Dems for Stems
By Will Swarts
November 8, 2006
StemCells (STEM1)
Share price as of Tuesday's close: $3.07
Share price now: $3.39
Percent change: 10.4%
Volume: 16.4 million shares, daily average 1.4 million
The News
Missourians narrowly approved a ballot measure that encourages stem-cell research in their state on Tuesday, prompting investors to vote with their wallets. Shares of a basket of biotechnology companies specializing in stem cells rose on Wednesday.
A chief beneficiary of the "Missouri Stem Cell Research and Cures Initiative2" was StemCells (STEM3), whose shares popped 10% on the referendum's slim 51%-49% margin of victory. The initiative ensures access to federally permitted stem-cell research for scientists, doctors and patients in the state. Other shares enjoying a bump included those of Geron (GERN4), one of the largest and best-known stem-cell research operations, Aastrom Biosciences (ASTM5) and Cytori Therapeutics (CYTX6).
None of the stem-cell companies is profitable, and all their stocks are down for the year to date. But as stem-cell research assumed a larger role in the Missouri campaign, many of these stocks enjoyed healthy run-ups as investors bet on changes surrounding a hot-button issue. The state issue received national attention after conservative talk radio host Rush Limbaugh ridiculed an endorsement for Democratic senatorial candidate Claire McCaskill that featured the actor Michael J. Fox, who suffers from Parkinson's disease. In the political commercial, Fox trembles visibly; Limbaugh claimed the actor was exaggerating his symptoms.
McCaskill narrowly edged incumbent Republican Jim Talent in the Senate race.
But far away from the Show Me State, stem-cell research companies notched a short-term win for their stock prices. That likely won't last, say industry watchers, because the external issues have no bearing on these companies' fundamental performance. Similar measures in New Jersey and California prompted similar price moves several years ago.
But looking ahead, the Missouri initiative changes the playing field for an area of scientific research that's been inhibited by federal legislation. Until the Senate voted July 18 to reverse President Bush's ban on research on embryonic stem-cell lines created before 2001, ongoing research was hobbled and was unable to find connections to larger industrial partners that could create commercial applications for treating diseases, says Steve Brozak, an analyst at WBB Securities in San Diego.
"There's been a visible absence of large pharmaceuticals and large biotech in the field," he says. "So what you've got is a situation where there's been a stultifying effect on all these independent researchers."
The Analysis
No company was better poised for a one-day lift than Palo Alto, Calif.-based StemCells, observes Jose Haresco, an analyst at Merriman Curhan Ford & Co. It's equally vulnerable to a bit of a drop-off once the buzz fades, largely because it's heavily owned by retail investors, who are more volatile in their buying and selling than large institutional investors.
"It's the perfect ticker," he says. "It swings wildly on anything that affects it politically, but fundamentally that doesn't affect the company at all."
Brozak, who doesn't cover StemCells, concurs, and says he's not sure lots of these short-term players even fit the mold of typical biotech investors, who must have a high risk tolerance for the volatile sector.
"Look at the symbol: Do you think the people who are investing today really have a clue about what they're investing in?" he says. "They are sitting and watching CNBC, and sitting by computers and day trading."
That's not to dismiss the company's real efforts. StemCells last year was cleared by the Food and Drug Administration to begin a Phase I trial on a treatment based on neural stem cells for Batten disease, a fatal neurodegenerative disorder. The disease is caused by genetic mutations that result in a defective or missing enzyme. Batten patients, who are often diagnosed as young children, experience mental impairment, seizures, sight loss and declining motor skills. Eventually, patients become blind, bedridden and unable to communicate. Few survive past their early 20s, according to the Batten Disease Support and Research Association.
The Bottom Line
The electoral effect on these stocks won't last, but the signal Missouri sent to the stem-cell research sector and to investors looking for opportunities is clear nevertheless.
"These stocks are volatile, and they face a drop every time something bad happens" on the legislative front, Haresco says. "They should find a new level of support given the new political climate."
While the single state endorsement of stem-cell research in principle isn't grounds to expect hyper-advanced genetic tinkering and the unveiling of cures for hereditary diseases in the next few weeks, Broszak says a wider shift in regulatory attitudes is likely.
"This is the first hole in the dike," he says, "and it's saying that there is not a valid reason for this research not to take place ? in several locations."
Links in this article:
1http://www.smartmoney.com/eqsnaps/index.cfm?story=snapshot&symbol=STEM
2http://www.sos.mo.gov/elections/2006petitions/ppStemCell.asp
3http://www.smartmoney.com/cfscripts/Director.cfm?searchString=STEM
4http://www.smartmoney.com/cfscripts/Director.cfm?searchString=GERN
5http://www.smartmoney.com/cfscripts/Director.cfm?searchString=ASTM
6http://www.smartmoney.com/cfscripts/Director.cfm?searchString=CYTX
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http://www.smartmoney.com/onedaywonder/index.cfm?story=20061108