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International Stem Cell — Update 2 August 2016

International Stem Cell — Update 2 August 2016

International Stem Cell

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Written by

International Stem Cell

First patient dosed in Phase I trial

Clinical update

Pharma & biotech

2 August 2016

Price

US$1.91

Market cap

US$6m

Net cash ($m) at 31 March 2016

1.5

Shares in issue

3.2m

Free float

55%

Code

ISCO

Primary exchange

OTC

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.7)

(48.8)

(35.4)

Rel (local)

(8.6)

(50.9)

(37.6)

52-week high/low

US$6.5

US$1.8

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 (hpSCs). Its lead candidate is a cell therapy treatment for Parkinson’s disease.

Next events

June quarter results

August 2016

Phase I preliminary data

Q117

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

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

International Stem Cell announced in July 2016 that it had dosed the first patient in the Phase I dose escalation study examining its neural stem cell product ISC-hpNSC for the treatment of moderate to severe Parkinson’s disease. The study will enrol 12 patients at three dosing regimens with a primary endpoint of safety, but will provide preliminary efficacy data measured at six and 12 months following the treatment.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/14

7.0

(8.7)

(9.71)

0.0

N/A

N/A

12/15

7.6

(4.6)

(1.29)

0.0

N/A

N/A

12/16e

8.2

(5.5)

(1.73)

0.0

N/A

N/A

12/17e

9.0

(5.8)

(1.83)

0.0

N/A

N/A

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

Optimal dose of cells sought

Patients on the study will be treated with 30m to 70m stem cells, delivered via intracranial injection. The single-arm, open-label study is being conducted at the Royal Melbourne Hospital in Australia. Clinical assessments are scheduled at six and 12 months following surgery, and the data from this trial will be used in the design of a future Phase II trial expected to initiate in late 2017 or 2018.

Trial will provide first evaluation of efficacy

In addition to safety, the trial will also provide physiological and functional assessments of the patients, which will give the first indication of the efficacy of the treatment in humans. Brain function will be directly assessed via PET scan to assess the degree of disease progression. Additionally, patients will be assessed via the six-point Unified Parkinson Disease Rating Scale (UPDRS), a qualitative functional scale of a patient’s mental state, muscle tone and ability to perform daily tasks.

Building on significant primate data

ISC-hpNSC has been previously evaluated in non-human primates, where it was found that the treatment increased the number of dopaminergic nerve fibers in the brain, resulting in an increase in the concentration of free dopamine. Additionally, the animals were assessed via functional assay for Parkinsonian symptoms, and those in the active arm showed a statistically significant improvement over control.

Valuation: $28m or $8.75 per basic share

We have increased our valuation to $28m (from $27m), but have reduced the valuation per basic share to $8.75 (from $9.60). This reflects higher cash ($1.5m vs $0.5m) offset by an increase in the number of shares (3.2m vs 2.8m previously). Otherwise our valuation remains unchanged. There remain approximately 19m in potentially dilutive shares from warrants, options and convertible preferred stock. We maintain that the company will need at least $76m in additional financing before profitability in 2024.

Got stem cells on the brain?

On 28 July 2016, International Stem Cell Corporation announced that it had initiated the Phase I trial of ISC-hpNSC for the treatment of Parkinson’s disease (PD). ISC-hpNSC is the company’s proprietary neural stem cells (NSC) derived from a human parthenogenetic stem cell line (hpSC). The trial is a dose escalation study designed to evaluate the safety of the intracranial injection of between 30m and 70m cells. The trial will also evaluate the treatment for efficacy by monitoring changes in brain function via PET scan, as well as functional assessment via the UPDRS over the course of 12 months. The study will be performed at the Royal Melbourne Hospital in Australia and has a targeted enrolment of 12 moderate to severe PD patients.

The UPDRS is the most common standardized assessment used to monitor the progression and severity of PD in the clinical setting. It comprises six sections including both patient and clinician evaluation of motor function, mood and the ability to perform daily tasks (Exhibit 1).

Exhibit 1: Unified Parkinson Disease Rating Scale

Section

Description

Assessments

1

Mental assessment

Intellectual impairment, thought disorder, depression and initiative

2

Patient scored evaluation of ability to perform daily activities

Hygiene, food preparation, dressing, avoiding falls, speech, tremor etc.

3

Clinician scored motor assessment

Measures of function (tremor, rigidity, posture), functional assessments (ability to rise from a chair, gait, speech) and evaluation of specific muscle groups (fingers, face, legs)

4

Complications associated with therapy

Rate of dyskinesia, assessments of "off" periods, other complications of treatment (nausea, insomnia, etc)

5

The Modified Hoehn Yahr Staging

Global evaluation ranging from no visible signs of disease to wheelchair-bound state

6

Schwab & England Activities of Daily Living Scale

Degree of independence from care givers ranging from completely independent to inability to swallow or perform bowel movements

Source: National Parkinson Foundation

The data from this trial will provide the first assessment of ISC-hpNSC in humans. However, the treatment was previously studied in non-human primates (Exhibit 2). In this model, the treatment successfully increases the number of dopaminergic neurons in the animals’ brains measured post-mortem. This was accompanied by an increase in the concentration of free dopamine (up to approximately 200% dependent on brain region), indicating that the neurons were functional. Finally, the animals treated with ISC-hpNSC showed statistically significant improvement over the control animal on an assessment of Parkinsonian symptoms (ParkScore).

Exhibit 2: ISCO preclinical data

Source: International Stem Cell presentation

PD affects 7-10 million people worldwide with approximately 1.5 million in the US. The most widespread treatment for the disease is the combination of levodopa and carbidopa, which provides the brain with dopamine lost by the death of dopaminergic neurons. The majority of clinical development in the space has been focused on the reformulation of this and other treatment regimens and, to date, no disease-modifying therapies have been approved. A small number of gene and cell therapies focused on changing the course of the disease have entered the clinic (Exhibit 3).

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

Company (originator)

Stage of development

Description

Therapeutic modality

Milestones/comments

Living Cell Technologies

Phase IIa

Choroid plexus cell product that secretes neurotrophins and cerebrospinal fluid (CSF)

Cell therapy

Phase IIb start Q116; NTCELL decreased UPDRS by an average of 16 points after 58 weeks, representing a three- to four-year reversal of neurological deterioration.

International Stem Cell

Phase I

Neuronal cells derived from human parthenogenetic stem cells (hpSC)

Cell therapy: Stem cell

Phase I preliminary data (Q416).

uniQure NV

Phase I

Adeno-associated viral (AAV) vector carrying the glial cell-derived neurotrophic factor (GDNF) gene

Gene therapy: Viral vector: Adeno-associated virus (AAV)

The aim of this clinical trial is to introduce GDNF in a targeted way to the brain to enhance outcomes. NIH research at UCSF with option to license.

Voyager Therapeutics

Phase II

Adeno-associated virus (AAV) serotype 2 encoding the dopa decarboxylase (DDC; AADC) gene injected into the putamen

Gene therapy: Viral vector: Adeno-associated virus (AAV)

Phase Ib data (H216).

Oxford BioMedica

Phase I/II

LentiVector carrying three genes encoding enzymes for dopamine synthesis

Gene therapy: Viral vector: Lentivirus

Preclinical studies in the industry standard in vivo model of Parkinson’s disease have shown that, following a single treatment, almost complete recovery of movement behavior was achieved after five to eight weeks. Therapeutic effect was statistically significant (p<.0.05) after two weeks and was maintained throughout the duration of the preclinical studies, with the latest time point being 44 months.

Source: BioCentury, Edison Investment Research

The announcement that the first patient has been dosed in this trial is consistent with our previously predicted timeline, and we currently expect that the company will be able to progress to a Phase II study in late 2017 or 2018 depending on the safety and efficacy profile discovered in the current trial (preparations may begin at the six-month interim update if early efficacy is seen, or later if the maximum tolerable dose is not reached early); however, we do not expect preliminary data until Q117 (previously Q416). We currently model commercialization of the product in 2024.

Valuation

We are increasing our valuation to $28m (from $27m) based on an increase in cash reported in Q116 following the March 2016 equity offering. However, the valuation per share has been reduced to $8.75 per basic share (from $9.60) based on an increase in the number of shares outstanding. The total number of basic shares increased from 2.8m to 3.2m due to the offering and the subsequent exercise of 290k shares worth of warrants and convertible preferred stock (announced in June 2016). Approximately 19m potentially dilutive shares from warrants, options and preferred stock remain outstanding. Our valuation is otherwise unchanged.

Exhibit 4: rNPV valuation model

Product

Status

Launch

Peak sales ($m)

NPV
($m)

Probability

rNPV
($m)

NPV/share ($/share)

Cosmetic and biomedical business

Commercial

Current

22

29

90%

26

8.21

Parkinson’s disease (royalties at 12% of sales)

Phase I/IIa

2024

2,800

408

7.5%

31

9.68

G&A expense – after tax

100%

(30)

(9.52)

Net cash (at end Q116)

1.5

100%

1.5

0.48

Valuation

 

 

 

438

 

28

8.75

Source: Edison Investment Research estimates

Financials

International Stem Cell reported a loss of $14.6m for Q116, although the majority of this was a non-cash charge for the change in fair value of warrants following the March 2016 offering ($13.4m). We have adjusted our 2016 projections to include this charge and include $19.6m in warrant liability on our balance sheet. The company reported $1.6m in sales from the cosmetic and biomedical business, which translated into a $1.2m operational loss for the quarter. We maintain our forecast of $5.5m in cash losses for 2016, expanding to $15m in 2022 with the advancement of the clinical program. We project financing needs of at least $76m by 2023, which we record as illustrative debt.

Exhibit 5: Financial summary

US$000

2013

2014

2015

2016e

2017e

2018e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

6,150

7,017

7,551

8,167

9,043

9,924

Cost of Sales

(1,643)

(1,921)

(2,056)

(2,205)

(2,442)

(2,580)

Gross Profit

4,507

5,096

5,495

5,962

6,601

7,344

Research and development

(3,560)

(5,386)

(2,707)

(4,000)

(4,000)

(6,000)

EBITDA

 

 

(8,007)

(9,138)

(5,036)

(5,524)

(5,218)

(6,811)

Operating Profit (before amort. and except.)

(7,543)

(8,680)

(4,564)

(5,052)

(4,746)

(6,339)

Intangible Amortization

0

0

0

0

0

0

Exceptionals

0

0

0

(13,401)

0

0

Other

(2,930)

(3,796)

1,929

0

0

0

Operating Profit

(10,473)

(12,476)

(2,635)

(18,453)

(4,746)

(6,339)

Net Interest

(3)

(2)

0

(480)

(1,080)

(1,680)

Profit Before Tax (norm)

 

 

(7,546)

(8,682)

(4,564)

(5,532)

(5,826)

(8,019)

Profit Before Tax (reported)

 

 

(10,476)

(12,478)

(2,635)

(18,933)

(5,826)

(8,019)

Tax

0

0

0

0

0

0

Profit After Tax (norm)

(10,476)

(12,478)

(2,635)

(5,532)

(5,826)

(8,019)

Profit After Tax (reported)

(10,476)

(12,478)

(2,635)

(18,933)

(5,826)

(8,019)

Average Number of Shares Outstanding (m)

0.8

1.3

2.0

3.2

3.2

3.2

EPS - normalized (US$)

 

 

(12.77)

(9.71)

(1.29)

(1.73)

(1.83)

(2.51)

EPS - normalized and fully diluted (US$)

 

(12.77)

(9.71)

(1.29)

(1.73)

(1.83)

(2.51)

EPS - (reported) (US$)

 

 

(12.77)

(9.71)

(1.29)

(5.93)

(1.83)

(2.51)

Dividend per share (US$)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

73.3

72.6

72.8

73.0

73.0

74.0

EBITDA Margin (%)

N/A

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

N/A

BALANCE SHEET

Fixed Assets

 

 

3,113

3,563

4,147

4,541

4,953

5,383

Intangible Assets

2,250

2,795

3,223

3,690

4,157

4,624

Tangible Assets

830

714

864

791

736

699

Investments

33

54

60

60

60

60

Current Assets

 

 

4,626

3,616

2,991

6,357

7,745

6,924

Stocks

1,369

1,517

1,348

1,458

1,614

1,772

Debtors

306

453

539

583

645

708

Cash

2,243

1,111

532

3,743

4,914

3,872

Other

708

535

572

572

572

572

Current Liabilities

 

 

(7,021)

(6,858)

(5,544)

(21,553)

(21,680)

(21,807)

Creditors

(7,021)

(6,858)

(5,544)

(21,553)

(21,680)

(21,807)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

0

0

0

(6,000)

(13,500)

(21,000)

Long term borrowings

0

0

0

(6,000)

(13,500)

(21,000)

Other long term liabilities

0

0

0

0

0

0

Net Assets

 

 

718

321

1,594

(16,655)

(22,481)

(30,500)

CASH FLOW

Operating Cash Flow

 

 

(5,635)

(6,413)

(4,120)

(4,645)

(4,366)

(5,960)

Net Interest

(3)

(2)

0

(480)

(1,080)

(1,680)

Tax

0

0

0

0

0

0

Capex

(896)

(988)

(738)

(866)

(884)

(901)

Acquisitions/disposals

0

0

0

0

0

0

Financing

8,123

6,270

1,169

2,500

0

0

Dividends

0

0

0

0

0

0

Net Cash Flow

1,589

(1,133)

(3,689)

(3,492)

(6,330)

(8,541)

Opening net debt/(cash)

 

 

(654)

(2,243)

(1,111)

(532)

2,257

8,586

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

3,110

703

(0)

0

Closing net debt/(cash)

 

 

(2,243)

(1,110)

(532)

2,257

8,586

17,128

Source: Edison Investment Research, company reports

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DISCLAIMER
Copyright 2016 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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