusive interview with The Life Sciences Report, LifeTech Capital's President and Senior Managing Director of Research Stephen Dunn explores the history of stem cell therapy and discusses companies that are reviving this "old" technique for profit.


Companies Mentioned: Aastrom Biosciences Inc. : Athersys Inc. : Dendreon Corp. : Navidea Biopharmaceuticals Inc. : NeoStem Inc. : Neuralstem Inc. : Pfizer Inc. : Regeneron Pharmaceuticals Inc. : Roche Holding AG : Sanofi SA : Shire Plc : StemCells Inc.

The Life Sciences Report: Stephen, in the 6,000-year history of scientific medicine, we have seen three basic therapeutic modalities (excluding the surgical approach). First came the small molecule, then the biotech/biologic approach. Both of these are primarily protein inhibitors. The third approach, still nascent, could be described as the oligonucleotide, in which proteins are modified or inhibited before or during synthesis (as in RNA interference and antisense). Would you say that stem cells are the fourth column supporting the healing arts?

Stephen Dunn: What surprises many investors is that cellular therapy is over 50 years old, dating back to when the first successful hematopoietic stem cell transplantation, or bone marrow transplant, was performed. More recently there have been many advances in the basic science and understanding of the various cell types, along with advances in development and manipulation techniques, which have evolved into a broad medical field called cellular therapeutics. This includes regenerative medicine or stem cell therapy. In some ways, cellular therapy is one of the oldest of the "new" medical fields. I would characterize stem cell therapeutics as perhaps more mature than oligonucleotide therapeutic approaches. Clearly, cellular therapy and regenerative medicine are becoming basic building blocks of healthcare.

TLSR: What is the allure of cellular therapy in terms of therapeutic utility? Will it be the largest-ever segment of healthcare?

SD: A great deal of medical research and drug development is focused on areas such as boosting or inhibiting intracellular processes, with the goal of targeted cell death in diseases like cancer. The flip side is cellular therapy, which replaces defective or dead cells with healthy cells. Hence the term regenerative medicine or stem cell therapy. The cellular therapy field, which has the goal of repairing damaged or dead tissue, organs and nerves, could represent the biggest game-changer in human health and longevity. The excitement over the future potential of stem cells to significantly improve, or even cure, some of today's most difficult medical conditions makes the field very attractive. However, it is still early days in terms of unlocking the full potential of cellular therapies. We recommend investors to take a long-term outlook and be cognizant of the capital requirements in this space. We believe that patient and selective investors will ultimately do well in the stem cell space.

TLSR: Have you isolated or segmented the market potential of stem cells among the various uses and disease indications or categories? For example, there must be a hundred potential central nervous system applications alone—from acute and chronic spinal cord injury to acute and chronic stroke to Parkinson's disease and lysosomal storage disorders. Can you provide some examples of market opportunities?

SD: The financial reward for success in cellular therapy can ramp up very quickly. This is due to the functional combination of a given medical condition's severity and complexity, prevalence and incidence, the healthcare costs to treat and support patients over their lifetimes, and pricing power. What investors should realize is that successful cellular therapies should have very strong pricing power based on the medical conditions they are trying to tackle.

"What surprises many investors is that cellular therapy is over 50 years old, dating back to when the first successful bone marrow transplant was performed. In some ways, cellular therapy is one of the oldest of the 'new' medical fields."

For example, cellular dysfunction due to genetic defects can result in severe chronic medical conditions that are usually fatal if untreated. Drugs to treat these rare diseases are the most expensive in the world. For example, enzyme-replacement drugs such as Sanofi (SNY:NYSE)/Genzyme's Cerezyme, for Gaucher disease, and Fabrazyme, for Fabry disease, each cost $200,000 ($200K) per year. Shire Plc's (SHPGY:NASDAQ; SHP:LSE) Elaprase, for Hunter syndrome, costs $375K per year. There are more than a dozen approved drugs to counter defective cellular functions that cost between $200–400K annually. Financially, these drugs generate high levels of sales revenue despite the small size of their orphan indications.

Cellular therapy also has the potential to replace existing drugs. For example, in wet age-related macular degeneration (AMD), Regeneron Pharmaceuticals Inc.'s (REGN:NASDAQ) Eylea and Roche Holding AG (RHHBY:OTCQX)/Genentech's Lucentis, which are on track for combined sales of almost $2 billion ($2B), cost $1,800–2,000 per injection, with an average 6–8 injections per year, resulting in revenue of approximately $133K per patient over 10 years. However, if a single injection of stem cells could treat the patient for life, it would easily be a multiblockbuster.

Finally, the current economic and societal costs of caring for patients with severe chronic and debilitating conditions, such as paralysis, blindness or neurodegenerative diseases, for the duration of their lifetimes is staggering. If cellular therapy or regenerative medicine can replace defective cells with healthy cells with a single implantation procedure per lifetime, and improve the functionality of these patients, the healthcare cost reductions would easily provide support for very high pricing. It's not hard to imagine that success in any one of these indications could generate $10B or more in revenues.

TLSR: Stephen, time will ultimately tell, but has StemCells Inc. (STEM:NASDAQ) found the right animal model for developing a stem cell therapy for Alzheimer's disease? Do you think the company's triple transgenic model will translate to human utility?

SD: StemCells Inc., which we have rated a strong speculative Buy, has had a very good 2012, with shares gaining more than 130% thus far. The company's stem cell candidate, HuCNS-SC, which is composed of purified human neuronal cells, has generated a number of upward catalysts for investors recently.

Starting in April, the company's phase 1 trial in Pelizaeus-Merzbacher disease (PMD), a fatal myelination disorder in children, showed progressive and durable donor-cell derived myelination in all four children in the study, as well as small but measureable gains in motor and/or cognitive function in three of the four children. These results are remarkable, as development of new myelin signals is unprecedented in patients with connatal PMD and could open the door to treatment of more common myelination disorders, such as multiple sclerosis and certain forms of cerebral palsy.

"The cellular therapy field, which has the goal of repairing damaged or dead tissue, organs and nerves, could represent the biggest game-changer in human health and longevity."

This news was quickly followed by more in July, when the company announced data showing that its human neural stem cells had a significant effect on memory in two different animal models for Alzheimer's disease. Those models are, specifically, the triple transgenic Alzheimer's disease (3xTg-AD) mouse model, which is the only model to exhibit both beta amyloid and tau pathology to mimic human Alzheimer's disease, and CaM/Tet-DTA mice, which have an 80% reduction in hippocampal CA1 neurons to mimic the extensive hippocampal loss seen in Alzheimer's disease in humans. Earlier this month, StemCells Inc. also announced interim six-month data from the first patient cohort in its phase 1/2 trial in thoracic chronic spinal cord injury, in which two out of the study's three patients showed considerable gains in sensory function, and the third patient remained stable. We also expect the company's clinical trial in dry AMD to begin dosing the first patient soon.

Finally, the California Institute for Regenerative Medicine (CIRM) has awarded up to $40 million ($40M) in matching loans for preclinical development of StemCells Inc.'s HuCNS-SC in both cervical chronic spinal cord injury and in Alzheimer's disease, with the goal of filing an investigational new drug application for human clinical trials. After many years, StemCells Inc. is now generating successful data in multiple indications and unlocking the potential of stem cell therapy.

TLSR: Neuralstem Inc. (CUR:NYSE.A) stock is up 21% over the past month. The company originally went public without a clinical asset, and shares have suffered subsequently. Is the company finally ready to turn the corner and reward investors?

SD: Neuralstem is using neural stem cells in another difficult neurodegenerative disease, amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease), which affects the motor neuron cells in the spine. The company just treated the eighteenth and final patient in its phase 1 safety trial, using its NSI-566 spinal cord neural stem cells in both the lumbar and cervical regions. The results thus far indicate that the stem cells are safe and well tolerated. What is particularly interesting is that patients have been retreated with multiple injections, which further demonstrates the stem cells' safety. In addition, some of the ambulatory patients appeared to have stabilized. While this is a small phase 1 safety trial, the preliminary efficacy indications are very encouraging.

It's been a bit of a bumpy ride for investors this year, as Neuralstem sold shares to raise cash in February, August and most recently September, at $1 per share. However, the company enjoys significant investor support, as Lou Gehrig's disease is a high-profile indication. For those investors with a long time horizon, Neuralstem could be very rewarding. The company has additional development projects in its pipeline, such as NSI-189, a small molecule drug that is currently in a phase 1b clinical trial for major depressive disorder—another shot-on-goal.

TLSR: The market reacted badly when NeoStem Inc. (NBS:NYSA.A) diluted itself and sold $6M worth of shares back at the beginning of April. You downgraded the company a few weeks after that. Nobody was happy when the company bought Amorcyte Inc. either. But since April 5, 2012, NeoStem is up about 83%. Are you changing your mind? And is the Street finally recognizing the company's stem cell technology?

SD: NeoStem was over $2 a share just 18 months ago, as it had a promising stem cell program in China and also owned 51% of Suzhou Erye Pharmaceuticals, a manufacturer of active pharmaceutical ingredients that generated over $60M in sales revenue in the Chinese market. Unfortunately, the Chinese government suddenly changed both regulatory and financial guidelines, which adversely impacted the company. New government pricing pressure resulted in an overall decline in revenues of 24% in 2011, with new government curbs on antibiotics and medical insurance cuts projected to reduce future sales of some of Erye's drugs by 50–75%. To add insult to injury, the Chinese Ministry of Health asked for a moratorium on new stem cell clinical trials and stipulated that patients in existing clinical trials not be charged. Due to this loss of revenue and the resulting uncertainties, NeoStem was forced to raise cash by selling stock at $0.40 per share in April. Since then, NeoStem has agreed to sell Suzhou Erye Pharmaceuticals for $12.3M in cash, which also eliminates $35M in debt.

"The excitement over the future potential of stem cells to significantly improve, or even cure, some of today's most difficult medical conditions makes the field very attractive."

In Q3/11, NeoStem began its transition to a pure-play cell therapy company by acquiring Amorcyte and its stem cell candidate AMR-001, which is currently in a phase 2 clinical trial for acute myocardial infarction (AMI or heart attack). We are expecting the company to complete enrollment in H1/13, with six-month data expected in late 2013. NeoStem is also planning a phase 1 trial for congestive heart failure, which is expected to initiate in Q1/13. AMR-001 is interesting because it consists of autologous, bone marrow-derived stem cells enriched for CD34+CXCR4+. Based on an analysis of the hits and misses in the cardiac cell therapy field, there is significant evidence that CD34+ cells play an important, if not the most important, role in cardiac stem cell indications. Specifically, NeoStem's AMR-001 stem cells home in on at-risk cardiac tissue via the SDF-1 gradient to induce neoangiogenesis. We advise investors to keep an eye on NeoStem's development program for AMR-001 as the company progresses into 2013.

TLSR: Treatment of critical limb ischemia is a growing market, and autologous cell therapies have held some promise. However, we have seen a big disappointment in Dendreon Corp.'s (DNDN:NASDAQ) autologous stem cell platform for the treatment of advanced prostate cancer. It does not seem to be efficient and margins are thin. Has Dendreon's disappointment been an overhang on Aastrom Biosciences Inc. (ASTM:NASDAQ)?

SD: Aastrom's stem cell candidate, ixmyelocel-T, requires a patient-specific manufacturing process, in which a sample of the patient's bone marrow is taken, shipped to a central location for stem cell expansion, and then shipped back and implanted in the patient. Investors see similarities to the manufacturing process of Dendreon's Provenge vaccine for prostate cancer, which was approved by the U.S. Food and Drug Administration (FDA) in 2010. Since Provenge is patient-specific and custom-manufactured, the costs of production in multiple production centers did not provide the kind of margin investors demand from a biotech company.

However, Aastrom is a well-known name in the stem cell space and has slowly but surely been making clinical progress. The company has two clinical trials that are expected to be significant catalysts for Aastrom shares. In May, Aastrom began a pivotal 594-patient phase 3 trial in critical limb ischemia (CLI) and the company is targeted to complete enrollment by Q1/14. The primary endpoint is the efficacy of ixmyelocel-T on amputation-free survival at 12 months post-injection. Nearer term, the company is initiating a 108-patient phase 2b trial in patients with ischemic dilated cardiomyopathy using a NOGA catheter to deliver the cellular therapy. The primary endpoint is reduction of major adverse cardiac events at 12 months, and the company is targeting top-line results in mid-2014.

Dendreon was a victim of extremely high expectations on the part of investors, who were not cognizant of the economics of patient-specific manufacturing. I believe Aastrom investors have already built the manufacturing issue into the equation, as shares are trading at one-tenth the valuation of Dendreon's. The result is that there is plenty of upside for long-term investors should Aastrom's clinical results meet the endpoints.

TLSR: Athersys Inc. (ATHX:NASDAQ) is partnered with Pfizer Inc. (PFE:NYSE) in a phase 2 study in inflammatory bowel disease (IBD). Is this partnership positive for the company and for investors? IBD and Crohn's disease seem to be treatable with stem cells.

SD: Investors really sat up and took notice of Athersys in December 2009, when Pfizer signed a partnership agreement to develop the company's MultiStem product for IBD. This was the first large pharma parternship in the stem cell space, and it was a step forward in validating Athersys and the entire stem cell field.

"We believe that patient and selective investors will ultimately do well in the stem cell space."

Multistem is an example of an "off-the-shelf" stem cell therapy. It is delivered systemically to the patient, which makes it attractive to Pfizer from a manufacturing and commercialization standpoint. Pfizer is currently conducting a 126-patient phase 2 trial, with the goal of full enrollment by year-end and top-line results expected in mid-2013. Athersys also has an internal phase 2 program for MultiStem in ischemic stroke. While interesting, investors have seen dozens of non-stem cell failures in ischemic stroke over the years, and they are understandably cautious about the stroke indication. Athersys is also working on using MultiStem for the prevention of graft-versus-host disease (GvHD) in patients with leukemia, as well as on other indications including Hurler syndrome, a lysosomal storage disease.

Athersys has a great partner with Pfizer but still needs to maintain funding for its internal programs. The company was awarded two grants earlier in the year, but was required to sell stock to raise funds in March, and it's likely they will need to do so again before the end of 2012. For long-term investors, the mid-2013 top-line IBD data from Pfizer will be a significant catalyst for Athersys shares.

TLSR: You also cover Navidea Biopharmaceuticals Inc. (NAVB:NYSE), which has been rather controversial over the past year.

SD: The company had a setback earlier this month, when the FDA issued a complete response letter (CRL) regarding the company's Lymphoseek technology for lymph node mapping.

TLSR: The technology could be a powerful assist in dealing with metastasis, which is the true killer in solid tumors. Shares lost about 30% of their value on Sept. 10. How serious is this event? Is this stock a deep value now?

SD: The FDA's CRL for Navidea's new drug application (NDA) for Lymphoseek (technetium Tc99m tilmanocept) was not due to efficacy or safety issues. Rather, it addressed deficiencies of current Good Manufacturing Practices (cGMP) at the company's third-party contract manufacturer, specifically the manufacturer's quality control processes and procedures. We believe this provides additional confidence that the Lymphoseek efficacy and safety data supports approval, and we further believe the contract manufacturer's cGMP issues can be resolved in a timely manner. Our current estimate, based on corrective action by the contract manufacturer, Navidea's resubmission of the NDA and an FDA manufacturing reinspection with a Class 2 review, is a Lymphoseek FDA approval and a U.S. launch by the company's strong marketing partner, Cardinal Health (CAH:NYSE), in Q2/13.

We believe savvy investors should take advantage of the current weakness in Navidea shares due to the delay. Investors should also benefit from future catalysts, such as a European partnership and marketing authorization application filing, along with advances in Navidea's AZD4694 program for Alzheimer's imaging, its CFT program for Parkinson's imaging and its humanized monoclonal antibody RIGScan program for radiolabel-guided surgery in colon cancer. All of these programs provide for multiple shots-on-goal and potential revenue streams in the future. We rate Navidea a strong speculative Buy.

TLSR: Thank you for your time.

SD: My pleasure.

LifeTech Capital President and Senior Managing Director Stephen Dunn was previously the managing director of life sciences research at Jesup & Lamont, as well as director of research for Dawson James Securities and director of life sciences at Cabot Adams venture capital group. He has held management positions in business development, finance and operations, having worked in more than 25 countries in North America, Europe and the Far East with biomedical companies including Beckman Coulter, Coulter, Cordis (Johnson & Johnson) and Telectronics (St. Jude Medical), as well as several smaller companies. With more than 25 years in the global biomedical industry, Dunn has negotiated numerous intellectual property licenses, product development agreements, venture funding, mergers and acquisitions and joint ventures. Dunn is a five-star biotechnology analyst on StarMine and has appeared in both the financial and scientific media, including The Wall Street Journal, CNN, Newsweek, Forbes, Nightly Business Report, Nature Biotechnology, The Scientist, BioWorld and many other media outlets. He is a frequent speaker and panel member for many financial, medical and venture capital events.

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DISCLOSURE:
1) George S. Mack conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Neuralstem Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Stephen Dunn: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) In the past 12 months StemCells Inc. has been an investment banking client of LifeTech Capital. NeoStem Inc. and Navidea Biopharmaceuticals have been advisory clients of LifeTech Capital.




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