By Phil Lassiter
Last December Pfizer Inc. (NYSE:PFE) joined a group of ten large drug companies, including Roche Holding (PINK:RHHBY), Johnson & Johnson (NYSE:JNJ), Sanofi (NYSE:SNY), and Eli Lilly & Co. (NYSE:LLY), to create StemBANCC, a collection of 1,500 induced pluripotent stem (iPS) cell lines for use in early testing of for a number of neurological diseases and diabetes. IPS cells are basically skin cells that have been reprogramed to act like stem cells, and have the potential of replacing any type of cell in the body. Scientists at Japan’s Kyoto University recently grew new kidney tissue using iPS cells. The project will consist of 500 patients who have the diseases that are being studied; and skin and blood samples will be taken to derive three iPS lines. The iPS cells will be available to other researchers to use within the project to develop new therapies.
StemBANCC, which has a budget of $72.7 million and will be managed by Oxford University, is a big step for the regenerative medicine market as large drug companies are seeing the potential in developing new stem cell therapies cells in battling diseases. Working in a collective effort, the big drug companies should be able to share costs and shorten the time it takes to develop new stem cell technology in a more efficient manner, which is needed considering the decline in funding of neurological conditions, where drug development has proven especially expensive and results below expectation.
Pfizer has been one of the early leaders in stem cell research & development. In 2008 the company created the Pfizer Regenerative Medicine Unit only to scuttle it two years later due to its global R&D restructuring for cost cutting measures. However, that didn’t mean Pfizer exited the regenerative medicine market, quite the contrary, the company merely changed its direction by investing in, and collaborating with, other companies that focus primarily on developing regenerative medicine. Earlier last year Pfizer Canada announced that it invested $500,000 in a collaboration with Canada’s Centre for Commercialization of Regenerative Medicine (CCRM) to establish the Pfizer-‐CCRM Innovation Fund to accelerate regenerative medicine technologies for drug screening and therapeutic applications, with the goal of moving regenerative medicine from testing to bedside. Though it is a tiny investment compared to Pfizer’s more than $7 billion the company invests annually in R&D, It is probably a more prudent investment for the giant drug company to partner and invest in smaller companies that are focusing strictly on stem cell development, as seen with its collaborative efforts with Athersys Inc. (NASDAQ:ATHX) in developing the stem cell therapy MultiStem.
In what is probably a goal to raise investor profits, Pfizer, in the past year has done some restructuring, and the world’s largest drug company may not be done yet. There is chatter that CEO Ian Read could follow Bristol-Myers Squibb’s lead and separate the company’s branded medicines from its generic medicines as part of a strategy to shrink the company and raise investors’ stock value. Generic brands, though a growing segment of the drug business, have seen profit margins shrink as the FDA’s six-month exclusivity period following patent expirations no longer exist, plus there will be 50% fewer drug coming off patent in the next year. Earlier this month, Pfizer spun off its animal health division into a separate company, Zoetis Inc. (NYSE:ZTS), and last April it sold its infant nutrition units to Nestles for $11.9 billion. Interestingly, those two sales did little to tighten the valuation disparity, as Pfizer still sells for a lower price relative to earnings than roughly 80% percent of similar-sized companies in its sector. Pfizer has a market cap of $199.45 billion but has an estimated EV (Enterprise Value) of $215 billion. The break-up of the company, which is pure speculation at this time, gained attention due to an interview on Bloomberg News January 15th, when Pfizer’s president of the specialty care and oncology business, Geno Germano, commented that the company’s four drug units will probably evolve into two units, one innovative and the other would be value.
I like Pfizer, and though it has already risen over 28% the past year, I think it is an undervalued company compared to its competitors. The company was once known as a great dividend stock, but its purchase of Wyeth in 2009 caused the dividend to be cut in half. Now its quarterly dividend is starting to rise again, up 9% to $0.24 per share. Pfizer closed on Friday at $27.39 per share, slightly below its 52 week high. Breaking up the company would probably be best for investors in the long run, plus it will allow for Pfizer to focus on what it does best, research, develop, and market top quality medicines. I believe the company will continue to grow whether it breaks up or not; and I am long on Pfizer.
As mentioned earlier in the article, Pfizer is in partnership with Athersys Inc, a development stage company that focuses on regenerative medicine therapies. After a poor showing in 2012, this Cleveland, Ohio based company has seen its stock soar better than 50% YTD. The reason for the run up might be two fold, the market has digested the companies November announcement of a secondary stock offering at $1.51 per share, and it recently updated shareholders on its collaboration with Pfizeron MultiStem, its patented and proprietary non-embryonic stem cell therapy. Though MultiStem is currently in four separate clinical trials, it is the Phase II trial with Pfizer, for the treatment of inflammatory bowel disease, that has generated the most attention. Athersys received $6 million up front, and has a potential of receiving up to $106 million more in milestone payments, for selling the rights to Pfizer to develop MultiStem for IBDs. Results of the Phase II trial are expected to be released sometime in the second quarter of 2013.
MultiStem is also in a Phase II trial, separate from Pfizer, for treating people suffering from moderate to moderately severe strokes. If the MultiStem treatment is found to be successful it could be a big step for stroke victims as well as a profit windfall for investors. According to Dr. Gil Van Bokkelen, Athersys’ Chairman and CEO, “We believe MultiStem has the potential to significantly enhance patient recovery, as well as meaningfully extend the treatment window over the current standard of care for stroke victims, enabling many more patients to receive treatment. We are pleased with the results from the initial phase of the study, including the additional evidence of a consistent safety profile for MultiStem, and we intend to move the program forward aggressively to completion.” According to the World Heart Federation each year an estimated 15 million individuals suffer from a stroke worldwide. Dr. Bokkelen further commented, “We believe that development of a safe and effective therapy for ischemic stroke represents both a major clinical and commercial opportunity, and one that could drive value for our shareholders. We believe that this Phase 2 study will provide compelling evidence for the potential of the program.”
Athersys, which has yet to have sales, has a market cap of $80 million. Last November the company raised $23 million in a public offering of 22.8 million shares, however, the offering diluted the holdings of existing shareholders by about one-third. Also later this month the company will hold a special stockholders meeting to vote on the adjustment of the exercise price of private warrants, issued on March 14th 2012, from $2.07 down to $1.01 per share. While these warrants will raise money and strengthen the balance sheet, it will also dilute the holding of the existing shareholders an additional 7% to 8%. While this might cause the stock to decline in the short term, I think investors in Athersys need to look long term at the technology and if MultiStem shows promising results in its Phase II study and begins a Phase III study the stock could rise back to levels it hasn’t seen since 2007. I do like that the company is collaborating with Pfizer, and that does lend credibility to the product and the company. However, should results from the study turn out below expectations Pfizer will not feel a thing, Athersys shares, on the other hand, would most probably drop like a rock.
This year could be a good year for NeoStem Inc. (NYSEAMEX:NBS), the small biopharmaceutical company that is both a contract stem cell manufacturer, through its Progenitor Cell Therapy (PCT) subsidiary, and a developer of its own stem cell therapies, through its other subsidiaries, Amorcyte and Athelos. However, what I find a most interesting therapy that the company is developing is its very small embryonic-like stem cells, (VSEL) technology. It turns out that certain bone marrow stem cells have properties that are similar to embryonic stem cells — so close are these properties that they have dubbed these bone marrow stems cells — VSEL stem cells. What NBS has been able to demonstrate is that VSEL stem cells regenerated bone in a mouse model, and in healing wounds in animal models. What this means is that NBS should be able to show that VSEL stem cells act in the same way as embryotic stem cells, but without the political baggage that embryotic stem cells carry. NeoStem expects to begin studies with the University of Michigan on VSEL technology in treating patients with periodontitis sometime this year.
While the future VSEL technology could be worth billions to the company, I do like that NBS already has a very successful and profitable stem cell manufacturing division in PCT. Manufacturing cell therapies are more expensive than conventional treatments; these therapies cannot be mass produced, and costs thousands of dollars to manufacture an individual therapy. To develop and manufacture these stem cell therapies it requires a specialized facility and an experience staff, as Dendreon Corporation (NASDAQ:DNDN) found out from its ill-fated endeavor to build and run its own stem cell manufacturing facility instead of staying with PCT. PCT, with manufacturing plants on both coasts, can boast the most experienced staff in the industry, and has been a leader in stem cell manufacturing, with over 30,000 cell products manufactured for themselves and other companies, including Baxter International Inc. (NYSE:BAX), ImmunoCellular Therapeutics (NYSEAMEX:IMUC) and most recently, Adaptimmune. PCT has worked closely with its clients in the development process all the way through trials, with the goal to obtain long-term contracts to manufacture and develop new stem cell products.
NeoStem is a small company; its market cap is just under $100 million, but it acts like a much larger company with its subsidiaries developing stem cell therapies including its PreSERVE AMR-001 currently in phase II trials for the treatment of chronic myocardial ischemia. NeoStem is down 8.5% YTY, but is starting to show signs of an upward trend, rising 4.6% YTD, and closing on Friday at $0.61 per share. I think this company is a bargain, especially after shedding its Chinese drug manufacturing company Erye, putting $12.2 million in cash in the bank while eliminating $30 million in debt and growing 98% in the first 3 quarters of 2012 compared to the same quarters of 2011. I like the growth potential of NeoStem both as a stem cell development company and as a contract manufacturer.
Regenerative medicine is a developing and evolving technology, and I believe there is opportunity for investors to generate great profits in these ground floor biotechnical companies, but these are also highly risky investments too. I do like how Pfizer is mitigating its risk while staying actively involved in the R&D of regenerative medicine, and it is by far one of the safest and better companies to have in ones portfolio. However, for a larger risk and reward, I think either NeoStem or Athersys present good value propositions.
Disclosure: Long PFE and NBS.