Persistent Merger & Acquisition Talk In Stem Cell Sector (GERN, ASTM, CYTX, NBS, STEM, KOOL, OSIR, LIFE)

May 21, 2009 · Filed Under R&D, stem cells 

It is not uncommon at all to have takeover rumors in the drug or biotech sector.  That is also true in the speculative groups inside this.  But we keep hearing the notorious “takeover chatter” in the stem cell sector, and particularly in Geron Corporation (NASDAQ: GERN). This is out there again, but be advised that we have seen the same notes getting passed around on multiple occasions with nothing that has ever come from it.

What we wanted to show you was where these stocks are now compared to the date of March 9, 2009 when the Obama administration was signing the executive order breaking the Bush ban on embryonic stem cell funding.  Some of the other stem cell companies are as follows:

Aastrom Biosciences, Inc. (NASDAQ: ASTM) is at $0.40, and was at $0.62 when we covered it on March 9; market cap today is $69 million.

Cytori Therapeutics, Inc. (NASDAQ: CYTX) is at $2.83 and was at $3.20 when we covered it on March 9; market cap today is $97 million.

Neostem, Inc. (NBS) is at $2.16 and was at $0.69 when we covered it on March 9; market cap today is almost $17 million.

StemCells Inc. (NASDAQ: STEM) is at $1.75 and was at $2.15 when we covered it on March 9; market cap today is $182 million.

Thermogenesis Corp. (NASDAQ: KOOL) is at $0.55 today, was at $0.57 when we covered it on March 9; market cap today is $31 million.

Osiris Therapeutics, Inc. (NASDAQ: OSIR) is in a stem cell pact with Genzyme, but for adult stem cells.   This is a $12.19 stock, and shares were at $17.97 when we covered it on March 9; market cap today is $399 million.

There is also a much larger company called Life Technologies Corporation (NASDAQ: LIFE) and it has the Invitrogen unit that has many efforts, including a focus on creating unique primary and stem cell models for better and more efficient drug screening.

We would describe takeover chatter in this sector as something that feels like more fiction or a stretch rather than something we’d consider as any documentary evidence.  The stem cell sector offers wonderful promises and wonderful cures for many diseases and conditions.  But that is also after the ethical argument has been made.  Despite the positive studies and the positive indications, the group overall is still in its infancy and there are now many international patent issues in the sector because this was largely off-limits for about seven years on the new development front from new lines of stem cells.

Geron did not even have $1 million in quarterly revenues last month.  The company also recently had a financing pact earlier this year that raised over $40 million in gross proceeds.  So any acquisition here is something that would be a bet for years and years into the future.

Geron does seem to be the bogey company of the public stocks in the biospace for stem cells.  it has some valuable lines and valuable studies with positive indications.  Many of the other names do as well.  The problem is that Geron is worth close to $650 million today as far as the market capitalization of its stock.  To get management and shareholders to agree here to a buyout might take close to $1 billion.

How many companies will spend $1 billion today for a call option?  The answer is actually more than you might normally think. That would be a line item for a drug giant or even one of the large biotech giants.  But it could come with a stigma and controversy here in the U.S. and the costs might be far more expensive than a backdoor entrance into these companies.

Perhaps an overseas operation could be interested, but there is still the notion that the company would be spending $1 billion for an implied call option in the field of domestic stem cell studies and treatments.  Again, this is not out of the realm of possibilities.  It just still seems a stretch.

What you can be assured of is that if a buyout comes to Geron or one of the other more recognized stem cell players, there will be more speculation in the other players in the group at valuations that seem astronomical.

The last notion we would like you to ponder from an investment angle is this: it would cost a major drug company or major biotech operation very little to merely partner with these stem cell companies.  Partnerships can be a cheap way for a drug company or major biotech company  to acquire the rights to or a portion of the rights to future treatment indications.  Spending hundreds of millions of dollars to acquire a company outright may make far less sense financially than spending a few million to lock-up a partnership and the rights down the road.

JON C. OGG
May 21, 2009

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