International Stem Cell

Phase I progressing

Financial update

Pharma & biotech

14 December 2016

Price	US$1.33
Market cap	US$5m

Net cash ($m) at 30 September 2016		0.7

Shares in issue	3.6m
Free float	55%
Code	ISCO

Primary exchange	OTC
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(26.1)	(29.6)	(69.2)
Rel (local)	(29.6)	(34.1)	(72.7)

52-week high/low

US$5.0

US$0.9

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

Phase I preliminary data

Q117

Analysts

Maxim Jacobs	+1 646 653 7027
Nathaniel Calloway	+1 646 653 7036

healthcare@edisongroup.com

Edison profile page

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

International Stem Cell recently announced that the first two patients in its Phase I trial in Parkinson’s disease (PD) had successfully undergone intracranial transplants of ISC-hpNSC without complications. The study will enroll 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	7.5	(4.8)	(1.26)	0.0	N/A	N/A
12/17e	8.3	(6.0)	(1.57)	0.0	N/A	N/A

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

Parkinson’s trial ongoing

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

Besides 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.

Preclinical safety studies published

In the 30 September issue of Scientific Reports, a journal from the publishers of Nature, data from in vitro and in vivo preclinical studies showed that the company’s ISC-hpNSC cells are devoid of undifferentiated pluripotent stem cells and are safe for transplantation due to the low risk of tumorigenicity. In another preclinical study, ISC-hpNSC cells improved cognitive performance and motor coordination in rodents with traumatic brain injury.

Valuation: $24m or $7.57 per basic share

We have decreased our valuation from $28m or $8.75 per basic share to $24m or $7.57 per basic share. This is primarily due to a lower value for the cosmetic business, due to lower than expected revenues, as well as a lower cash balance and a higher share count. There remain approximately 17.9m potentially dilutive shares from warrants, options and convertible preferred stock. We project that the company will need at least $73m (previously $76m) in additional financing before profitability in 2024, of which $10.5m will be required by the end of 2017.

ISC-hpNSC for Parkinson’s disease

International Stem Cell Corporation has announced that the first two patients in its Phase I trial in Parkinson’s disease (PD) have successfully undergone intracranial transplant of ISC-hpNSC without complications. It had initiated the Phase I trial of ISC-hpNSC for the treatment of PD in July. ISC-hpNSC are 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 is being 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 increased 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 two patients have been dosed in this trial is consistent with our previously predicted timeline. 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 have decreased our valuation from $28m or $8.75 per basic share to $24m or $7.57 per basic share. This is primarily due to a lower value for the cosmetic business due to lower than expected revenues, as well as a lower cash balance and a higher share count. There remain approximately 17.9m potentially dilutive shares from warrants, options and convertible preferred stock.

Exhibit 4: Risk-adjusted NPV valuation model

Product	Status	Launch	Peak sales ($m)	NPV ($m)	Probability	rNPV ($m)	NPV/share ($/share)
Cosmetic and biomedical business	Commercial	Current	22	26	90%	24	7.38
Parkinson’s disease (royalties at 12% of sales)	Phase I/IIa	2024	2,800	408	7.5%	31	9.58
G&A expenses – after tax					100%	(31)	(9.62)
Net cash (at end Q316)				0.7	100%	0.7	0.48
Valuation				435		24	7.57

Source: Edison Investment Research estimates

Financials

International Stem Cell reported revenues of $1.9m for Q316, down 9% compared to Q315. This decline was due to weakness in the cosmetic business, which reported sales of $0.65m for the quarter, down 30% compared to the same quarter last year. The reason for this weakness has not been disclosed, but the company has said previously that the cosmetic business is non-core and it would limit investments in that area. The biomedical business continues to grow, reporting revenues of $1.3m in Q316, up 7% compared to Q315. For the company as a whole, the operating loss was $1.3m. We have adjusted our model to reflect weaker cosmetic business sales than we had forecast as well as lower R&D spending in 2016 thus far.

Exhibit 5: Changes to estimates

$000s	Revenue			Operating profit			Profit after tax
$000s	Old	New	% change	Old	New	% change	Old	New	% change
2016e	8,167	7,471	(8.5%)	(5,052)	(4,803)	4.9%	(5,532)	(4,803)	13.2%
2017e	9,043	8,311	(8.1%)	(4,746)	(5,130)	(8.1%)	(5,826)	(5,970)	(2.5%)
2018e	9,924	9,156	(8.4%)	(6,339)	(6,749)	(6.5%)	(8,019)	(8,189)	(2.1%)

Source: Edison Investment Research. Note: Operating profit and profit after tax exclude amortization of acquired intangibles, exceptional items and share-based payments.

We project the company will need at least $73m (previously $76m) in additional financing before profitability in 2024, of which $10.5m will be required by the end of 2017, which we record as illustrative debt in Exhibit 6.

Exhibit 6: 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	7,471	8,311	9,156
Cost of Sales		(1,643)	(1,921)	(2,056)	(2,017)	(2,244)	(2,381)
Gross Profit		4,507	5,096	5,495	5,454	6,067	6,776
Research and development		(3,560)	(5,386)	(2,707)	(2,800)	(4,000)	(6,000)
EBITDA		(8,007)	(9,138)	(5,036)	(5,131)	(5,458)	(7,077)
Operating Profit (before amort. and except.)		(7,543)	(8,680)	(4,564)	(4,803)	(5,130)	(6,749)
Intangible Amortization		0	0	0	0	0	0
Exceptionals		0	0	0	1,676	0	0
Other		(2,930)	(3,796)	1,929	0	0	0
Operating Profit		(10,473)	(12,476)	(2,635)	(3,127)	(5,130)	(6,749)
Net Interest		(3)	(2)	0	0	(840)	(1,440)
Profit Before Tax (norm)		(7,546)	(8,682)	(4,564)	(4,803)	(5,970)	(8,189)
Profit Before Tax (reported)		(10,476)	(12,478)	(2,635)	(3,127)	(5,970)	(8,189)
Tax		0	0	0	0	0	0
Profit After Tax (norm)		(10,476)	(12,478)	(2,635)	(4,803)	(5,970)	(8,189)
Profit After Tax (reported)		(10,476)	(12,478)	(2,635)	(3,127)	(5,970)	(8,189)

Average Number of Shares Outstanding (m)		0.8	1.3	2.0	3.8	3.8	3.8
EPS - normalised (US$)		(12.77)	(9.71)	(1.29)	(1.26)	(1.57)	(2.16)
EPS - normalised fully diluted (US$)		(12.77)	(9.71)	(1.29)	(1.26)	(1.57)	(2.16)
EPS - (reported) (US$)		(12.77)	(9.71)	(1.29)	(0.82)	(1.57)	(2.16)
Dividend per share (c)		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	4,835	5,429	6,040
Intangible Assets		2,250	2,795	3,223	3,815	4,407	4,999
Tangible Assets		830	714	864	960	962	981
Investments		33	54	60	60	60	60
Current Assets		4,626	3,616	2,991	4,965	6,922	6,644
Stocks		1,369	1,517	1,348	1,334	1,484	1,635
Debtors		306	453	539	533	593	654
Cash		2,243	1,111	532	2,526	4,273	3,784
Other		708	535	572	572	572	572
Current Liabilities		(7,021)	(6,858)	(5,544)	(7,255)	(7,377)	(7,499)
Creditors		(7,021)	(6,858)	(5,544)	(7,255)	(7,377)	(7,499)
Short term borrowings		0	0	0	0	0	0
Long Term Liabilities		0	0	0	(3,000)	(10,500)	(18,000)
Long term borrowings		0	0	0	(3,000)	(10,500)	(18,000)
Other long term liabilities		0	0	0	0	0	0
Net Assets		718	321	1,594	(455)	(5,525)	(12,815)

CASH FLOW
Operating Cash Flow		(5,635)	(6,413)	(4,120)	(4,212)	(3,991)	(5,610)
Net Interest		(3)	(2)	0	0	(840)	(1,440)
Tax		0	0	0	0	0	0
Capex		(896)	(988)	(738)	(1,016)	(922)	(939)
Acquisitions/disposals		0	0	0	0	0	0
Financing		8,123	6,270	1,169	3,519	0	0
Dividends		0	0	0	0	0	0
Net Cash Flow		1,589	(1,133)	(3,689)	(1,709)	(5,753)	(7,989)
Opening net debt/(cash)		(654)	(2,243)	(1,111)	(532)	474	6,227
HP finance leases initiated		0	0	0	0	0	0
Other		0	1	3,110	703	0	0
Closing net debt/(cash)		(2,243)	(1,111)	(532)	474	6,227	14,216

Source: International Stem Cell accounts, Edison Investment Research

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