International Stem Cell — Moving forward in Parkinson’s and TBI

ISCO is an early-stage biotechnology company developing therapeutic, biomedical and cosmeceutical applications for its proprietary form of pluripotent stem cells – human parthenogenetic stem cells (hpSCs). ISC California (the predecessor to ISCO) was created in 2006 and went public in December 2006 through a reverse merger, changing its name to International Stem Cell in January 2007.

With its hpSC technology, ISCO has created 15 stem cell lines to develop different cell types: liver cells, neural cells and three-dimensional eye structures. The company’s technology platform does not require the use of fertilized eggs, embryos or foetal tissue to create stem cells, improving product cost and consistency while reducing the controversy associated with other types of stem cells. Its lead candidate is a set of neural cells currently undergoing Phase I clinical testing for PD. The company’s portfolio includes preclinical candidates to address TBI, ischemic stroke, spinal cord injuries, metabolic liver disease, and retinal and corneal blindness.

ISCO’s commercial operations leverage its hpSC technology and generate revenues to partially offset R&D spending for therapeutic development. LSC develops and sells skincare products and LCT produces human cell culture products for testing.

We value ISCO based on a risk-adjusted net present value (rNPV) methodology, using a 10% discount rate and 90% probability for the skincare/biomedical businesses and a 12.5% discount rate and 7.5% probability for the PD candidate, due to its early development stage. Our model does not ascribe any value to the rest of ISCO’s therapeutic pipeline but we shall revisit that once additional candidates enter the clinic. Our rNPV value is $34m, or $5.45 per share on an undiluted basis.

The company had $0.3m in cash on the balance sheet at 31 December 2017. This was supplemented in March 2018 through a promissory note that provided $0.35m in funds in cash from the co-chairman and CEO of the company. Operating cash burn is approximately $0.18m per month and is likely to increase as clinical trials progress. Minority investors should note that under the current capital structure, there are c 12.7m potential common shares from convertible preferred stock (including anti-dilution provisions, which could increase potential dilution), options and warrants that are outstanding, on top of the 6.2m common shares outstanding, which potentially creates sizeable dilution. Also, as the funds have come primarily from management, they 83% of outstanding shares as of 31 December 2017. We project financing needs as illustrative long-term debt of $62.5m by 2024, with an estimated $7.5m required by the end of 2018.

As with any early-stage biotechnology company, ISCO faces numerous risks and uncertainties, especially preclinical risk. The investment case rests largely on the successful execution of the PD cell therapy clinical trials and the company’s ability to attract a licensing/development partner to continue clinical development and, if approved, commercialization. The company’s therapy for PD is in Phase I human trials and, due to its early-stage nature, has not been shown definitively to be efficacious although there are encouraging signs of efficacy from the interim six-month data from the first cohort of patients. Another risk stems from the capital structure, which, as mentioned, potentially creates sizeable dilution risk for minority investors.

ISCO is an early-stage biotechnology company developing therapeutic, biomedical and skincare applications for its proprietary form of pluripotent stem cells – hpSCs. With its hpSC technology, ISCO has created 15 stem cell lines, each of which is a different HLA type. From this, it creates different cell types such as liver cells, neural cells and three-dimensional eye structures. Its lead candidate is a set of neural cells currently undergoing Phase I clinical testing for PD.

ISCO’s technology platform is based on hpSCs which are differentiated using chemical means. There are several techniques for turning an oocyte into a parthenote. One example uses a chemical catalyst such as SrCl2, ethanol, Ca2+ ionophore, or ionomycin. This is followed by another chemical, for instance 6-DMAP (a broad protein synthesis inhibitor) or cytochalasin B or D (inhibitors of actin filaments polymerization), which blocks second polar body (PB2) extrusion. Thus, the resulting parthenote is a “pseudodiploid” heterozygous embryo containing the two sister chromatids of each maternal chromosome present in the MII oocyte.

Basic parthenogenetic cells are expanded, characterized and cryopreserved into a master cell bank under Current Good Manufacturing Practices (cGMP) conditions. These cells are then chemically directed to differentiate into a pure population of neural stem cells (ISC-hpNSC) under feeder-free conditions. The differentiated cells are grown in an incubated environment, characterized for the presence of neural markers and the lack of pluripotent markers, and then tested for microbial and viral contaminants before being used.

According to the Parkinson’s Foundation, there are nearly one million Americans with PD, with 60,000 diagnosed a year. PD is a progressive, irreversible neurodegenerative disorder. It arises from a lack of dopamine in the brain, owing to the death/damage of dopamine-generating cells in the substantia nigra located deep in the mid-brain just above where the spinal cord connects to the brain. The cause of cell death is currently unknown.

PD patients are evaluated using the Unified Parkinson Disease Rating Scale (UPDRS), which consists of three parts: mentation, behavior, mood; activities of daily living; and motor symptoms. Of a total possible score of 199 points (0 = no disability, 199 = worst/total disability), motor symptoms can account for just over half (108 points at worst) of the patient rating.

There are a number of different classes of therapeutic molecules available for PD (see Exhibit 1); however, these therapies only address the symptoms and do not slow or halt progress of the disease. The main families of drugs useful for treating motor symptoms are levodopa (L-DOPA), dopamine agonists and MAO-B inhibitors and are dominated by generics.

L-DOPA is one of the most commonly used treatments for PD symptoms with generics constituting almost all prescriptions. When patients begin to take L-DOPA, motor improvements of 25% (off-patient baseline so -7 points on an initial baseline of 28) have been cited. However, long-term studies suggest that after four or five years patients see modest improvement (6 points on the UPDRS scale) on L-DOPA compared to baseline. Also, after five to 10 years of treatment, between 50-70% of PD patients develop levodopa-induced dyskinesia, which is characterized by involuntary random and jerky movements similar to those motor symptoms for which the L-DOPA was originally prescribed. Current management includes adjusting L-DOPA dosing and/or adding a dopamine receptor D2 agonist to the regimen to spare L-DOPA.

Much of the advanced small molecule pipeline for PD focuses on enhancements to existing therapies such as ways to provide more consistent delivery of L-DOPA (see Exhibit 2). However, the clinical challenge may be that the mechanisms of L-DOPA in the brain are more complicated than originally believed. For example, L-DOPA is released on an intermittent or as needed basis in the brain, not at a consistent level. In addition, the oral dosage of L-DOPA needed to achieve therapeutic benefits is considerably higher than would be needed under more direct delivery methods, which may contribute to long-term L-DOPA resistance.

When medications are not enough to control symptoms, surgical techniques such as deep brain stimulation (DBS) can relieve the associated movement disorders; however, patients undergoing DBS frequently develop side effects such as short-term memory loss. Another invasive therapy is Duopa (AbbVie, Duodopa ex-US), which is a gel formulation of carbidopa and levodopa that is delivered directly to the duodenum via an implanted pump. This device continuously infuses the drugs and is effective at reducing off states (63% reduction, twice the effect of immediate release pills) and dyskinesia (86% more on time without dyskinesia compared to immediate release pills), but requires major surgery. We therefore expect it to be limited to only the most poorly controlled patients. The product was approved in the US in early 2015, but has been approved in Europe since 2004. In 2017 the product sold $355m, with 83% of sales in Europe.

There are several cell therapy and gene therapy treatments looking to address the cause of PD. Cell therapies introduce new neural cells to supplement or replace cells damaged or destroyed by the disease. One of the most advanced is Living Cell Technologies’ NeutrophinCell (NTCELL), an implantable choroid plexus cell product that contains specialized brain cells, which produce and secrete neurotrophins and cerebrospinal fluid (CSF). In a Phase IIa clinical study, NTCELL was injected in four patients under guidance by neuroimaging into the affected area of the brain. NTCELL decreased UPDRS by an average of 16 points after 58 weeks, representing a three- to four-year reversal of neurological deterioration. Data from the 18-patient Phase IIb trial is currently expected in May 2018.

Furthest along in gene therapy research is Voyager Therapeutics’ VY-AADC, an adeno-associated virus (AAV) serotype 2 vector encoding dopa decarboxylase (DDC; AADC) that is delivered to the posterior putamen using image-guided, convection-enhanced delivery. In March 2018, the company reported Phase Ib results from 15 patients across three cohorts. In cohort 2, which will likely be the dose for Voyager’s pivotal program, patients had a mean increase of 5.1 hours a day of on-time without any dyskinesia and experienced 65% less off-time. The company expects to initiate its pivotal trial in mid-2018.

ISCO initiated its Phase I trial of ISC-hpNSC for the treatment of PD in July 2016. ISC-hpNSC are the company’s proprietary neural stem cells (NSC) derived from an hpSC that are delivered intracerebrally to the striatum and substantia nigra via a one-time injection over a four- to five-hour period. The trial is an open-label, single-center (at Royal Melbourne Hospital in Australia), uncontrolled clinical trial that is evaluating three different dose regimens of 30m, 50m and 70m cells. A total of 12 participants with moderate to severe PD are to be enrolled. Patients are monitored to evaluate the safety and biologic activity of ISC-hpNSC for a year. A PET scan is performed at baseline, as part of the screening assessment, and at six and 12 months after surgical intervention. Clinical responses compared to baseline will be evaluated using various neurological assessments such as UPDRS, Hoehn and Yahr and other rating scales. The company expects to begin a Phase II PD trial later in 2018.

In November 2017, at the Society for Neuroscience annual meeting in Washington DC the company announced interim results from the first cohort of four patients, who received an intracranial injection of 30m cells. Importantly, there were no serious adverse events reported related to the cells themselves and no evidence of tumors, cysts, enhanced inflammation or infection. Also, there are some early signs of efficacy across a variety of measures (see Exhibit 4), though of course certain caveats apply as this is a single-arm, open-label study, these data are only interim (the key datapoint is 12 months) and no p-values were provided. The decrease in ‘off time’, which is defined as the periods during the day when the PD medication is not working well in controlling symptoms, and the increase in ‘on-time without dyskinesia’, defined as the periods during the day when the PD medication is working optimally without a key side effect are particularly encouraging as these have the most direct impact on a patient’s quality of life. Additional data on the first cohort may become available upon publication of the interim results in a scientific journal which the company expects to happen sometime in 2018.

The company presented results of its PD preclinical studies in October 2015 at Neuroscience 2015 in Chicago. The preclinical studies on 18 non-human primates showed that at 12 months, the transplanted cells had integrated into the dopamine fibres and dopamine levels post-mortem were significantly higher in the transplanted group versus the control group.

We do not anticipate sales from ISCO’s PD therapy until 2024, and expect the company to identify a licensing partner after Phase II data is released. Our model includes a 50/50 share of R&D costs for the PD product between ISCO and its licensee, milestone payments of $10m in 2021, $15m in 2022 and $30m on US FDA approval (currently modelled in 2024) and a 12% royalty on sales to ISCO. We assume a treatment price of $20,000 (excluding surgical costs) in the US and $15,000 outside the US and we forecast peak sales in 2032 of $2.8bn resulting in royalties to ISCO of $334m.

ISCO recently announced it has completed the preclinical studies of ISC-hpNSC in TBI and plans to start a Phase II study of ISC-hpNSC by the end of 2018. A TBI can be any injury that disrupts the normal function of the brain and is usually the result of a fall, being hit by an object, or a car accident.

According to the CDC, in 2010 TBI accounted for approximately 2.5m emergency room visits, hospitalizations and deaths in the US and approximately 3.2-5.3 million people are living with a TBI-related disability with no effective long-term treatments outside of rehabilitation. Increased awareness, especially of sports-related concussions, has resulted in a greater level of emergency room visits as more patients seek care.

Once Phase II data in TBI are in hand, we would expect the company to apply to the FDA for the new Regenerative Medicine Advanced Therapy (RMAT) designation, which came into existence as part of the 21st Century Cures Act. Sponsors of regenerative medicine products, like ISC-hpNSC, may obtain the designation if the drug is intended to treat a serious or life-threatening condition and there is some preliminary clinical evidence of the ability to address unmet medical needs for that condition. RMAT designation allows for increased interactions with the FDA, similar to the interactions available to those with breakthrough designation. The company may also become eligible for priority review and accelerated approval.

TBI could be as meaningful to the company as PD, for which we forecast $2.8bn in peak sales. We do not yet include TBI in our valuation (either in terms of revenues or R&D expense) as we await more clarity on the start of the company’s Phase II trial.

Lifeline Skin Care (LSC) develops, manufactures and markets a line of luxury skincare products sold in the US and internationally through a branded website, professional channels (including dermatologists, plastic surgeons, medical, day and resort spas) and a network of distributors including Amazon. Products sold include cleansers, exfoliators and a range of specialized moisturizers and serums based on proprietary human non-embryonic stem cell extract and small molecule technologies. The global skincare market, while large, is very competitive and challenging which resulted in LSC sales falling 20.8% in 2017 compared to 2016. However, Q4 sales were up 33.3% sequentially and down only 4.1% compared to 2016. We are projecting a CAGR of 3.4% from 2017-2022 for the skincare business.

Lifeline Cell Technology (LCT) develops, manufactures and commercializes over 130 human cell culture products, including frozen human ‘primary’ cells and the reagents (called media) needed to grow, maintain and differentiate the cells. Cell types include endothelial, epithelial, fibroblasts, melanocytes, stem and smooth muscle among others.

Unlike the skincare business, LCT has been growing briskly, up 20.5% in 2017 compared to the prior year. This growth rate has improved operating margins, which grew from 29.0% to 35.1% in 2017. We are projecting a CAGR of 9.1% from 2017-2022.

As with any early-stage biotechnology company, ISCO faces numerous risks and uncertainties, especially preclinical risk. The investment case rests largely on the successful execution of the PD cell therapy clinical trials and the company’s ability to attract a licensing/development partner to continue clinical development and, if approved, commercialization. The company’s therapy for PD is in Phase I human trials and, due to its early-stage nature, has not been shown definitively to be efficacious although there are encouraging signs of efficacy from the interim six-month data from the first cohort of patients.

Another risk stems from the capital structure, which, as mentioned, potentially creates sizeable dilution risk for minority investors. To date, ISCO has relied primarily on funds from management in the form of a combination of convertible preferred shares, warrants and options to fund its growth so that on a fully diluted basis management controls 83% of outstanding shares as of 31 December 2017. While management has not converted or sold its sizeable holdings (and says it does not intend to), investors need to consider the possibility of significant dilution risk at some point in the future. There remain approximately 12.7m potentially dilutive shares from 4.0m warrants, 2.3m options and 6.4m convertible preferred shares on top of the 6.2m common shares outstanding. Also, investors should note that the convertible preferred shares are subject to anti-dilution provisions under certain circumstances, creating further dilution potential.

We value ISCO based on an rNPV methodology, using a 10% discount rate and 90% probability for the skincare/biomedical businesses and a 12.5% discount rate and 7.5% probability for the PD candidate, due to its early development stage. Our model does not ascribe any value to the rest of ISCO’s therapeutic pipeline but we shall revisit that once additional candidates enter the clinic. We have updated our valuation to $34m (previously $33m) or $5.45 (previously $5.52) per basic share. The difference is mainly due to rolling forward our NPV, which was mitigated by a lower cash balance and a higher share count.

ISCO reported 2017 revenues of $7.5m, up 4.1% compared to 2016. In Q417, revenues were $1.8m, up 9.0% compared to Q416. The biomedical business had revenues of $5.2m for the year, up 20.5% compared to 2016. The cosmetics business, however, was down 20.8% in 2017. For the company as a whole, the operating loss was $4.9m for 2017, up 1.9% compared to the prior year as the profitability of the biomedical business improved to a greater extent than the profitability of the cosmetic business deteriorated, while spending on therapeutics increased somewhat. We have made slight adjustments to our model, increasing our 2018 revenue estimate for the commercial business by $0.15m, as it was stronger than expected in Q4, and adjusted our 2018 SG&A expense estimates higher by $0.05m due to a higher run rate. We have also introduced our 2019 estimates, which include growth in commercial business revenues to $8.8m.

The company had $0.3m in cash on the balance sheet at 31 December 2017. This was supplemented in March 2018 through a promissory note that provided $0.35m in funds in cash from the co-chairman and CEO of the company. Operating cash burn is approximately $0.18m per month and is likely to increase as clinical trials progress. We project that the company will need at least $62.5m in additional financing before profitability in 2024, of which a total additional $7.5m will be required by the end of 2018 and a further $10m by the end of 2019.