StreetTalk: Stem-Cell Revolution: Big Opportunity for Investors

Despite recent stock market indications, the momentum is building and the future is bright for developing therapeutic cell products.
May 01, 2005
Volume 18, Issue 5

Brian O'Connell
My editor, Carol Fisher, is one smart cookie. She politely insisted that the first column I wrote for 2005 should be a "trends" piece covering the issues that I thought would most impact the biopharm sector throughout the year.

I moaned and groaned and said that I hate doing prediction pieces. In fact, I wrote those very words in that column.

But now I see the error of my ways. I still hate doing prediction columns but the issues that I cherry-picked for inclusion in the piece turned out to be a template for the columns I'd be writing for the rest of the year.

Take stem-cell research. Most readers of BioPharm International likely already know the stem cell story. For those who don't, stem cells are "unspecialized" cells that can generate healthy new cells, tissues, and organs. Medical researchers believe that stem cells can be used to replace diseased cell populations within patients, effectively reversing the symptoms of many diseases and perhaps even affording a cure. Experts say stem cell research could lead to treatments for diabetes, Alzheimer's, Parkinson's, spinal cord injuries, and over 70 other diseases and conditions affecting more than 128 million Americans.

I wrote in the January trends column that stem cell research — and the stocks of those companies involved in stem cell research — were poised for liftoff in 2005. I said the momentum in the stem cell research — triggered by California's decision to earmark $3 billion for research — should carry over into other states, and could lead to big profits for stem cell research firms. That, in fact, is already coming to pass. New Jersey is committing to $9.5 million for stem cell research, while Wisconsin is promising $750 million in research funding. And in early January, Connecticut jumped on the stem cell bandwagon too, with the governor committing up to $20 million for stem cell research. Expect other states to follow suit. The New York general assembly also is set to vote on a $1 billion, ten-year commitment to stem cell research. Massachusetts, Colorado, Maryland, Delaware, and Nevada all have similar capital funding plans underway. Not all state governments are sold on stem cell research. Initiatives in Illinois and Missouri, for example, have failed in recent weeks however.

Granted, growth in public spending hasn't specifically translated into big stock gains for prominent stem cell companies. Geron (GERN), for example, has fallen 33% since the start of the year, from $9 to $6 per share. But the company's fundamentals are so strong that three leading analysts that follow the stem cell sector — Needham & Co., Rodman and Renshaw, and Landenburg Thalmann have Geron listed as a "hold," "market outperform," and "strong buy," respectively.

The outlook for Geron's stem cell research also is bullish. Geron recently trotted out a litany of studies showing that human embryonic stem cells (hESCs) can be propagated in culture using defined growth factors without the need for feeder cells or media conditioned by feeder cells. That, scientists say, is a major step forward in the development of scalable systems to culture hESCs for the production of therapeutic cell products. Geron also has about 250 existing patents in embryonic stem cell research.

Consequently, the company is drawing some notice among Wall Street types. Jamie Dlugosch, editor of The Rational Investor, a Minneapolis-based growth stock newsletter, calls Geron his "stock of the year." Dlugosch says Geron is poised to take off in stem cell research. "Widespread coverage of the stem-cell debate negated nearly 50% of Geron's market cap in 2004 and offers investors a chance to scoop up shares at a discount," he says. "Earnings are negative, but are expected to show marked improvement in 2005. With large pharmaceuticals struggling mightily, I expect companies such as Geron to benefit greatly. Geron is well capitalized with tremendous market potential. I would buy up to $9 per share. My target is $18."

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