Obama Can't Save Stem Cell Companies

In 2001, President George Bush hampered stem cell research by restricting government funding on embryonic stem cell research to the then-available embryonic stem cell lines. Today, there's a big buzz in the scientific community because President-elect Barack Obama plans to issue an executive order allowing federal funding for new embryonic stem cell research.

Unfortunately, that's not going to help existing stem cell companies and their investors all that much. Let me explain.

Public funds
First off, these public funds are likely to go to research institutes and universities. That could result in collaborations with current companies, but those are too difficult to predict to be used as the basis of an investment thesis. That funding could also eventually result in startups that are spun out of universities, but that, too, is difficult to predict. Finally, the money will likely lead to advances in knowledge and techniques, but that is more of a long term result and, again, should not be the basis of an investment thesis.

In other words, Obama changing the rules is not going to help current investors a whole heck of a lot. At least not immediately.

That said, an increase in funding could benefit Life Technologies (Nasdaq: LIFE  ) -- formerly Invitrogen -- a supplier of laboratory reagents that help scientists grow stem cells.

Some stem-cell companies are using stem cells from sources other than embryos. For instance, Cytori Therapeutics is developing therapies using stem cells derived from fat tissue. While government-sponsored research on embryonic stem cells might eventually help scientists better understand all stem cells, it's not likely to help the companies right now.

And they could use the help:

Company

Market Cap (in millions)

Cash and short-term investments (in millions)

Increase (decrease) in cash YTD (in millions)

Geron (Nasdaq: GERN  )

$276

$174

($32)

StemCells

$86

$21

($15)

Cytori Therapeutics

$66

$13.4

$2*

Source: Capital IQ, a division of Standard & Poor's. *Includes a $30 million secondary offering.

With products still a ways off, these companies are going to need a shot of capital in the arm fairly soon. Unfortunately, with their stock prices deflated over the past year, secondary offerings aren't a very good option at the moment.

Private-private partnerships
If public-private partnerships aren't going to stimulate the growth of the stem cell industry, then is the industrial potential of stem cells dead in the water? Not even close. What's going to drive this industry is funding from large pharmaceutical companies.

Pfizer (NYSE: PFE  ) recently set up a unit to focus on stem cells. I think it's likely that we'll see Pfizer spending some of its cash to partner up with these experienced stem-cell companies rather than recreating all the hard work that its little brothers have done. And of course Pfizer will likely need access to the patents held by these companies to develop therapies anyway.

The other way that stem-cell companies can generate cash while they wait for the technology to advance is by using stem cells to create systems to test drug toxicology. Geron is designing a system based on liver cells because the liver is one of the most common places that drugs cause the side effects that derail their clinical development. AstraZeneca (NYSE: AZN  ) , GlaxoSmithKline (NYSE: GSK  ) , and Roche have teamed up with the U.K. government to start a similar venture. However, I'm sure the companies would be just as happy to buy a system from Geron if it could save them time and money by identifying drugs that were likely to fail in the clinic.

Long road
Patient investors willing to wait a while for these small-cap stocks to develop could certainly see some serious gains from here. They're still fairly risky and will likely need help from big pharma to bring their treatments to market, but that was true of Amgen (Nasdaq: AMGN  ) in the mid 1980s, which needed a hand-up from Johnson & Johnson (NYSE: JNJ  ) , and look where the company is now.

It's risky to invest in new technologies, but if you've got the guts to buy, the payoff could be huge. Just be smart, Fools, and keep it a reasonably small percentage of your portfolio.

Pfizer, Johnson & Johnson, and GlaxoSmithKline are Motley Fool Income Investor picks. Pfizer is also an Inside Value recommendation, and The Fool owns shares. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Orelli, Ph.D., has grown mouse embryonic stem cells in the lab, but none of the human variety. He doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


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  • Report this Comment On December 01, 2008, at 8:54 PM, gcdsocal wrote:

    You are correct in asserting that Obama changing the [stem cell] rules is not going to help current investors a whole heck of a lot. At least not immediately. However, what is unknown apparently to you and most of the public is that BCRO LLC, an American company, has successfully manufacturing progenitor stem cells for clinical treatment since 1991 – with over 5,000 patients successfully treated to date! The reason for this success is that BCRO uses animal rather then human cells, which are less political, far more numerous than adult stem cells, and possess some unique properties like:

    1. Ability to differentiate and undergo changes in response to environmental stimuli, or in accordance with own genetic make-up.

    2. Easy adaptability caused by the plasticity of tissues (and that includes growth, migration, mobility, ability to create cell-to-cell contacts), that in course of normal fetal development gradually decreases, and finally disappears at the completion of development.

    3. More frequent and faster cell division and proliferation, as compared with adult stem cells; depending upon the type of tissue and stage of fetal development.

    4. Production of large amounts of various biological substances, i.e. growth factors, etc., which facilitate the survival and growth of stem cells after implantation and stimulate damaged cells of the host.

    5. Lowered immunogenicity that results in a much weaker immune response of the host, as compared when mature cells & tissues are implanted.

    6. Capability to survive on energy supplied by glycolysis alone and thus lesser amount of oxygen that is important during the preparation of stem cell transplants, and during the first hours after implantation.

    To learn more about BCRO or progenitor stem cells, just Google E. Michael Molnar MD and you will find over 500 links directing you to this incredible physician/scientist who is considered one of the foremost authorities in the world on stem cell transplantation!

  • Report this Comment On December 02, 2008, at 4:49 PM, lbuckler wrote:

    Any benefits felt will be be 'indirect' I agree but that does not mean they will be inconsequential. For instance, adult stem cell stocks went up whenever there was news or speculation of a loosening of embryonic stem cell funding restrictions. The effect of this was material even though one has very little to do with the other. Secondly, any loosening of funding even if primarily for academic programs trickles down or through to companies to some degree. In addition it lends momentum that is seen, felt, and leveraged by private and public capital.

    It is encouraging to see some pharma companies now starting to invest in cell therapies and regenerative medicines in addition to the use of cells as tools for discovery and testing.

    You do a good job of pointing out that all stem cell therapies are not using embryonic stem cells - a point that needs constant clarification. Another point worth emphasizing is that not all cell-based therapies use stem cells (e.g, Dendreon's PROVENGE is an autologous dendritic cell vaccine).

    Further discussion and information on the cell therapy industry is available at:

    www.stemcelldigest.net

    www.celltherapyblog.com

  • Report this Comment On December 02, 2008, at 5:17 PM, donmargolis wrote:

    Mr. Orelli makes some good arguments in general, many stem cell companies are under water, many more have already drowned, and profits are very hard to predict. Too much hype and too little time allowed for development has cursed stem cell companies, and the VC artists are too sharp to fall for it any more.

    But his case is weakened by his accent on embryonic companies which have very little to show for the hundreds of millions already in the sinkhole. He makes the assumption that the new administration will throw all the cash to embryonics and ignore what already works to save and improve lives. His apparent surprise that "Some stem-cell companies are using stem cells from sources other than embryos" shows that he is unaware of where the real action is.

    No mention that Osiris, with stem cell products for two rather minor diseases approaching FDA approval, just latched on to a cool billion dollars from Genzyme which I believe will go down as one of Genzyme's smarter moves for more reasons than just profits.

    Cytori is already in the market treating people and should have an EEC approval or two before the end of 2009. Bioheart is also close to EEC approvals and just petitioned them for the standard support they give to stem cell companies.

    Then there are several fine, well-run, non-embryonic stem cell service/product companies such as Cognate, Cytograft and Progenitor to name a few, which may also service embryonics if and when it ever get to the clinical trial stage.

    Finally, I suggest that within two years the public will become sufficiently aware of already-existing stem cell therapies and will buy umbilical cord storage in greater numbers. Then all it will take is one of those companies breaking through with a more cost-efficient storage technology to dominate and spread over North America. Let's hope!

    Don Margolis

    The Repair Stem Cell Institute

    www.RepairStemCells.org

  • Report this Comment On December 24, 2008, at 2:52 PM, bwolfe01 wrote:

    I do agree with the article to some extent, however given the current market decline and volatility, I do not see the impact that definite. The belief that the market, funds, stocks, bonds, commodities, etc. will move based on weather there is $$ flow from the Fed. into specific companies is irrelevant. $300+ billion has already been spent propping up the battered investment banks and mortgage back securities. Has any of that tax payers money spent being easing the credit markets? Has any of the taxpayer money left those institutions? Ok, has any of that taxpayer money been spent out of the executive management or board members of those institutions?

    The real answer on weather the stem cell companies will benefit from this reversal of policy is time. However, based on the research that I have done on the policies implemented by President George W. Bush, the only ethical or religious boundaries that those companies have infringed upon is not contributing to the "Bush/Cheney Retirement Fund". Reminder to all investors: political decisions are only based upon the control and assistance that those receiving/not receiving are going to give the policy makers. For instance, when GWB implemented the stem cell ban, big pharma increased their political contributions to his political campaign by 75%. (http://www.opensecrets.org/).

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