Take Caution With Stem-Cell Stocks

Aug. 10, 2001 -- President Bush's decision to support limited funding for stem-cell research is good news for companies that are involved in this area. But investors might not want to jump on the stem-cell bandwagon just yet.

That's because most of the work done in stem-cell research thus far is just that — research. While stem-cell research is a very promising area for the future of medicine, it could be years before stem-cell therapies reach the commercial stage.

"I think it's going to be at least several years before this research really starts to pay off, and that definitely increases the risk for investors," says Amy Arnott a senior analyst at Morningstar who follows pharmaceutical and biotechnology stocks.

And given the small and somewhat speculative nature of these companies' activities, Arnott say investors should probably limit their investment in stem-cell research companies to a small percentage of their total portfolios, which she defines as less than 5 percent.

A a safer and more diversified way to play the sector is by buying a mutual fund that invests in the biotechnology or health-care sectors, she adds.

Profits Elusive

But for those who do want to partake in the individual stocks of these companies, there are some key factors to watch out for in this young field.

Albert Rauch, who looks at genomics companies for New York-based investment bank Ladenburg Thalmann, says it is important to pick out companies that are leaders in their sector and that have shown progress in getting products out to the market.

"I would look not so much as who's developing most intellectual property, but who's thinking the cleverest about how to get stem cells into commercialized property," says Rauch.

Take Geron, which is considered the most established company in this area. Based in Menlo Park, Calif., Geron is focused on developing and commercializing therapeutic and diagnostic therapies for cancer and chronic degenerative diseases. With $22 million in cash and $1.8 million in revenue at the end of the quarter ended March 1, 2001, Geron was by far the largest of the three publicly traded stem-cell companies.

Still, the company is not profitable, posting a net loss of $7.4 million for that quarter. Analysts say the key to profitability for companies like Geron will be in getting out of the research phase and into getting actual products and therapies into the marketplace.

For Geron, that time could still be a few years away. Company officials would not say specifically when they would show profits at a press conference today. But the company, which has done in-depth research on three of the 60 stem-cell lines that the president approved for funding, expressed confidence that their work would become the "gold standard" for other stem-cell researchers.

What to Look For

Other major players in the stem cell area that are publicly traded include StemCells, which develops cell-based treatments of diseases of the liver, pancreas, central nervous system and other tissue. StemCells is much smaller than Geron, posting revenues of $100,000 and a cash balance of $4.5 million in the first quarter.

Aastrom Biosciences is another firm often mentioned in this area, although this company produces cells from bone marrow and umbilical cord blood, not embryotic cells, and is thus less impacted by Bush's decision.

Some additional factors investors should look at when considering stem-cell companies include their agreements with larger pharmaceutical or other health care concerns, if any. These might be good bets, since a bigger, more established firm is validating the company's research, says Ladenburg Thalmann's Rauch. In addition, movement of products into clinical trials is also a positive sign that a company has overcome technical hurdles to get its products into the marketplace, he says.

But with stem cells, this is again a process that could take time. Geron's president and chief executive Thomas Okarma says he expects to see clinical trials of the company's therapies in the next three to five years, though he would not say exactly which treatment that would be for, underscoring the uncertainty that remains when it comes to the commercialization of stem-cell products.

It also underscores that for investors who want to profit from stem-cell research, patience might be their best virtue.