For investors on the hunt for groundbreaking technologies, stem cell therapies originally looked promising. But the world has been waiting for a long time for the basic research to transform into viable therapies, and in the meantime, Wall Street has largely lost interest. Now, however, there's a "disconnect between science and valuation in cell therapies," says Jason Kolbert, an analyst with National Securities.

The state of stem cell therapy today is reminiscent of where monoclonal antibody therapy was back in the mid-1990s, after that field had a period of high hopes followed by disappointing results, Kolbert says. Back then, the whole sector's market cap was $1 billion. Now, blockbuster treatments such as Avastin (a product of Roche [RHHBY] subsidiary Genentech) and Rituxan (which Roche markets in partnership with Biogen Idec [BIIB]) have changed all that. Similarly, given the advances in stem cell science in recent years, it is clear to Kolbert "cell therapy is going to be a viable part of our future."

The Basics of Stem Cell Therapy


Stem cells
are unspecialized cells that can develop into many different cell types in the body; in many tissues, they serve as a sort of internal repair system, mainly through division. When a stem cell divides, the new cells can become more specialized cells, such as a muscle cells, red blood cells or brain cells.

The idea behind stem cell therapy is to cure diseases by transplanting stem cells into the patient, where they can grow new, specialized cells to replace those which are damaged or defective. Imagine curing a diseased liver by allowing it to grow new tissue, rather than transplanting a whole one; regenerating brain and nerve cells and tissues to treat Alzheimer's or Parkinson's diseases; repairing the effects of spinal cord injuries, heart disease, diabetes, arthritis or burns by giving the body the tools it needs to heal itself.

While the use of embryonic stem cells in these therapies has led some to have ethical issues with the treatments, the use of adult stem cells or pluripotent stem cells -- specialized adult cells that can be "reprogrammed" to assume a stem cell-like state -- removed many of those barriers and concerns.

The Three Favorites

Companies in the field can be differentiated depending on the therapies they're pursuing, the cells they're using, and the manufacturing process or the service they offer. For example, "Replacing diseased tissues with stem cells is the holy grail of regenerative medicine," Kolbert says. "But companies attempting this feat, such as Geron (GERN) (with its spinal chord graft) and StemCells (STEM) (with its liver initiative) face difficult scientific challenges and will take a long time to play out."

One hurdle to overcome is developing a way to avoid teratoma -- when stem cells continue to grow and divide beyond the intent of the therapy, essentially creating a cancer. "It's not clear whether StemCells or Geron will ever achieve their goals," says Kolbert. He prefers the companies that use stem cells to alter the micro-environment in the region of injury.

Aastrom Biosciences (ASTM) develops therapies for use in the treatment of severe cardiovascular diseases. Recently it reported data from a Phase 2 trial in people with critical limb ischemia showing circulation was restored to many patients facing amputation. "I think it's one of the most significant clinical events that we've seen last year. Interestingly enough, Aastrom's stock price didn't move and no one seems to be taking notice, but the company is still making progress."

Athersys (ATHX) has developed its unique off-the-shelf MultiStem platform to treat illnesses including cardiovascular and inflammatory diseases. In December, Athersys signed a global alliance agreement with Pfizer (PFE) for the development and commercialization of MultiStem for the treatment of inflammatory bowel disease. "This just proves MultiStem's potential," Kolbert says. MultiStem is currently being tested in two Phase 1 trials.

Although Athersys uses allogeneic cells (cells that are derived from a healthy donor), while Aastrom uses autologous cells (cells that are derived from the patient, treated then re-injected), it has a similar product to Aastrom, so any positive data there should be good for Athersys.

Pluristem Therapeutics (PSTI), meanwhile, uses human placental cells to develops therapies to treat degenerative, ischemic and autoimmune disorders. These off-the-shelf, ready-to-use products do not require tissue matching. Its leading candidate is in a Phase 1 trial for peripheral arterial disease.

"We expect to see results from several trials of stem cell therapies in the next two to three years. We believe companies such as Athersys, Aastrom and Pluristem, with cells that promote local healing and clear from circulation without tissue integration, are most likely to be successful," Kolbert says.

A Chance to Buy in Ahead of the Curve -- If You're Willing to Take Some Risk

"You can buy the entire sector for about $1.6 billion. If you took out market leaders Geron and Osiris, you can buy the entire space for $500 million. That's shocking for a space with the potential to revolutionize medicine as we know it today."

"Seeing Pfizer invest in the space, Genzyme's (GENZ) bet with Osiris Therapeutics (OSIR) (which recently had a setback when two of its Phase 3 trials did not meet their end points) and the fact that Celgene (CELG) is getting deeper into the space means that the larger companies want to stake out a piece for themselves for the future -- a bullish sign."

"I'm seeing enough clinical trial progress in companies like Athersys and Aastrom that I believe that the stage is being set for successful data over the next two to three years," says Kolbert. Some investors might indeed think it's a great time to buy in ahead of the curve, but keep in mind that even Kolbert doesn't expect any products on the market for the next three to five years, and that most of the companies are very small, making them riskier and more speculative by nature.

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