CAPScall of the Week: Neuralstem


For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm taking a closer look at Neuralstem .

What Neuralstem does
Neuralstem is a biotech company attempting to develop a technology capable of producing neural stem cells of the brain and spinal cord on a commercial level that can also control the ultimate differentiation of these neural stem cells into neurons and glia.

Neuralstem recently announced its findings of a phase 1 clinical trial for amyotrophic lateral sclerosis (better known as Lou Gehrig's disease), and the overall results were encouraging. According to data from Neuralstem on the six patients that were autopsied following this trial, all showed stem cell DNA content in the range of 0.67% to as high as 5.4% in treatment spots.

This gives the company concrete evidence that its cells survived, which was encouraging on two levels. First, it demonstrated that some level of functional recovery or progression slowdown may have been derived from its stem cell therapy. Second, with immune suppression medications discontinued by five of six patients, it demonstrates the need for only intermittent immunosuppressants in future studies. NSI-566 has been granted orphan drug status by the Food and Drug Administration.

Whom it competes against
As a clinical-stage stem cell company, Neuralstem has just a handful of true competitors, but also can count U.S. regulators and history as a potential threat.

StemCells is currently developing a multitude of potential stem cell therapies, including HuCNS-SC, which will gauge efficacy and safety of stem cell injections as related to thoracic spinal cord injuries. Similarly, Aastrom Biosciences recently initiated a phase 3 trial after encouraging results from its cellular therapy, Ixmyelocel-T, which met its mid-stage trial endpoints in treating critical limb ischemia.

The big question mark remains what sort of long-term stance the U.S. government will take with regard to stem cell therapies. Regulators' stance on using embryonic stem cells has reversed course before, and that has the potential to put a kibosh on all research in the sector. Consider also that the clinical failure rate among stem cell researchers is incredibly high. Geron , for instance, announced in late 2011 that it was shutting down its stem cell research program after years of losses. Cytori Therapeutics' regenerative cell platform took years to reach the clinical testing stage as it suffered delays in finding development partners. In short, history is most definitely not on the side of stem cell developers.

The call
After carefully reviewing the prospects for Neuralstem, I've decided to make a CAPScall of underperform on the company.

The concerns I have with Neuralstem relate to both the poor success rate of the sector and very little evidence that would signify a near tripling of the stock off its 52-week low.

In terms of stem cell success, as I mentioned earlier, Geron left the game completely while others like Aastrom and StemCells have burned through precious cash for the past decade with little to show for it at the moment. Since 2005, Neuralstem has generated roughly $1 million in total revenue while burning through close to $40 million in cash. Based on its current balance sheet, it has around one year of cash left before it'll run out or seek yet another dilutive secondary offering.

The other factor is that little bit about efficacy. I'm not going to argue against the fact that the results bore some encouraging stem cell survival and possible functional recovery results. What I am going to argue is that six patients hardly makes NSI-566 a success, regardless if t it bears orphan drug status. I can't count how many times I've seen therapies like this fail to meet statistical significance once it moves beyond early stage trials. While I cross my fingers for a cure to ALS, I'm also realistic that history is not on the sector's side.

One therapy geared for success
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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