There are some good reasons to be cautiously optimistic about looking at stem cell companies as investment opportunities. Pres. Obama has already removed Bush administration restrictions on federal funding of controversial embryonic stem cell research, for example. Washington lawmakers have introduced legislation to futher loosen restrictions. Some stem cell companies are likely to benefit from that in the form of National Institutes of Health and other federal research grants, though perhaps not as much as universities and other biomedical research institutions. But remember that most stem cell companies are working with stem cells derived from other sources: fat tissue, umbilical cord blood, placentas, amniotic fluid, induced pluripotent stem (iPS) cells derived from tissues like skin, etc. One company actively involved in embryonic stem cell research is Geron Corp., which in January 2009 announced that the U.S. Food and Drug Administration had finally lifted a seven-month hold on its application for clinical trials of a human embryonic stem cell-based treatment that can be applied within seven to 14 days of acute spinal cord injuries. But some analysts were less than impressed with the announcement, noting that it will be a long time (summer 2009) before the trial starts. And there's no guarantee the Phase I safety trial will succeed and move on to Phase II. Some analysts have been very critical of the company, noting that its only real success has been in raising money, not bringing drugs to market. (This can be said of a lot of stem cell companies.)
But Geron is only one of 27 companies involved in stem cell research that are conducting or recruiting for clinical trials in a wide range of diseases and disorders. (Another 60+ companies aren't even close to testing a therapy on humans.) Fourteen of the 27 are publicly traded, here and abroad. With that in mind, here are some tips if you are interested in investing in stem cell research companies sooner or later.
Things You'll Need
- Internet connection
Start watching these companies closely, paying attention to the progress of their clinical trials, their financial health, strategic research partnerships, etc. Go to their Web sites and add yourself to the press release or financial report distribution list. (There's a link in the Resources section below to a Web page that provides contact and clinical trial information on both the public and private companies with products being tested in the clinic.)
Pay close attention to companies that are in partnerships with bigger, more established pharmaceutical firms with deep pockets. Pfizer, for example, is actively embracing smaller companies with promising technologies or products (like stem cells for research). Pfizer already has arrangements with companies like Stem Cell Sciences (UK) and EyeCyte (U.S.), and more may be in the works. PerkinElmer bought and absorbed ViaCell in 2007. Watch for developments involving GlaxoSmithKline in the future. Biomedical research supply company Invitrogen (now Life Technologies) last year took a minority position in a stem cell company called Q Therapeutics.
Remember that most stem cell research companies are at the preclinical (animal research) stage (or are just emerging from that stage) and have no products on the market. Their revenue, if any, is derived from licensing of patented technology, from venture capital and public financing, from "milestone" payments related to research partnerships, and from research grants. So the old rule of thumb about sales and earnings doubling every decade is inappropriate in this context.
No matter what companies you're interested in, pay attention to another old rule of thumb: stay away from companies that are too heavily in debt, even if the debt is held by inside shareholders.
Take a close look at the management. It's always good when top executives are major stock owners. They have a real incentive to get the company growing and keep it growing.
The primary trait of good management is integrity. Check the annual reports for a few years. Check older press releases. Read the president's annual letter to shareholders. How many of his or her predictions came true? Were outlandish predictions about upcoming clinical trials made? Did any forecasts of progress come true? Or was it all hype to keep stock prices up and stockholders excited? One of the beefs about Geron is that, from February 2004 through 2008, top management predicted time and again that clinical trials for a spinal cord injury treatment were imminent. It didn't happen until 2009.
Remember that these companies have little if anything that could be called a successful track record (except perhaps at raising money). So be extremely cautious. At the very least, focus on - I didn't say "invest in" - companies that have products entering the clinical trial phase. Watch them closely. And take every press release with a grain of salt. There may be great money-making opportunities in this industry in the future. It's just tough to figure out where the cellar ends and the ground floor begins.
Think like a venture capitalist. Or, at least check out what the venture capitalists are thinking when they pour millions into a stem cell start-up. They're supposedly experts in the industry. What do they see in the company that's worth their money, time, and effort? Venture investors look for a promising technology in an industry with huge growth potential. And they pay very close attention to the strength of the management team.
Check a public stem cell company's quarterly and annual reports filed with the Securities and Exchange Commission. You'll find a lot of interesting (sometimes depressing) information packed into the reports. They contain not only a company's Profit & Loss (P&L) statements and current balance sheet (with cash level), but also commentary by top management. (See the Resources section below for a link to the SEC Web site. You'll need to know the company's ticker symbol to search the database.)
While you're looking at annual reports and SEC filings, put the magnifying glass on any discrepancies between the two. Try to separate the ravioli (SEC filing) from the hyperbole (annual report).
Figure out the company's cash "burn" rate. This is especially important in a start-up, but it matters in other companies as well. How much cash have they got in the piggy bank and how much are they burning every month on salaries, rent, test tubes, etc.? Without constant replenishment, eventually cash runs out. If a company doesn't have a big piggy bank (like Geron) or can't find new sources of cash (loans, private security sales, public security sales, grants, etc.), its future is gloomy, to say the least.
Got a question about a particular company? Call them or e-mail them. As a private individual (rather than a reporter or securities analyst) you might be able to get an executive to give you a (somewhat) straight answer. I say "might." If you can't get someone to talk to you, that might be an indicator that something's not quite kosher. Is there a reason not to be open and honest? Something to hide maybe?
Although not strictly stem cell research companies, several commercial cord blood banking firms seem to be doing well. Parents are warming to the idea of storing (in freezers) the stem cells derived from their babies' umbilical cords for future use in, for example, stem cell transplants. It's tough to tell at this point whether commercial blood banks, whose fees are steep, are really a viable growth industry.
Want a safer stem cell research investment opportunity? Take a close look at companies that provide products and services to stem cell research laboratories. Talk about a growth industry! There are many big and successful firms in this area, such as Medtronic, Life Technologies (formerly Invitrogen), Stem Cell Technologies, BD (Becton Dickinson), etc. More on this later.