I’ll just start off by telling you that yes, this stock might be one of the most familiar biotech ideas we’ve ever covered here at Stock Gumshoe — not necessarily because I like it or our other writers like it, or even because it’s been a good investment, but because it’s been so aggressively teased and touted so many times for so many years. And several of you have written in to guess at the stock (with the right answers, naturally, we’ve got a wise bunch here).
But I don’t want to spoil the surprise, and the ad is brand new in this current version, so let’s dig into it and see what they’re talking about…
… the ad is from Stephen Petranek for his Breakthrough Technology Alert over at Agora Financial (either $1,250 or $2,000/yr, depending who you ask), here’s how it starts:
“U.S. Food and Drug Administration Readies for Breakthroughs from…
“The Resurrection Cell
“Here’s why a little-known $2 stock on the forefront of this Nobel Prize winning technology could explode over 1,000% starting March 31, 2016”
What does it mean an explosion “could start” on March 31? You guessed it, that means — nothing at all! But it sure sounds exciting and imminent and gives you that feeling of “oh my GOD I can’t wait a second I have to get in now!”… and that’s all a copywriter needs to get your attention without making the lawyers mad.
On the order form it says…
“… in as early as a few days, shares in Ethical Stem Cells Inc. has [sic] the potential to soar if possible news of the first stem cell approval hits. If it does, it’ll take Wall Street by surprise.
“And your quick action today puts you out front of the “so called experts” who will be scrambling to catch up.”
So we’ll keep that “promise” in mind as we skim through the rest of the ad — and yes, they did make up a clever name to disguise their secret recommendation, so no need to go Googling “Ethical Stem Cells Inc.,” that’s just their invented term for this stock.
So what is it? Well, it is indeed a stem cell company (remember when those were hot stuff five or ten years ago?), and Petranek gets the ad started by asking you to imagine having a heart attack, getting to the hospital on time, and having the cardiologist tell you that he can take some stem cells from your armpit, turn them into heart cells, and inject them to rebuild your damaged heart tissue in 60 days. Which obviously sounds fantastic (and, no coincidence I’m sure, 60-70 year old men who are most afraid of heart attacks on the golf course are also the prime market for investment newsletters). Here’s a bit of the ad:
“Just last July, scientists grew fully functioning; beating cardiac tissue… using a strange new cell that may be the biggest game-changer in medical history….
“This technology has already been tested on humans with great success.
“In fact, one Mayo Clinic trial achieved a 100% success rate with a form of this cell!
“The doctor in charge of the trial reported ‘We have demonstrated the feasibility and safety of this procedure.’
“Institutions like UCLA, Cornell and the prestigious Icahn School of Medicine at Mt. Sinai are into forms of this technology… big..
“Even companies like General Electric and Google are ready to send shockwaves through medical science with this technology on their own.
“In a few moments I’ll show you more, incontrovertible evidence that a simple cell could indeed cure heart disease inside of a decade.
“And I’ll also show you how it could make shareholders in companies that work with The Resurrection Cell utterly ridiculous amounts of money.
“In particular, a tiny company that I think holds not only the keys to The Resurrection Cell, but other regenerative medicines. And this company has already shot up as much as 1,000% in the past … and now I believe it is poised to do so again.”
So there’s your tease — what is this “tiny company” that Petranek thinks is poised to climb 1,000% again?
A few more hints and clues from the ad:
“You see, the Resurrection cell is essentially a wildcard that can turn into any of the hearts seven types of cells.
“Or for that matter… it can change into about ANY type of cell.
“This new cell could also be the wildcard in your portfolio that builds massive wealth.
“Because the Resurrection Cell could take a nice chunk of the projected $818 billion in annual direct medical costs associated with cardiovascular diseases predicted to hit in 2030.
“You see, breakthroughs in this technology happen FAST.
“That’s because we’re not talking about the normal 15 year development pipeline for new pharmaceutical products.
“No, agonizing development times may not apply to the Resurrection Cell.
“Because the gap between seeing promising results in animals and starting first human trials can be as short as 15 days.
“I say this because a Belgian company wants to submit an approval request in Europe during the first quarter of 2016 so it can start its Phase III trials of their application of this technology in the U.S.
“That deadline is rapidly approaching. It could be as late as March 31, but it could also happen before. This event could occur anytime, in fact.”
That Belgian company is not the one being teased here, to be clear — that’s Celyad (Cyad), which had a US IPO last year and is indeed pushing this heart-rebuilding stem cell treatment through clinical trials in Europe. The ad is just using this fairly advanced company to get your attention regarding the potential of “resurrection cells,” which is Petranek’s term for induced pluripotent stem cells (ie, not embryonic stem cells, like those from embryos or umbilical cords; and not adult stem cells, like those used in what used to be bone marrow transplants for certain cancers and are now generally stem cell transplants from bone marrow matches; but adult stem cells that are tinkered with to turn them into pluripotent stem cells that can become lots of other kinds of cells… like heart tissue cells).
Petranek says these are the kinds of stem cells that don’t come with ethical or religious objection, which is why he calls his secret company “Ethical Stem Cells Inc” … and then we get to the clues about that company:
“Ethical Stem Cells Inc. is led by the rare combination of a brilliant scientist and a savvy businessman with a long track record of success….
“… we’ll call him Dr. Maverick.
“…. he started making waves as a kid.
“Young Dr. Maverick talked his way into building a home lab….
“And his mom fretted over it.
“She was constantly nervous about the number of bottles labeled ‘poison’ and ‘acid’… but his dad always went to bat for him.
“And of course, like all kids, he was overconfident.
“A bromine experiment at home resulted in an explosion.”
If this were a movie, then Dr. Maverick’s dad would have been killed in the explosion, and Dr. Maverick would have gotten superpowers as a result and used them to save lives and assuage his guilt — but no, his father later died of a heart attack and, we’re told, inspired him to “defeat death itself.”
“Dr. Maverick” then went on to study at the Goldstein Lab and the University of Arkansas, where he lost time in his PhD program “after disporivng his mentor’s research on DNA”, then got his doctorate in 1989 and founded “what many consider the first regenerative medicine company, Geron.”
So, yes, we can dispense with the silly “Dr. Maverick” term and tell you that, as you’ve guessed by now, this is a reference to Michael West, who is indeed the founder of Geron (though you won’t find his name on their website anymore these days). More from the ad…
“After leaving Geron, he became CEO, President, and Chief Scientific Officer of Advanced Cell Technology, Inc. (now Ocata Therapeutics), a company engaged in developing human stem cell technology for use in regenerative medicine.
“Then, in 2007, Dr. Maverick took over leadership for Ethical Stem Cells Inc.
“He’s as savvy a researcher and businessman as there is on the planet.
“For example, Dr. Maverick built Geron’s stem cell program.
“Four years after taking over Ethical Stem Cells Inc., he made a savvy deal to acquire Geron’s entire stem cell portfolio… including heart cells.
“All for a song with a stock for intellectual property swap.
“Dr. Maverick has also launched an ambitious program to build a complete map of stem cells, which will be similar to the mapping of the human genome.”
Which means, you guessed it, that Stephen Petranek is following in his predecessor’s footsteps and again recommending BioTime (BTX). Patrick Cox, who ran Breakthrough Technology Alert before Petranek, was a huge fan of BioTime and touted it as an opportunity for life-changing wealth seemingly dozens of times… he was calling it the owner of the “God Switch” three years ago when it was around $4, for example, though I think the first time he teased it was back in November of 2008 when it was around $1.40. He was quite consistent, he also called it a bigger story than Gutenberg’s printing press” in 2011 and argued that it might generate 8,000% returns, and the shares were around $7 then. As befits a true “story stock,” the price and valuation of the company have rarely been mentioned in any of those ads.
Which, frankly, makes some sense — how can you value a company like this? They have a lot of stem cell patents, including all the work Dr. West bought from Geron, they have started up or acquired seemingly dozens of little companies and spun parts of them off (like Asterias (AST) and OncoCyte (OCX)), and they’ve tried lots of different business lines related to stem cells (from materials to cosmetics) without any meaningful revenue… but, of course, if they actually can restore damaged hearts after a heart attack or do something equally dramatic with their stem cell lines or other products in a large medical market, no one will care that the company has chewed through $215 million over the past 20 years.
Right now, their pipeline of potential products is somewhat underwhelming — they have several drugs at the Phase 1/2a stage assessing safety, but not much has been reported in any thrilling way about the potential efficacy of any of them that I’ve seen. It appears from their latest corporate presentation that completion of dosing in their OpRegen trial (for dry AMD) will be done in the first quarter, so that’s the next “catalyst” on the clinical trial front.
It’s an interesting company, and it’s always been interesting in the eight years since I first looked at it — but I have no idea what it should be worth. You can start with the fact that their partially spun-off subsidiaries Asterias and OncoCyte are publicly traded, so BioTime’s ownership stake in those at current market prices is valued at about $170 million. That means the rest of BioTime is apparently worth about $100 million (the enterprise value for BTX right now is $270 million), but certainly the value of OCX or AST could change dramatically at any time due to results from their mostly early-stage clinical trials.
I find it hard to even think about the valuation of a company when more than half of their revenue comes from grants, but they do have some other revenue (and have had for a long time) from sales of research materials (stem cell lines, I guess) and royalties. All that revenue, totaling probably something like $7 million over the last twelve months, is, as you might imagine, dwarfed by their spending — total operating expenses run about $60 million a year (that’s not all cash, but they did run through close to $40 million in cash over the last four quarters). This remains, as it has been since I first saw the stock teased in 2008, an investment in the “someday potential” of stem cells…. maybe that “someday” is closer now, I don’t know.
More on that “March 31” catalyst? This is what they say:
“Because as soon as March 31st regulators could approve the first application of this new technology in the UK… and I believe this will snowball into great success for worldwide regenerative medicine stocks…. but most importantly, a little-known small U.S. biotech stock. After such approval, this tiny stock could easily be on every Wall Street analyst’s radar….
“…. we believe that this tiny company, whose subsidiary is working with Resurrection Cell technology, could shoot to the moon if this upcoming announcement from their foreign competitor goes well.
“Because this announcement could open doors to all companies working with Resurrection Cell technology—this tiny company included.
“And our tiny little company still has extremely limited risk if development doesn’t pan out.”
Petranek’s argument seems to be mostly that BioTime will do well, with low risk, because the success of this competitor (CYAD) will drive more interest in stem cells, and more folks will use BioTime’s stem cell lines, and therefore they’ll earn more royalties as treatments derived from those stem cells are commercialized.
There’s some reasonable logic there, but my cynical self suspects that any advances will continue to be very slow and incremental, and that we’re probably a long way away from huge royalties (that is, to be fair, just a guess — and I might be too curmudgeonly on this front — but royalties are extremely minimal so far, about at a $1.4 million/year pace now, and that’s the most since at least 2010, which was the last year that they got close to a million dollars — if you want to research that potential, they do detail their royalty terms in the 10-K). That would mean, if you follow the math to a logical conclusion, that a 20X increase in royalties would be needed to help BioTime break even. That’s possible, I suppose, but it would presumably depend on a commercial treatment sold at reasonable scale, and I think we’re still a ways off.
And, to be fair, Petranek does talk about this being a long-term project — though that’s obviously not the headline:
“As I mentioned, this company is quite small. Less than 95 million shares are outstanding… and insiders like Dr. Maverick own almost half.
“As royalty income starts snowballing in say, 7-8 years, we could see close to the earnings per share of a smaller company like INSYS Therapeutics, which is trading at 39 times earnings.
“That would mean that if our tiny Ethical Stem Cells Inc. traded at the same multiple… the stock would go from around its current $2 and change to over $26.
“That’s 13 times your money.
“Which could turn a $10,000 investment to $130,000.
“But of course, we’ve got to get the royalty income streaming in first… and that’s still a few years away.
“And there is always a chance that this company does not deliver the success I’m predicting. Every investment involves this element of risk.
“However, the potential smacks of ridiculous gains… but I believe big returns will come in stages.
“And over a little more time, the company could crush those numbers… especially after 10-15 years if it really gets rolling.”
Which, again, is perhaps a reasonable way to value the company — but you’re talking about hypothetical royalties coming in seven or eight years from now, so obviously you have to do something to guess at the odds of success over those seven years. And though the “royalty” aspect of the business might mean that they’re not spending tons of money on clinical trials, particularly if you ignore the majority-owned subsidiaries that might be more fully separated at some point or might raise more money on their own, BioTime is, from my back of the envelope calculations, currently on pace to burn through another $300 million in cash over those the next seven years.
That makes this valuation an insoluble math problem, but it does at least give you some idea of the variables at play — when might they earn royalties, how big will the royalties be, what are the odds of those products getting approval, is there a possibility of significant revenues from any other source?
The products most likely to generate royalties are, from what I can tell, currently in very early stage trials, so even if they’re accelerated there won’t be revenues for, at a bare minimum, five years… and I would assume that the odds of approval are probably in the 10-30% range (that’s without me knowing the science), and that the ones that are more likely to be accelerated will be those that impact the smallest number of people (ie, spinal cord injury — not heart disease or Leukemia).
But yes, BioTime has risen 1,000% twice before, once starting in 1995 or so and again from the lows in 2008. It came back down quickly both times, and has spent the past five years drifting downward, but there have certainly been lots of peaks and valleys during that downward journey. Their directors have been buying shares at prices higher than today’s over the past year, including large owner Broadwood Partners, but officers have not (generally, it’s better to see insider buying from executives than from board members). Analysts have just started to follow the stock again recently, and it has two “buy” ratings and a $7.50 target price from those analysts (Chardan’s at $5, Oppenheimer’s at $10), but those folks don’t see any kind of step forward in the financials so they must see something they like in the science or the partnerships. Or perhaps they just think that investors will get excited about stem cells again and bid up BioTime.
I like the story, but I can’t figure out how much I think the company should be worth, or what the odds might be of large long-term gains, and I’m too lazy and inexpert in the science to sift through those royalty agreements and check on each of the drugs in development to come at any sort of rational calculation, so I’ll continue to stay away from BioTime and leave this for the biotech fans to chew on. If I were to buy shares in a company like this, I’d keep my position small and resolve to try to ignore the day to day gyrations for five or ten years. If you’ve got some thoughts on BTX or any of the related companies, feel free to shout them out with a comment below.