ViaCell's Cancer Trial Snag

Shares of ViaCell (Nasdaq: VIAC  ) got whacked yesterday in the wake of an announcement that the infant cord blood harvester and stem cell researcher had to suspend its phase 1 clinical trial aimed at using cord blood stem cells in cancer treatment.

The trial, which had been approved for testing on 10 subjects, had begun work on eight of these patients when ViaCell learned that two of the subjects experienced Grade IV acute graft-versus-host disease. What that means, essentially, is that the subjects' immune systems rejected the donor-cord blood cells -- not uncommon in transplant procedures.

Federal Food and Drug Administration guidelines required the suspension, and it's worth emphasizing that at this time, this is just a suspension -- the clinical trial has not been canceled. In its statement announcing the suspension, ViaCell advised that its treatment is a one-step procedure, in which stem cells are introduced into the subject patient once, and then the results are observed. As such, 80% of the phase 1 trial has now been completed, with a 25% failure rate to date. ViaCell will now take a breather and go over the data in conjunction with the FDA before deciding whether to call it quits or continue testing with two new subjects.

The suspension certainly doesn't qualify as "good news," and as such, it's understandable that the stock took a shellacking when the story broke yesterday. However, a Fool has to wonder whether investors didn't overreact just a tad. After all, this was just a phase 1 trial -- a very small-scale test of the possible effectiveness of a new treatment. As such, it's hard to fathom why investors would think that 22% (the amount the stock fell yesterday) of ViaCell's market cap was riding on the success or failure of this initial test.

Sure, biotech remains all the rage these days. (Why, we even devote a full page of the Fool's Rule Breakers newsletter to the subject.) But in addition to this high-risk, high-reward aspect of ViaCell's business, investors should keep in mind that the real money-maker behind ViaCell is its ViaCord cord blood storage business. That business hasn't been affected by the trial results, and judging from the company's recent Q2 earnings release, fleshed out in its subsequent 10-Q filing, the storage unit is still going strong. Because of it, ViaCell generated positive cash from operations in the first six months of this year, and looks to be within shouting distance of positive free cash flow.

Clinical trials or no, in this Fool's view, that's the real story that bears watching.

Interested in biotech? Rule Breaking Fools David Gardner and Charly Travers are. Each month,they recommend two new companies that are breaking the rules for doing business in areas ranging from biotech to nanotech to plain old FMCG retailing.If a high-risk, high-reward investing plan sounds like it might appeal to you, take afree trial today.

Fool contributorRich Smithhas no position, short or long, in ViaCell.

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