3 Regenerative Medicine Plays For 2013

In this article we will review a trio of regenerative medicine stocks from my watchlist that could see significant movement this year. Stem cell companies are receiving more funding than ever from both public and private sources, and seem to be generating interest from Wall Street due to the outperformance of a number of stem cell stocks.

Osiris Therapeutics (NASDAQ: OSIR)

OSIR has been quite disappointing this year, dropping 14% since the start of the year despite the fact that the S&P 500 is up 6.5% and the iShares NASDAQ Biotechnology Index (NASDAQ: IBB) is up 6%. Interestingly enough, this underperformance has been quite consistent and isn’t the result of bad news that may have caused any drastic drops. So why is Osiris underperforming this year?

If you look further back into its history, you can see that OSIR actually created an enormous amount of wealth in 2012 – especially in June, after it was announced that their lead product Prochymal (remestemcel-L) was granted marketing approval in New Zealand for the treatment of graft-vs-host disease (GvHD) in children. This indicated that the marketing approval in Canada was not a fluke, and that Prochymal had serious momentum going forward. Also, the fact that Prochymal is available in the United States, underexpanded access programs (which allow patients to utilize the product if they don’t meet clinical trial enrollment criteria) shows that the FDA is confident about the overall profile of the product, which bodes well for its chances of a US approval.

Osiris moved as high as $14.46/share on this excitement, although profit taking and fears over the high valuation of the company (which was approaching $500 million at the time) whittled away at the stock’s price until it reached its current level.

This year, going forward, I think investors will continue in their struggle to put a price on Osiris. I think continued underperformance is not nearly as likely now that OSIR stock has “cooled off” since 2012, and the product revenues that it will earn from Canada and New Zealand should start to whittle down the company’s expenses gradually. It’s also worth noting that the company has a low cash balance, but has a big pool of liquid investments (about $36 million worth) that can be used to finance activities for a few years. This should give Prochymal enough time to develop a revenue stream that can offset the company’s expenses, and should provide a buffer against share dilution.

If the market remains strong, I think OSIR could move above $10/share this year on valuation alone.

TiGenix NV (TIG.BR)

Tigenix is one of the leading cell therapy companies in Europe, and is one of the few that is already selling its product in a foreign market. Their product ChondroCelect is a therapy that is administered during knee cartilage repair surgeries.

It doesn’t sound too exciting until you consider the huge number of people that have cartilage defects in their knees (estimated to be 130,000 in the US alone), and the growing number of middle-aged patients that require knee replacement surgeries. It’s also worth noting that ChondroCelect seems to be gaining momentum in Europe.

For Q3 2012, TiGenix reported €1.1 million in ChondroCelect sales alone in Belgium and the Netherlands, which represents a 175% jump in sales revenue relative to Q3 2011. This is beginning to offset a large chunk of the company’s cash burn rate of roughly €5-6 million per quarter.

What could drive this stock significantly this year is the reimbursement situation of ChondroCelect in various European nations. I don’t think TiGenix needs the US market to reach earnings-positive territory, which is another catalyst that could drive the stock significantly higher (although this will likely occur in 2014 or later.)

Neostem Inc. (NYSE: NBS)

Neostem is another name in the stem cell sector that has plenty of potential, although it has unique traits that differentiate it quite significantly from most stem cell companies. A large part of Neostem’s business is based around the manufacturing of cells, which provides a decent stream of (growing) revenue that offsets a portion of the company’s accrued expenses. If you look at the numbers, Neostem’s top-line growth is actually quite phenomenal. Last quarter, they reported 98% revenue growth in Q3 2012 relative to Q3 2011. This was actually caused by a big spike in demand for their consulting services, as described in the excerpt below:

The increase in revenue, representing a 98% revenue growth for the nine months ended September 30, 2012 compared to the prior year period, was primarily driven by clinical service revenues in the Company’s PCT subsidiary, and reflected an increased overall visibility and penetration of PCT into the cell therapy marketplace, along with a general increase in the development of autologous cell therapies in the United States due to enhanced investment and expanded marketing programs in 2011 and 2012.

Neostem has been trading quite flat in the last few months, and it seems that the market doesn’t know what to think about the company’s situation. The flagship product in their therapeutic pipeline is Amorcyte, which is moving into phase II’s and will take quite some time to product results for their acute myocardial infarction indication. The market isn’t putting much value on this therapy yet, but interim results from the phase II could get the market excited due to the large patient population that could be targeted by Amorcyte.

Overall, Neostem is quite the oddball of the stem cell sector but it is relatively inexpensive at a $100 million valuation, and offers great diversity in terms of its sources of revenue. I think it could move much higher this year if their top-line growth continues as the company reports financial figures in future quarters.