Biotech Buzz Post No. 10 - ICEL

“On résiste à l'invasion des armées; on ne résiste pas à l'invasion des idées” – Victor Hugo (1802-1885), Histoire d’un Crime, 1877.

Cellular Dynamics (Nasdaq: ICEL) – Creating value from an idea whose time may just be coming

The line I just quoted above from Victor Hugo is the origin of those words people often attribute to him: ‘Nothing is more powerful than an idea whose time has come’. Hugo never said that. What he said was ‘An invasion of armies can be resisted; an invasion of ideas cannot be resisted.’ That more accurate quote comes from the final chapter of Hugo’s History of a Crime, where he describes the 1852 takeover of France by Louis-Napoleon Bonaparte (1808-1873), the Corsican upstart’s nephew, who, leveraging widespread Bonapartist sentiment to the max, ended up crowning himself as Emperor Napoleon III. Hugo didn’t like Napoleon III’s anti-democratic ways and chose to exile himself from France until 1870, the year when the Emperor foolishly engineered a war with Prussia that saw the French defeated in a matter of months and the Emperor’s own reign ended in favour of the Third Republic. In concluding History of a Crime Hugo says that the invasion of France by the Germans was bad, but the real winner in the long run was France because it was fundamentally a country of ideas, not of arms, and the main ideas it stood for – those of the French Revolution, which managed to make a comeback with the Third Republic – were spreading out irresistibly throughout the world. ‘What can be done against a revolution which has so much right on its side? Nothing. To love it. That is what the nations do. France offers herself, the world accepts her. The whole phenomenon lies in these few words. An invasion of armies can be resisted; an invasion of ideas cannot be resisted’.

So why do people always say ‘Nothing is more powerful than an idea whose time has come’? Because it’s true, as anyone who has watched the battle of ideas which is science can attest. In this Biotech Buzz post I would like to argue that stem cells are one of those ideas whose time has now come, that great profits have the potential to come to those who back the idea of stem cells as future therapies, and that one of the future winners may be Cellular Dynamics (Nasdaq: ICEL), the stem cell manufacturer from Madison, Wi., which recently raised US$43m in an IPO.

Cellular Dynamics is the creation James Thomson, the cell biologist from the University of Wisconsin at Madison who became world famous in late 1998 when his lab became the first to isolate human embryonic stem cells (click here for the Science paper which announced the news). The Thomson lab’s work was a big step forward for science because it looked like people could now start harnessing the pluripotency of stem cells and with them treat all sorts of hitherto untreatable diseases. Stem cells are simply cells in the body with the ability to develop into a number of different cell types. Since many diseases are caused by cells being lost or damaged (think Type 1 diabetes and the loss of pancreatic islet cells), the apparent ability of stem cells to regenerate what has been lost has enormous potential for good. The trouble with the breakthrough from Thomson et. al. 15 years ago was that their cells were pluripotent – capable of differentiating into almost all cell types - but you had to create embryos to get them, and I don’t have to remind you that a lot of us are not all that crazy about messing with embryos. Mind you, it wasn’t just King James Bible-toting Christians like me who had issues – it was scientists of all faiths or non-faiths who were concerned about the tumorigenicity of embryonic stem cells. So in fact there were two main ethical issues for the field to deal with. Think of embryonic stem cells as the ‘invasion of armies that can be resisted’.

The beautiful part of the stem cell story is that the ethical issues didn’t hold the field back. For a start, people just focused on adult stem cells and started to use their multi-potentiality (ie their ability to differentiate into some but not all cell types) and the growth factors they secrete to make big scientific and commercial strides. Just look at the Australian company which leads the stem cell field globally, the Melbourne-based Mesoblast (ASX: MSB). It now has a market capitalisation of A$1.7bn because its Mesenchymal Precursor Cells, grown up from donated adult bone marrow, have yielded great clinical data in heart failure and spinal disc repair and a massive 2010 partnering deal with Cephalon that Teva inherited and, I believe, is going forward with. The work that went into Mesoblast, however, didn’t win its founder, Silviu Itescu, the Nobel Prize (which was fine because a Nobel these days only gets you a handshake with King Carl XVI Gustaf of Sweden and 8 million Swedish kronor or ~US$1.1m, a lot less than the quarter of Mesoblast stock which Silviu owns). The stem cell Nobel, awarded last year, went to the man who created the real-deal breakthrough in the field - Japan’s Shinya Yamanaka. In 2007 Yamanaka was able to show that normal differentiated adult cells such as skin cells could be reprogrammed into ‘induced pluripotent’ stem cells (iPS cells) using only four factors transduced into the cells (click here for the Cell paper that announced this). So you could create pluripotent stem cells without using embryos. Goodbye, ethical issues. Hello future therapies.

Well, not quite. For the iPS cell field there were quite a few technical issues to sort out related to which factors to transduce and, most importantly, how to avoid the ‘footprint’, which included genetic indicators of the vectors used to get the factors into the cells. Which is where James Thomson and Cellular Dynamics comes in. In 2009 Thomson and other collaborators invented a ‘footprint free’ technique for reprogramming adult cells into iPS cells that involve the use of episomes (segments of DNA that don’t integrate into that of the host cells) to deliver six reprogramming genes (click here for the original paper). This provided a way to make clean iPS cells from any individual’s blood, and then use them to manufacture differentiated tissue cells in industrial quality, quantity and purity. Cellular Dynamics, the company founded by Thomson in 2004, has spent the years since 2009 optimising this technology to the point where it is rapidly becoming the ‘industry standard’ for iPS cells. I argue that this technology has the potential to be the invasion of ideas that cannot be resisted in the stem cell field, even though people at the moment are still worried about the footprint issue in terms ‘aberrant epigenomic reprogramming’ – the idea that an iPS cell will have DNA hotspots resistant to reprogramming that could hinder its therapeutic use (click here for a relevant 2011 paper in Nature).

What will make is Cellular Dynamics’s technology less likely to be resisted is the business plan. This company isn’t a regular stem cell company with a pipeline of prospective cellular therapies at clinical and preclinical. It is first and foremost a manufacturer of differentiated cells whose main product is sold - for cold, hard cash - to academic groups and drug companies. These customers now have, for the first time, genuine human cells with which to study cellular processes and develop and test drugs. At the moment Cellular Dynamics makes cardiomyocytes, neurons, hepatocytes and endothelial cells and more cell types will become available all the time. All the big drug companies use cells from Cellular Dynamics and in 2012 the company shipped US$5.2m of them. For the customers it is money well spent because they can more easily avoid toxicities that may slip through cells that only approximate rather than reproduce what real human cells are like. US$5.2m may not seem like much for company capitalised at US$219m, but business is brisk - in the June 2013 quarter revenue was US$2.8m versus US$1.3m in the previous corresponding period. Moreover US$3.5bn gets spent every years on cells for in vitro experiments globally so Cellular Dynamics has plenty of room to grow. In short, Cellular Dynamics is growing a business, and potentially a big business, while all the time  it gets better at making iPS cells and differentiating them. The company’s ideas will continue to invade the field with every paper published that involved its cells.

Differentiated cells for research purposes aren't, however, the end of the story. The company also makes iPS cells from specific tissue samples brought to them by customers. So, for example, Cellular Dynamics won a US$16m contract in March from the California Institute for Regenerative Medicine (CIRM) to derive three iPS cell lines from each of 3,000 different individuals. The idea is for researchers to have a stem cell ‘bank’ that they can go to for stem cells relevant to diseases they are studying. Other customers with particular cells they want to study or to use in cellular therapy are coming to Cellular Dynamics to have iPS cells made of their candidate cell so they can have as much of the cells as they need. Given enough time this area of Cellular Dynamics may end up revolutionising stem cell banking and make today’s cord blood collection industry look primitive. More importantly, it has the potential to provide the basis for much of the cellular therapy that will be commercialised in the future as stem cell developers turn to iPS cells as their basic enabling technology.

Which brings us to what may be the next stage of the journey. Cellular Dynamics announced in January that it was producing, under cGMP, proprietary master cell banks of human iPS cells, where the donor cells for starting material came from people with the HLA profiles (ie cellular markers of ‘self’ as opposed to ‘non-self’ in the immune system sense) most amenable to transplantation into unrelated recipients. This work will give Cellular Dynamics a library of cells with the potential to develop into ‘off-the-shelf’ therapies for a range of disease conditions, whereas until recently people had largely been thinking of iPS cells only for autologous use. Whether these new cells banks will be accessible by customers the company didn’t say at the time. What the iPS master cell bank development potentially gives Cellular Dynamics is the ability to develop its own cellular therapies. That landmark may not be coming for several years down the track, or it may not happen at all if the company chooses to remain a seller of picks and shovels rather than a digger for its own therapeutic gold. However given the progress that the iPS field has made since 2007 it’s not unreasonable that Cellular Dynamics may become confident of moving in that direction after a few more years of technology optimisation. That’s because nothing is more powerful than an idea whose time has come.

Stuart Roberts, Australian Life Sciences consultant, with global focus
Nisi Dominus Frustra

+61 (0)447 247 909

sroberts2164@gmail.com

Twitter @Biotech_buzz

About Stuart Roberts. I started as an equities analyst at the Sydney-based Southern Cross Equities in April 2001, focused on the Life Sciences sector from February 2002. Southern Cross Equities was acquired by Bell Financial Group (ASX: BFG) in 2008 and I continued at Bell Potter Securities until June 2013. Over the twelve years to 2013 I built a reputation as one of Australia's leading biotech analysts. I am currently consulting to the Australian biotech industry. Before joining Southern Cross Equities I wrote for The Intelligent Investor, probably the most readable investment publication in Australia. I have a Masters Degree in Finance from Finsia. My hobbies are jazz, cinema, US politics and reading patent applications filed by biotechnology and medical device companies.

Previous Australian Biotechnology Buzz posts:
Cellular Dyamics (Nasdaq: ICEL), 3 September 2013
ImmunoCellular Therapeutics (NYSE MKT: IMUC), 27 August 2013
Immunomedics (Nasdaq: IMMU), 21 August 2013
Inovio Pharmaceuticals (NYSE MKT: INO), 24 August 2013
Merrimack Pharmcaceuticals (Nasdaq: MACK), 26 August 2013
Oncolytics Biotech (Nasdaq: ONCY),  22 August 2013
Pharmacyclics (Nasdaq: PCYC), 2 September 2013
Regulus Therapeutics (Nasdaq: RGLS), 23 August 2013
Sunshine Heart (Nasdaq: SSH), 28 August 2013
Synta Pharmaceuticals (Nasdaq: SNTA), 1 September 2013.

Disclaimer. This is commentary, not investment research. If you buy the stock of any biotech company in Australia, the US or wherever you need to do your own homework, and I mean, do your own homework. I'm not responsible if you lose money.