Stock Preacher

StemCells Inc. (Nasdaq: STEM)

StemCells Inc. (STEM) is a clinical-stage biotechnology company, focused on the research, development and commercialization of products derived from stem-cell technologies. It targets the development of cell-based therapeutics to treat diseases of the central nervous system and liver. The Company’s lead product candidate, HuCNS-SC cells, are purified human neural stem cells, which can be expanded and banked until they are delivered as patient doses.

STEM has completed phase I clinical trial of HuCNS-SC cells as a potential treatment for neuronal ceroid lipofuscinosis, a rare and fatal neurodegenerative disease that affects infants and young children. The Company has also received approval from the U.S. Food and Drug Administration to initiate phase I clinical trial of the HuCNS-SC cells as a potential treatment for Pelizaeus-Merzbacher Disease, a rare and fatal brain disorder that primarily affects young children. In addition, STEM, through its wholly owned subsidiary, Stem Cell Sciences UK Ltd, is also pursuing applications of its cell-based technologies to develop research and drug screening tools, such as cell-based assays, and media and reagent tools. STEM has exclusive rights to approximately 55 issued or allowed U.S. patents and approximately 200 granted or allowed non-U.S. patents.

The Company was founded in 1988 and is based in Palo Alto, California.

Source: Reuters.com, SEC Filings.

Financial Summary

The Company is in the research and development stage and is unlikely to report meaningful revenue until its product candidates are approved for commercialization by FDA. Total revenue for the second quarter of 2009 was $265,000, compared to $30,000 for the second quarter of 2008. Licensing and grant revenue for the second quarter of 2009 were approximately $145,000, or 386% higher, as compared to the same period in 2008. In the second quarter of 2009, STEM recognized and consolidated approximately $121,000 as revenue from product sales in connection with the acquisition of the SCS operations.

The Company reported a net loss of $7.36 million, or $0.07 per share, for the second quarter ended June 30, 2009, compared with a net loss of $6.71 million, or $0.08 per share, in the second quarter of 2008.

Cash, cash equivalents and short-term marketable debt securities totaled $36.76 million at June 30, 2009. In the second quarter of 2009, the Company raised $8.65 million in gross proceeds through the sale of 4.93 million shares of common stock. For the first six months of 2009, the Company’s cash used in operations totaled $12.38 million, which was 1% higher than the same period in 2008. This modest increase reflects the Company’s continuing efforts to control expenses and manage working capital requirements.

Analyst Consensus

Source: http://www.reuters.com/finance/stocks/estimates?symbol=KERX.W

Analysts polled by Thomson Reuters recommend STEM as a “Buy.” Thomson Reuters pooled analysts anticipate revenue of $0.51 million and a net loss per share of $-0.32 for the fiscal year 2009.

Investment Highlights

The Company’s research and development efforts have been directed at refining the methods for identifying, isolating, culturing and purifying the human neural stem cell and human liver engrafting cells (hLEC), and developing these as potential cell-based therapeutics for the central nervous system (CNS) and the liver, respectively. In January 2009, STEM completed a six patient phase I clinical trial of HuCNS-SC cells in infantile and late infantile neuronal ceroid lipofuscinosis (NCL), two forms of a group of disorders often referred to as Batten disease. The data from this phase I trial showed that the HuCNS-SC cells were well tolerated, and there was evidence that the donor cells engrafted and survived.

STEM announced the publication of preclinical data demonstrating for the first time that transplantation of its purified human neural stem cells delays the loss of motor function in a mouse model of infantile NCL. The study highlighted STEM’s novel neuroprotective approach to treating neurodegenerative diseases and the therapeutic potential of its neural stem cells. In this research, these cells were transplanted in a mouse model of infantile NCL and compared to a control (non-transplanted) group. The results demonstrated that the transplanted cells engraft, migrate throughout the brain, and continuously secrete the missing lysosomal enzyme characteristic of NCL, which is needed to process cellular waste and keep neurons functioning and healthy. Compared with the control group, the mice that received the transplanted neural stem cells showed statistically significant reduction in cellular waste build-up, protection of critical host neurons and delayed loss of motor function.

In December 2008, the FDA approved the Investigational New Drug Application to initiate a phase I clinical trial of HuCNS-SC cells in a second indication, Pelizaeus-Merzbacher Disease (PMD), a fatal myelination disorder in the brain. The Company is planning to initiate, in collaboration with the University of California, San Francisco (UCSF) Children’s Hospital, a phase I clinical trial to evaluate the therapeutic potential of HuCNS-SC product candidate to treat PMD, by the end of 2009. The trial is likely to take 12-18 months to complete.

In addition, STEM’s HuCNS-SC cells are in preclinical development for spinal cord injury and retinal disorders. With regard to Liver Program, the Company is in preclinical development with the human liver engrafting cells and it plans to seek the necessary approvals to initiate a clinical study to evaluate hLEC as a potential cellular therapy, with the initial indication likely to be liver-based metabolic disorders.

In April 2009, STEM acquired the operations of Stem Cell Sciences Plc (SCS), which includes proprietary cell technologies relating to embryonic stem cells, induced pluripotent stem (iPS) cells, and tissue-derived (adult) stem cells; expertise and infrastructure for providing cell-based assays for drug discovery; a media formulation and reagent business; and an intellectual property portfolio with claims relevant to cell processing, reprogramming and manipulation, as well as to gene targeting and insertion. These acquired operations will likely help the Company to pursue applications of its cell technologies to develop cell-based research tools, which could represent nearer-term commercial opportunities.

Also in April, STEM announced that a major international pharmaceutical company acquired a non-exclusive license to the Company’s Internal Ribosome Entry Site (IRES) technology, which was acquired as part of the SCS operations. The IRES technology enables researchers to genetically modify any mammalian cell and to monitor the activity of a particular gene of interest without blocking the normal function of the gene. The IRES technology is particularly important for evaluating the success of gene knock-outs or knock-ins in stem cells, as well as for the successful creation of transgenic mouse and rat disease models.

The positive response of people toward stem-cell technology and lifting the ban on embryonic stem cell research will fuel the growth of the U.S. stem cell market in future. The stem-cell market in the U.S. is expected to grow at a CAGR of 84% during 2009-2012 to reach at around $889 million by 2012, according to a new report “US Stem Cell Market Analysis” from RNCOS. Meanwhile, another market-research report, Stem Cell Technology: Current Application and Future Directions from BCC Research, expects the domestic market for stem-cell technology to increase from $112.0 million in 2007 to $423.1 million in 2012, a compound annual growth rate of 30.5%. The optimistic approach of the patients suffering from severe diseases toward the adoption of stem cell technology will fuel the growth of the stem cell market in future. Also, the rise in healthcare spending, with a significant part of the population without health insurance coverage, is making the costly treatments unfavorable for Americans.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

STEM is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this penny stock.

The MACD for STEM currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

STEM has been relatively stable recently. This is evidenced by the width of its Bollinger Bands, which are tighter than normal. Additionally, STEM is trading within its Bollinger Bands. This is a normal condition and suggests that the small cap stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

Since 2005, adult stem-cell products have been commercially available for use in spinal fusion surgery, the common treatment for arthritis and other bone defects. The Obama administration’s lifting of research restrictions has renewed public interest in applications for embryonic stem cell therapies. However the majority of stem-cells players has their products in the research and development stage and are years away from reaching the market. The analyst consensus expects the stem cells sector to become mainstream over the long term; therefore it values the sector’s players with significant premiums compared to SP500 and established biotechnology companies.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Data provided by Thomson Financial

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