Goldman Small Cap Research: PSTI Stem Cell Pure Play.. Jan 5, 2012 by Rob Goldman

PSTI Cell Therapy Pure Play.. by Rob Goldman January 5, 2012

The best way to weather the macroeconomic environment is to find stocks that have no economic sensitivity whatsoever.

About a month ago, we wrote about a Company called Geron Corporation. Geron was the first company to engage in clinical trials using embryonic stem cells and announced it had planned to exit the business. Given management’s decision to exit the stem cell business, and certain issues surrounding the decision, we recommended avoiding the stock. We also mentioned in passing another player that was worth consideration. After performing some additional due diligence, it looks to us like Pluristem Therapeutics, Inc. (NASDAQ – PSTI – $2.53) is worth more than just a consideration. It looks like a great pure play on stem cells.

Unlike Geron, which utilized controversial embryonic stem cells, Pluristem uses cells derived from human placentas following a full term birth. This distinctive method is representative of the unique overall approach that sets Pluristem apart from Geron and others.

For example, a number of firms are exclusively focused on the typical safety and efficacy issues associated with preclinical and clinical trials. Pluristem management is as well. However, in an effort to set the stage for potential mass market utilization, management is one step ahead. The Company has already implemented in-house manufacturing and commercial production capabilities to mass-produce “off-the-shelf” products rather than harvest them petri dishes.

This stage is critical as Pluristem has already completed Phase I clinical trials for its lead product, PLX-PAD, which is targeted for patients with Critical Limb Ischemia (CLI), the final stage of Peripheral Artery Disease (PAD). While a total of 20M Americans are diagnosed with varying stages and forms of PAD, CLI affects 2.8M people, prompting 160,000 major amputations annually. It is estimated that this disease costs $10B each year.

Pluristem’s Phase I results were very favorable. Two trials were executed concurrently in Germany and the U.S. with 27 patients. Results showed that the PLX-PAD is safe and that 85% of the subjects had amputation-free survival.

Management plans to initiate Phase II trials in the U.S. and Europe for CLI along with other Phase I/II trials for other PAD-related diseases, and has a broad and deep portfolio of treatments ready for both clinical and pre-clinical trials. In fact, Pluristem has been granted 17 patents with 69 patents pending.

An interesting product development credibility enhancer for the Company is a recent deal signed with United Therapeutics (NASDAQ – UTHR – $43.04), a $2.5 billion market cap biotech. This deal, in which PSTI has out-licensed the use of its PLX cells for Pulmonary Hypertension, included an upfront $7M payment to the Company and could potentially include nearly $50M in milestone payments, plus royalties, upon approval.

With a unique stem cell derivation approach, solid development progress, which has been vetted by UTHR, and manufacturing capabilities, PSTI appears to be a great way to play the stem cell market. We expect the initiation of clinical trials next year to serve as a catalyst for the stock. Typically, biotechs receive a valuation boost of $30-40M for each product in Phase II. Therefore, once it reaches these development milestones, we think a 50% gain is in the bag.

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