Careful What You Wish For, Stem Cell Investors

Maybe it's because I've never owned one, but I just don't get investors in stem cell companies. Last month, it was preclinical data sending StemCells (Nasdaq: STEM) skyward; more recently, it has been court decisions sending the entire sector every which way.

Late last month, a judge ruled that federal funding of human embryonic stem cells went against a law banning the practice. And stem cell companies reacted. Sharply.

About two weeks later, the courts put a temporary freeze on the ban, freeing the government to hand out research money until an appeal is heard and investors rejoiced.

Source: Capital IQ, a division of Standard & Poor's.

The thing is, these companies aren't really dependent on the government for funding the development of their stem cell therapies. Geron uses human embryonic stem cells, but its main source of funding has always been investors; over the last year and a half, the company has raised $60 million to fund research through secondary offerings. StemCells is studying tissue-derived stem cells as its therapeutic approach and doesn't even use embryonic stem cells.

It's reasonable to argue that the funding at the academic level will translate into deeper knowledge that results in better stem cell therapies. But does it really justify those big one-day price moves? I have a hard time seeing it.

More coming?
Earlier this week, the government and those that oppose funding were back in court facing a federal court of appeals panel on whether to invoke a more permanent ban on the ban -- that is, allow the funding -- until a final ruling is made.

Today, the panel handed down its ruling that the government would be allowed to continue funding until the appeals court decides on the case. Anyone want to bet that this is the end of it? I'm guessing if the ban on funding is put back in place, stem cell stocks will head back down. I hope not, though; that would just show off investors' ignorance.

A better strategy
Stem cell companies are risky, but that doesn't necessarily mean you shouldn't own them; with the high risk comes high rewards. I don't see a point in jumping in and out with every little, often meaningless, news event.

If you're going to own stem cell companies -- and I'd suggest a basket might be better than trying to figure out which will come out on top -- a better strategy is to invest a small, and I do mean small, fraction of your portfolio and then just wait.

Do nothing.

For a really long time.

Maybe by then, the technology will have developed enough that there will be a drug on the market. Remember, Geron is the leader here, and it just restarted its phase 1 trial last month.

Like any game-changing medical technology -- think Intuitive Surgical's (Nasdaq: ISRG) robotic surgery, Genentech's biotech drugs, Isis Pharmaceuticals' (Nasdaq: ISIS) antisense, Alnylam Pharmaceuticals' (Nasdaq: ALNY) RNAi therapy -- the development is going to take time. This is definitely a marathon not a sprint; perhaps an Ironman race is a better metaphor.

There's also the distinct possibility that nothing will come of stem cells, at least in the time frame that makes the potential returns worth it on an annualized basis. Gene therapy sounded very promising, but hasn't lived up to expectations. Sequencing the human genome was going to lead to more cures than we could count, but Human Genome Sciences (Nasdaq: HGSI) still hasn't returned to the highs it set at the turn of the century.

Be careful out there, Fools. But more importantly, be smart.