Can adult and umbilical cord stem cells be used to treat illnesses, without destroying human embryos?

To sum up, in Russia:

- Companies that performed stem cell therapy were until recently extremely scarce

- There is still an absence of transparent business structures

- Ownership of these businesses is typically opaque

- The industry is hindered by complicated financial reporting and extremely tight budgets

- Although there is no official data on stem cell therapy company profits, according to most estimates the sector is not very profitable

As of mid-2006 the Russian government’s regulatory body, Roszdravnadzor, had issued as many as five permits for comprehensive clinical trials, valid for one year. The permits mandate receiving informed consent from patients, and all trial therapies must be offered free of charge.

Generally speaking, stem cell clinical trials are conducted in nine Russian institutions:

- State Scientific Research Institute of Transplantology and Artificial Organs or the Minzdravsotsrazvitiya of Russia

- The Center of Medical and Biology Technologies

- N.N. Blokhin State Russian Oncology Scientific Center

- “Neurovita” LLC “Clinic of Revitalizing and Invertional Neurology and Therapy”
- Russian Medical Academy of Sciences Hematology Scientific Center

- “Institute of the Stem Cell” LLC

- “Pyramida Clinical Group”

- Russian Medical Academy of Sciences “Scientific Center of Obstetrics, Gynecology and Perinatal Medicine”,

- N.F. Gamaleya State Scientific Research Institute of Epidemiology and Microbiology

From a commercial point of view, only one of these companies is publicly traded and has to report its business structure – the OJSC “Institute of Stem Cells”. OJSC has stock listed on the RTS exchange. Although the company has been officially listed for some time, its stock did not record a single transaction during the last 52 weeks. In terms of the interest in stem cell therapies among Russian investors, that statistic says it all.

Summarizing my brief overview of this innovative industry from the investor’s point of view:

- Existing Russian companies are not as developed as their international peers

- Investment in these companies remains very scarce;

- Profitability is very low;

- The chances for a successful IPO in Russia for biotech companies producing stem cell therapies seem very low.

Scroll down to find the first two parts of this series, which describe the global marketplace for stem cell therapies.

Click here to read the original post from Vladimir Kuznetsov's blog Equity Financing in Russia on January 31, 2007.

Part 1 - The Global Market for Stem Cell Research as of 2006

Current statistics make it possible to reasonably evaluate the present situation of the global stem cell therapy market. In 2005 this global market was estimated to be only worth $26.6 million, but by 2010 it is expected to reach $ 56.2 million and in 2015 - $96.3 million. Actually these estimates should be much higher to take into account beauty preparations, supplementary bio complexes, and treatments developed for veterinary medicine.

In the United States of America, about 20,000 stem cells transplantations have taken place. Globally (esp. in Europe) – this number is about 40,000. The world market for stem cell technologies dealing with the bone marrow transplants is estimated to be more than $ 400 million. The stem cell therapy market varies in the USA and Europe from $100 million to $150 million, bringing the actual global total to $ 200-300 million.

Stem cell therapy companies currently have risk factors similar to the bio-tech industry as a whole, with a few additional risks:

1. Changes in regulations made by governments in the countries where the companies are located (especially regarding the issues of stem cells provision)

2. Ethical and other considerations regarding the application of stem cells, which may result in decline of the demand

3. The time-consuming process of developing preparations

4. Time, effort and expenses required for the FDA and other medical regulators certification of products

5. Achieving success in expensive clinical trials

6. Willingness of the market to recognize the commercial success of each company’s products

7. Companies working in this sector usually do not have strong organizations for handling the sales, marketing and distribution of their product

8. Dependency on third parties for producing components and distributing raw materials

9. Competitiveness: the necessity to rapidly develop products and respond to changes in the market and competitors’ technologies

10. Guarding intellectual property - certifying legal patents

11. High probability of legal claims for new innovative products

Recently the number of companies involved in stem cell therapy has multiplied to about 500. It is obvious, even when compared to the rest of the bio-tech industry, that cell therapy is extremely cash-consuming and requires a constant flow of financing. Currently the sector is fragmented and poorly financed compared to other parts of the biotech industry. As a rule investment capital is being used for the following purposes:

-Scientific research and development of new products, including clinical trials;

-Applying for regulatory approval;

-R&D for commercial-scale production of product;

-Establishing and commencing operations at facilities necessary for clinical trials and for subsequent production;

-Purchasing essential technologies, intellectual property, and/or business;

-Expansion of the sales list through joint ventures, licensing or acquisitions;

-Intellectual property support and protection, both online and in the legal realm

Generally companies engaging in stem cell therapy are financed by:

-Government programs;

-Private funds and grants;

-Initial public offerings (IPOs)

Click here to read the original post from Vladimir Kuznetsov's blog Equity Financing in Russia on February 1, 2007.

Part 2 – Global Stem Cell Research IPOs

Stem cell companies have a special affection for stock markets. When these companies evaluate and develop their long-term plans, they clearly understand the necessity of attracting large scale investment. The most viable way to do so is to look into capital markets – public or private. In many cases stem cell therapy developers address these markets even though they do not require immediate financing. The reason is very simple – continuing product development and research efforts is a matter of survival in this business. If a biotech company runs out of money, the business is dead in the water.

It is essential that for IPO or private placement the company should fit into market requirements. The number of biotech companies actively engaged in stem cell therapy research is limited – that is why the list of global IPOs in this sector remains short.

When evaluating the globally available data, we may notice one thing all of the stem cell therapy companies have in common – they all are losing money at the time of their IPOs. Meager profits from preparation sales cannot cover their R&D expenses. For example:

- Geron Corporation– has the largest capitalization of any biotech company currently engaged in stem cell research. Since it started operations in 1990 through 2006, its losses have mounted to $369.6 million.

-Via Cell. As of December 31, 2005 – accumulated losses of $ 101.6 million.

-Aastrom. From 1989 until 2006 – $ 141 million.

-Osiris. From April 2002 to December 31, 2005 – losses of $ 142.5 million.

All of these companies are planning to ride out the losses they expect for the next several years. From an aggressive investor’s point of view, companies in the stem cell sector, despite their significant losses and lack of profits remain attractive. Just look at their IPO results - these companies are still able to finance their research after years of operating in the red.

When analyzing the trading pattern, one can easily notice a great deal of volatility of stem cell companies’ stock. New reported facts can change drastically these biotech stocks’ volumes and prices:

-Public announcements of R&D results, business development, technological innovations or new products;

-Changes in government regulations of the sector and industry;

-Public announcements regarding Mergers & Acquisitions;

-Public discussions about the ethics, morality and safety of the applied technologies;

-News of successful clinical trials conducted by competitors;

-News regarding the progress of clinical research work;

-Financial reports revealing the company’s profits and losses.

Summarizing all of the facts expressed above, there are two widely accepted ways to invest in this sector – short-term (speculative) and strategic. Strategic investments oriented at 3-5 years will definitely lead to greater results. Both ways remain extremely attractive for high net worth individuals.

The views expressed in this post and on his blog are the personal opinions of Vladimir Kuznetsov and are reproduced here solely for educational purposes. To read more Russia Blog posts about Russian capital markets, click on the finance section or type www.russiablog.org/finance in your web browser.