--Even the most obscure story can produce double-digit stock moves, thanks in part to the companies' diminutive stock floats.
--Some analysts say an investor may want to take a core long position as the stocks are so sensitive to news about clinical development and government regulation.
--Until recently, the idea of using stem cells to "repair" the human body seemed far-fetched, but now regenerative medicine is becoming a reality.
By Val Brickates Kennedy
BOSTON (Dow Jones)--After years of being swatted about like ping-pong balls, are stem-cell stocks now worth a second look?
Perhaps no other medical subsector has had to endure as much volatility as the fledgling stem-cell space, where even the most obscure story on regenerative science can produce double-digit stock moves, thanks in part to the companies' diminutive stock floats.
But while that sort of volatility might have been fun a few years ago, investors have been less eager to play in these risk-adverse times, making several of the stocks potentially good buys.
"These companies are trading at a discount when compared to other companies in the same stages of development," said Mark Monane, a biotech analyst for Needham & Co. "People have been overweighing the risks and not seeing the benefits."
A few years ago, the idea of using stem cells -- undifferentiated human cells that are capable of morphing into specialized cells -- to "repair" the human body seemed pretty far-fetched. But now, with several cellular products entering mid- and late-stage clinical testing, regenerative medicine is becoming a reality.
"The idea of regenerative medicine is a good one," said Monane, pointing out that Americans spend around $300 billion annually on drugs that generally only treat the symptoms of disease or injury, while regenerative therapies could actually cure the condition.
"People think regenerative medicine will be in the age of 'The Jetsons,' but it's already here," Monane said. "We've been doing bone-marrow transplants for about 50 years now."
Because of their sci-fi mystique, stem-cell-company stocks have been extremely headline-driven. Any scientific study supporting, or doubting, the medical potential of stem cells can move a stock hard, even if it is largely irrelevant to a company's work.
Another major catalyst has been the ongoing debate about whether government entities such as the National Institutes of Health should provide public funding for certain types of embryonic-stem-cell research, even though very few publicly traded companies are engaged in such work.
"The sector, in general, is news-flow-driven," said Reni Benjamin, a biotech analyst with Rodman & Renshaw. "We advise investors who want some exposure to the stem-cell space to take a long and short approach."
Benjamin said an investor may want to take a "core" long position as the stocks are so sensitive to news about clinical development and government regulation. "But sometimes you'll also have an opportunity to make a nice trade when the news flow outstretches the fundamentals, so to speak," Benjamin added.
The jury is still out, however, on whether stem-cell companies will become hot takeout targets for Big Pharma, which typically prefers companies with more tangible products and concrete clinical data. "For pharma to take something out, they need more data," said Joseph Pantginis, a biotech analyst for Roth Capital Partners. "Also, pharma is still getting used to the idea of cellular therapies.
"In general, the pharma approach has been to pop a pill."
Here's a roundup of some of the higher-profile names in the stem-cell space:
--Geron Corp.: The Big Kahuna of U.S.-based stem-cell companies, Geron (GERN) also has a promising oncology program. The Menlo Park, Calif., company grabbed headlines last year when it became the first company to run a clinical study on humans using cells derived from embryos. Geron is currently running Phase I trials to see if the cells can restore nerve function in patients who have suffered severe spinal-cord injuries.
Pantginis, who has a buy rating on the stock, said his price target of $7 really just covers Geron's oncology program because its stem-cell initiative is at such an early stage. "I'm being conservative," he added.
Benjamin likewise has a buy rating, with a price target of $9, on Geron. "This is one of the best-financed stem-cell companies out there, he said. "They're the 800-pound gorilla in the room, especially with embryonic stem cells."
Monane, meanwhile, has a hold rating on the stock, adding that Needham analysts are waiting to see more clinical data from the various programs. "We think the stock is fairly valued for the current events," he said.
Geron shares have slid around 18% since the start of 2011.
--Aastrom Biosciences: Based in Ann Arbor, Mich., Aastrom (ASTMD) is preparing to begin Phase III testing of a cellular therapy for the treatment of critical limb ischemia, a severe blockage of the leg arteries that can lead to amputation. The company is also running Phase II trials for the treatment of dilated cardiomyopathy, or enlarged heart.
Aastrom's shares have traded a bit flat since the beginning of the year, up about 4%.
Monane said he has an overweight rating on the stock, with a price target of $6 a share.
--Pluristem Therapeutics: Israeli stem-cell researcher Pluristem (PSTI) is focusing on placenta-based cellular therapies. The company has completed two Phase I clinical trials for the treatment of advanced peripheral artery disease, or PAD.
Pluristem shares have been on fire as of late, up nearly 150% this year.
Monane has an overweight rating and $5 price target for Pluristem, based on recent advances in its development programs.
--Mesoblast Ltd.: Mesoblast (MSB.AU) was pulled from relative obscurity earlier this year when Israeli drug titan Teva Pharmaceutical Industries (TEVA) announced it was paying $6.2 billion for Cephalon Inc. (CEPH), due in part to Cephalon's partnership with Mesoblast. After the deal closes, Teva will hold a roughly 20% stake in Mesoblast.
Mesoblast is currently running clinical trials for cellular therapies to treat heart failure and aid in bone-marrow transplantation.
Mesoblast's U.S.-traded shares have shot up approximately 100% this year, powered largely by the Teva deal.
Analysts at Nomura Equity Research have a buy rating on the stock.
--Cytori Therapeutics: San Diego-based Cytori (CYTX) has created a device that is able to extract adult stem cells from a patient's own body fat. The cells are then injected into the patient to help stimulate the growth of such tissues as breast tissue.
The device is already being used overseas for breast augmentation. Cytori is seeking to have it approved in the U.S. for breast reconstruction following cancer surgery. The company is also running clinical trials for the treatment of heart damage due to heart attack and chronic myocardial ischemia, a severe form of coronary-artery disease.
"Their strategy has been, 'If you build it, they will come,' " quipped Benjamin, speaking of Cytori's device.
Benjamin added that he has a hold rating on the stock largely because it has already reached his target of $8 a share and that he's waiting to see how the company's sales track.
Cytori shares have been trading largely flat this year.
--Neostem: Based in New York, Neostem (NBS) also operates a pharmaceutical-manufacturing business in China. The company has likewise been developing cellular therapies for orthopedic conditions and cosmetic procedures, primarily for the Asian market.
"We feel because they have a diversified model they should be able to move things forward," said Benjamin, who has a buy rating on the stock, with a target of $3.
Neostem shares are up about 3% since the beginning of the year.
Other stem-cell companies with market caps above $30 million are Advanced Cell Technology (ACTC), Athersys Inc. (ATHX), BioTime Inc. (BTX), Brainstorm Cell Therapeutics (BCLIE), International Stem Cell Corp. (ISCOE), Neuralstem Inc. (CUR), Osiris Therapeutics (OSIR), RTI Biologics (RTIX), StemCells Inc. (STEMD) and ThermoGenesis Corp. (KOOLD).
-Val Brickates Kennedy; 415-439-6400; AskNewswires@dowjones.com