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

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

International Stem Cell (ISCO) is an early-stage cell therapy company currently in clinical trials to treat Parkinson’s disease (PD). In November, the company presented interim six-month results from the first cohort of four patients in its Phase I trial of ISC-hpNSC in PD. Positive signals were seen in a variety of measures, which include daily living, mobility, depression and compulsive disorders.

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International Stem Cell

Moving forward in Parkinson's and TBI

Development update

Pharma & biotech

14 May 2018

Price

US$1.41

Market cap

US$9m

Net cash ($m) at 31 December 2017

0.3

Shares in issue

6.2m

Free float

26.4%

Code

ISCO

Primary exchange

OTC

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.8)

0.0

(11.9)

Rel (local)

(5.8)

(4.0)

(22.6)

52-week high/low

US$1.9

US$1.1

Business description

International Stem Cell is an early-stage biotechnology company developing therapeutic, biomedical and cosmeceutical applications for its proprietary stem form of pluripotent stem cells – human parthenogenetic stem cells. Its lead candidate is a cell therapy treatment for Parkinson’s disease.

Next events

Publication of interim results in scientific journal

2018

Initiation of Phase II in traumatic brain injury and PD

2018

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

International Stem Cell is a research client of Edison Investment Research Limited

International Stem Cell (ISCO) is an early-stage cell therapy company currently in clinical trials to treat Parkinson’s disease (PD). In November, the company presented interim six-month results from the first cohort of four patients in its Phase I trial of ISC-hpNSC in PD. Positive signals were seen in a variety of measures, which include daily living, mobility, depression and compulsive disorders.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/16

7.2

(4.9)

(0.34)

0.0

N/A

N/A

12/17

7.5

(4.9)

(1.46)

0.0

N/A

N/A

12/18e

8.2

(7.3)

(1.13)

0.0

N/A

N/A

12/19e

8.8

(8.3)

(1.25)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Second cohort enrolled in PD trial

In March 2018, the company announced it had completed dosing of the second cohort of four patients in its Phase I trial of ISC-hpNSC in PD, who are being treated with the 50m cell dose. As a reminder, patients on the study are being treated in three cohorts with 30m, 50m and 70m stem cells, delivered via intracranial injection. Interim data from the first cohort, who were treated at the 30m cell dose, are encouraging. The company expects to start a Phase II PD trial later in 2018.

Phase II in TBI coming up in 2018

In September 2017, the company announced that it had completed preclinical studies of ISC-hpNSC in traumatic brain injury (TBI) and was preparing to commence a Phase II trial, which should commence in 2018. According to the Centers for Disease Control (CDC), TBI accounts for 2.5m emergency room visits in the US annually and approximately 3.2-5.3 million people are living with a TBI-related disability.

Commercial operations help fund research

ISCO’s commercial operations leverage its hpSC technology and generate revenues to partially offset R&D spending for therapeutic development. Lifeline Skin Care (LSC) develops and sells skincare products and Lifeline Cell Technology (LCT) produces human cell culture products for testing. Together they generate $7.5m in sales and $1.4m in operating profit though additional funding would be necessary to advance PD and TBI into Phase II trials.

Valuation: $34m or $5.45 per basic share

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. There remain approximately 12.7m potentially dilutive shares from warrants, options and convertible preferred stock. 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.

Investment summary

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.

Valuation: $34m or $5.45 per basic share

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.

Financials: Dilution risk dominates

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.

Sensitivities: An early-stage, cell therapy asset

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.

A lasting treatment for PD?

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.

The Parkinson’s market

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.

Exhibit 1: Select currently marketed drug therapies for PD

Company name (originator)

Product names

Description

Comments/regulatory designation

AbbVie

Duodopa, Duopa, levodopa/carbidopa

Levodopa-carbidopa intestinal gel

US – orphan drug (treat PD)

Boehringer Ingelheim

Mirapex, Mirapex ER, Mirapexin, Sifrol, pramipexole (pexola)

Dopamine agonist

In one of the two early PD studies (n=335) the mean improvement from baseline on the UPDRS Part III total score was 5.0 in the MIRAPEX arm vs -0.8

Vernalis (Stada Arzneimittel in Japan)

Apokyn

Combines melevodopa, a methyl ester prodrug of levodopa, with carbidopa

Three blinded clinical studies (n=29, 17, 62) showed statistically significant benefit of Apokyn vs placebo on UPDRS motor scores (improvement of 20-24pt off baseline averaging 40)

Bristol Myers

Sinemet CR

Controlled release Levodopa-carbidopa

First approved controlled release CD LD formulation

GlaxoSmithKline

Adartel, Requip, ropinirole (Adartrel)

Dopamine D2 and dopamine D3 receptor agonist

Requip trial on early PD patients without L-DOPA (n=63) showed 30% improvement in UPDRS motor score on responders vs placebo. Similar results vs placebo from two other studies

Acadia

Nuplazid

Atypical antipsychotic

Indicated for the treatment of hallucinations and delusions associated with PD psychosis

Impax Laboratories

Rytary, carbidopa/levodopa (IPX066, GSK587124, Patrome)

Extended-release capsule formulation of carbidopa, an inhibitor of aromatic amino acid decarboxylation, and levodopa, an aromatic amino acid

In a 381 patient study, Rytary showed a 33-40% improvement from baseline in UPDRS Part II plus Part III scores at week 30

UCB

Neupro, rotigotine transdermal system

Dopamine agonist patch

Mean change in UPDRS (parts II + III) from baseline ranged from 13-23% across various studies

Novartis

Stalevo, Comtan, entacapone

Catechol-O-methyltransferase (COMT) inhibitor that inhibits breakdown of levodopa

Study data show improvement in “on” time (no symptoms) vs placebo (p=0.001). Approximately 15% improvement in UPDRS motor score (p<0.05)

Orion Corp

Eldepryl, selegiline

Selective monoamine oxidase B (MAO-B) inhibitor

Patients treated had a 13% reduction from baseline in daily “off” time, compared with a 5% reduction for patients treated with placebo

Roche

Tasmar (tolcapone)

COMT inhibitor that inhibits breakdown of levodopa

Adjuct therapy only

Teva Pharmaceutical Industries

Agilect, Azilect, rasagiline (mesylate)

Irreversible MAO-B

Study showed 15% improvement in UPDRS motor score at 1mg dosage as monotherapy

Valeant Pharmaceuticals

Zelapar, selegiline

MAO-B inhibitor

Source: BioCentury, EvaluatePharma, Edison Investment Research

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.

Exhibit 2: Levodopa treatment axis programs

Company

Name

Molecule(s)

Status

Notes

BIAL

Ongentys

Opicapone

Filed

‘Third generation’ COMT inhibitor

LobSor Pharmaceuticals

LECIGon

Carbidopa; entacapone; levodopa

Phase III

Gel formulation deliver directly to duodenum via a pump

Acorda Therapeutics

CVT-301

Levodopa

Phase III

Inhalable levodopa

Depomed

DM-1992

Carbidopa; levodopa

Phase II

Gastroretentive immediate release/extended release co-formulation. Development suspended

SynAgile

DopaFuse

Carbidopa; levodopa

Phase II

Drug delivered via a continuous oral pump

IMPAX Laboratories

IPX203

Carbidopa; levodopa

Phase II

Follow on for Rytary. Fast onset followed by extended release

NeuroDerm

ND0612H

Carbidopa; levodopa

Phase II

Liquid formulation delivered via a dermal pump

XenoPort

XP21279

Levodopa prodrug

Phase II

Sustained release levodopa prodrug designed to improve absorption. Development halted pending a partnership

Aposense

ATT-LD

Levodopa prodrug

Preclinical

Long-acting levodopa prodrug

Cerecor

CERC-406

-

Preclinical

COMT inhibitor that passes the blood brain barrier

Source: EvaluatePharma, company documents

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.

Exhibit 3: Selected clinical-stage cell and gene therapy candidates in PD

Company

Product (company)

Stage of development

Therapeutic modality

Description

Living Cell Technologies

NTCELL

Phase IIb

Cell therapy

Choroid plexus cell product that secretes neurotrophins and CSF

International Stem Cell

ISC-hpNSC

Phase I

Cell therapy: stem cell

Neuronal cells derived from hpSC

Voyager Therapeutics

VY-AADC

Phase II/III

Gene therapy: viral vector: adeno-associated virus (AAV)

AAV serotype 2 encoding the DDC; AADC gene injected into the putamen

Oxford Biomedica

OXB-102

Phase I/II

Gene therapy: viral vector: lentivirus

LentiVector carrying three genes encoding enzymes for dopamine synthesis

Source: Biocentury, Edison Investment Research

ISCO’s PD program

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.

Exhibit 4: Interim data of ISC-hpNSC in PD

Measure

Description

Result at six-month time point

% off-time

% of day when levodopa medication is not performing optimally and PD symptoms return

Decreased 24%

% on-time without dyskinesia

% of day that medication is working optimally without dyskinesia

Increased 19%

Beck Depression Inventory

21-question multiple-choice self-report inventory

Improved 35%

Questionnaire for Impulsive-Compulsive Disorders in PD

A brief self-completed questionnaire with 15 questions related to impulse control disorders in PD

Decreased 53%

PD Quality of Life Score (PDQ-39) - Emotional Wellbeing dimension

The PDQ-39 is a 39-item tool to assess the quality of life in PD patients and is self-completed. The emotional wellbeing section consists of six items

Improved 33%

PDQ-39 - Activities of Daily Living dimension

Six items in the PDQ-39

Improved 22%

PDQ-39 - Mobility dimension

10 items in the PDQ-39

Improved 15%

PDQ-39 - Bodily Discomfort dimension

Three items in the PDQ-39

Improved 12%

PDQ-39 – Cognitive Impairment dimension

Four items in the PDQ-39

Improved 14%

PDQ-39 - Stigma, Social Support, Communications dimensions

Stigma consists of four items, social support three items and communications 3 items

Not disclosed

UPDRS during off period

The UPDRS is a six-part rating scale and is the most commonly used scale in the clinical study of PD. It is a qualitative functional scale of a patient’s mental state, muscle tone and ability to perform daily tasks used to follow the course of the disease over time

No improvement

Change in UPDRS score from baseline

This is a secondary end point at 12 months

Not disclosed

Proportion of patients with improvement defined as any reduction in the UPDRS motor score

This is a secondary end point at 12 months

Not disclosed

Source: International Stem Cell

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.

Exhibit 5: ISCO preclinical data

Source: International Stem Cell presentation

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.

Traumatic brain injury Phase II coming soon

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.

Exhibit 6: Estimated average annual number of TBI-related hospital visits and deaths, 2002-2010

Mechanism of injury

Emergency room visits

Hospitalizations

Deaths

Falls

658,668

66,291

10,944

Struck by or against an object

304,797

6,808

372

Motor vehicle traffic

232,240

53,391

14,795

Assault/Homicide

179,408

15,032

5,665

Self-inflicted/Suicide

N/A

N/A

14,713

Other

122,667

25,478

4,990

Unknown

97,018

113,172

-

Source: CDC Report to Congress, Traumatic Brain Injury in the United States

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.

Exhibit 7: Age-adjusted rates of TBI-related hospital visits and deaths, 2001-10

Source: CDC Report to Congress, Traumatic Brain Injury in the United States

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.

Cosmeceutical and biomedical business lines

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.

Exhibit 8: LCT product categories

Airway cell systems

Mouse cells

Bladder cell systems

Prostate cell systems

Corneal epithelial cell systems

Renal cell systems

Cryopreservation solutions

Reproductive cell systems

Custom products and services

Skeletal muscle cell systems

Endothelial cell systems

Skin cell systems

Fibroblast systems

Smooth muscle cell systems

Hematopoietic systems

Stain kits

Keratinocyte systems

Human stem cell systems

Lung cell systems

Subculture reagents

Mammary cell systems

Supplements

Melanocyte systems

Source: Company website

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.

Exhibit 9: Commercial business segment reported financials

$000s

2016

2017

Revenues

Skin care

2,849

2,256

Biomedical

4,316

5,200

Total

7,165

7,456

Operating expenses

Skin care

2,797

2,634

Biomedical

3,065

3,373

Total

5,862

6,007

Operating income (loss)

Skin care

52

(378)

Biomedical

1251

1827

Total

1,303

1,449

Source: International Stem Cell 2017 10-K

Sensitivities

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.

Valuation

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.

Exhibit 10: International Stem Cell valuation

Product

Status

Launch

Peak sales ($m)

NPV ($m)

Probability

rNPV ($m)

NPV/share ($)

Cosmetic and biomedical business

Commercial

Current

18

23

90%

21

3.36

PD (royalties at 12% of sales)

Phase I

2024

2,800

521

7.5%

39

6.31

G&A expense - after tax

100%

(26)

(4.28)

Net cash

0.3

100%

0.3

0.05

Valuation

 

 

 

544

 

34

5.45

Source: Edison Investment Research

Financials

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.

Exhibit 11: Financial summary

US$000

2015

2016

2017

2018e

2019e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

7,551

7,165

7,456

8,193

8,846

Cost of Sales

(2,056)

(1,944)

(2,122)

(2,130)

(2,300)

Gross Profit

5,495

5,221

5,334

6,063

6,546

Research and development

(2,707)

(2,856)

(2,658)

(6,000)

(6,500)

EBITDA

 

 

(4,092)

(4,520)

(4,616)

(6,333)

(6,616)

Operating Profit (before amort. and except.)

(4,564)

(4,851)

(4,942)

(6,659)

(6,942)

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

1,929

3,772

(1,127)

0

0

Operating Profit

(2,635)

(1,079)

(6,069)

(6,659)

(6,942)

Net Interest

0

0

0

(600)

(1,400)

Profit Before Tax (norm)

 

 

(4,564)

(4,851)

(4,942)

(7,259)

(8,342)

Profit Before Tax (reported)

 

 

(2,635)

(1,079)

(6,069)

(7,259)

(8,342)

Tax

0

0

0

0

0

Profit After Tax (norm)

(2,635)

(1,079)

(6,069)

(7,259)

(8,342)

Profit After Tax (reported)

(2,635)

(1,079)

(6,069)

(7,259)

(8,342)

Average Number of Shares Outstanding (m)

2.0

3.2

4.2

6.4

6.7

EPS - normalised ($)

 

 

(1.29)

(0.34)

(1.46)

(1.13)

(1.25)

EPS - normalised fully diluted ($)

 

 

(1.29)

(0.34)

(1.46)

(1.13)

(1.25)

EPS - (reported) (US$)

 

 

(1.29)

(0.34)

(1.46)

(1.13)

(1.25)

Dividend per share ($)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

72.8

72.9

71.5

74.0

74.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

4,147

4,553

4,009

4,599

5,202

Intangible Assets

3,223

3,484

2,922

3,511

4,100

Tangible Assets

864

1,011

1,013

1,014

1,028

Investments

60

58

74

74

74

Current Assets

 

 

2,991

2,492

2,855

4,245

6,779

Stocks

1,348

1,390

1,307

1,463

1,579

Debtors

539

574

465

585

631

Cash

532

110

304

1,419

3,790

Other

572

418

779

779

779

Current Liabilities

 

 

(5,544)

(3,601)

(4,800)

(5,155)

(5,249)

Creditors

(5,544)

(3,601)

(4,800)

(5,155)

(5,249)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

0

0

0

(7,500)

(17,500)

Long term borrowings

0

0

0

(7,500)

(17,500)

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

1,594

3,444

2,064

(3,811)

(10,768)

CASH FLOW

Operating Cash Flow

 

 

(4,120)

(4,197)

(2,142)

(4,869)

(5,300)

Net Interest

0

0

0

(600)

(1,400)

Tax

0

0

0

0

0

Capex

(738)

(944)

(864)

(916)

(929)

Acquisitions/disposals

0

0

0

0

0

Financing

1,169

4,018

3,200

0

0

Dividends

0

0

0

0

0

Net Cash Flow

(3,689)

(1,123)

194

(6,385)

(7,629)

Opening net debt/(cash)

 

 

(1,111)

(532)

(110)

(304)

6,081

HP finance leases initiated

0

0

0

0

0

Other

3,110

701

0

0

0

Closing net debt/(cash)

 

 

(532)

(110)

(304)

6,081

13,710

Source: Edison Investment Research, company reports

Contact details

Revenue by geography

5950 Priestly Drive,
Carlsbad, CA 92008
US
+1 760 940 6383
www.internationalstemcell.com

Contact details

5950 Priestly Drive,
Carlsbad, CA 92008
US
+1 760 940 6383
www.internationalstemcell.com

Revenue by geography

Management team

Co-chairman and chief executive officer: Andrey Semechkin, PhD

Executive VP and chief scientific officer: Russell Kern, PhD

Dr Semechkin has over 20 years of experience creating and managing businesses ranging from startups to multi-billion dollar market cap companies, across different industries and scientific sectors. He is a specialist in system analysis, strategic planning and corporate management. Dr Semechkin is a member of the Russian Academy of Sciences.

Dr Kern was trained in medical genetics, embryology and stem cell biology. He was part of the team, along with scientists from the NYU Medical School, which elucidated the physiological changes that occur in the brains of PD patients. Dr Kern is a well-known speaker on stem cell biology, including the use of stem cells for neurology and skin regeneration. He has more than 40 publications in the field of PD and stem cell biology.

Acting chief financial officer: Jennifer Stephens, CPA

President of Lifeline Cell Technology: Francisco Bustamante

Ms Stephens has served in the director of finance position since February 2017. She has served an extensive number of companies in various management level accounting positions. Preceding her years as an accounting and finance consultant, Ms. Stephens worked with Ernst & Young LLP in a senior supervisory role in the San Diego audit practice where she worked with clients ranging in size from start-up companies to billion dollar SEC registrants. Ms. Stephens received a BA in Business Economics and Accounting from the University of California, Santa Barbara and is a licensed CPA.

Mr Bustamante has over 18 years of experience in operations of biotechnology companies, including senior management positions in the areas of manufacturing, procurement, planning, warehousing, distribution and project management. He has an excellent understanding of the manufacture and logistics of cell culture products, biological instruments, molecular biology kits and diagnostics His industry experience includes Clonetics, BioWhittaker (Cambrex), Digene and Meso Scale Diagnostics. Mr Bustamante received his BS degree in biology from the University of San Diego and his MBA degree from Frostburg State University. He has been with Lifeline Cell Technology since 2007.

Management team

Co-chairman and chief executive officer: Andrey Semechkin, PhD

Dr Semechkin has over 20 years of experience creating and managing businesses ranging from startups to multi-billion dollar market cap companies, across different industries and scientific sectors. He is a specialist in system analysis, strategic planning and corporate management. Dr Semechkin is a member of the Russian Academy of Sciences.

Executive VP and chief scientific officer: Russell Kern, PhD

Dr Kern was trained in medical genetics, embryology and stem cell biology. He was part of the team, along with scientists from the NYU Medical School, which elucidated the physiological changes that occur in the brains of PD patients. Dr Kern is a well-known speaker on stem cell biology, including the use of stem cells for neurology and skin regeneration. He has more than 40 publications in the field of PD and stem cell biology.

Acting chief financial officer: Jennifer Stephens, CPA

Ms Stephens has served in the director of finance position since February 2017. She has served an extensive number of companies in various management level accounting positions. Preceding her years as an accounting and finance consultant, Ms. Stephens worked with Ernst & Young LLP in a senior supervisory role in the San Diego audit practice where she worked with clients ranging in size from start-up companies to billion dollar SEC registrants. Ms. Stephens received a BA in Business Economics and Accounting from the University of California, Santa Barbara and is a licensed CPA.

President of Lifeline Cell Technology: Francisco Bustamante

Mr Bustamante has over 18 years of experience in operations of biotechnology companies, including senior management positions in the areas of manufacturing, procurement, planning, warehousing, distribution and project management. He has an excellent understanding of the manufacture and logistics of cell culture products, biological instruments, molecular biology kits and diagnostics His industry experience includes Clonetics, BioWhittaker (Cambrex), Digene and Meso Scale Diagnostics. Mr Bustamante received his BS degree in biology from the University of San Diego and his MBA degree from Frostburg State University. He has been with Lifeline Cell Technology since 2007.

Principal shareholders (fully diluted)

(%)

Dr. Andrey Semechkin and Russell Kern

83

Companies named in this report

Abbvie (ABBV), Vernalis (VER:LN), Bristol-Myers (BMY), GlaxoSmithKline (GSK), Acadia (ACAD), Impax (IPXL), UCB (UCB:BB), Novartis (NVS), Roche (ROG:VX), Teva (TEVA), Valeant (VRX), Voyager (VYGR), Living Cell Technologies (LCT:AU), Oxford Biomedica (OXB:LN)

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Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by International Stem Cell and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484))
and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

Kazia Therapeutics — GDC-0084 Phase II underway

Kazia Therapeutics has initiated the dose optimisation lead-in component of the Phase II trial of GDC-0084 in glioblastoma, with initial data expected in Q119. Initial data from the Cantrixil ovarian cancer Phase I are due shortly. In January Kazia received a ~5% shareholding in Noxopharm (current market value ~A$4m) in return for collaborative support of that company’s lead programme. We roll forward our DCF model and add in the Noxopharm shareholding, which increases our valuation to between A$73m and A$133m.

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