International Stem Cell Corporation (ISCO) - 2010 Conference Call: My Take on the Call

Today I listened in on International Stem Cell Corporation's (ISCO) annual conference call. Here's my take on company chairman Ken Aldrich's remarks in the call, the content of which he describes as a "roadmap" for what investors can expect in 2010:

First, Aldrich spent some time discussing why ISCO is not like other stem cell companies. One of the primary reasons that ISCO is different is that it has developed and patented the technology to create its own in-house universal stem cell bank; you will see in recent literature from ISCO that the name of this stem cell bank is called "UniStemCell." Whereas company's like Geron (GERN) have to forge licensing agreements to obtain stem cells, ISCO has its own stem cell bank to draw from. This asset allows ISCO to develop therapeutic applications in-house as well as license the use of its stem cell lines to other research companies. Aldrich did not use the term, but other literature I have found from ISCO describes this business model as an "Intel Inside" approach. By licensing its cell lines to other companies, ISCO intends to derive revenues both from the use of the cell lines as well as from any advancements that become viable products. Unlike other stem cell companies that are primarily focused on clinical trials to find specific cures, ISCO is primarily focused on distributing its cell lines to other companies.

Second, Aldrich points out that ISCO's proprietary stem cell technology (human parthogenic stem cell -- hpSC) also differentiates it from other stem cell companies. Whereas other stem cell companies face ethical problems by using fertilized eggs and human embryos, ISCO's technology uses non-fertilized eggs. From donated eggs, ISCO's hpSCs are pluripotent, meaning that the stem cells can become virtually any cell type of the human body; Aldrich describes an "unlimited" potential as to the range of degenerative diseases that may ultimately find cures because of this technology. ISCO's hpSCs also do not have the same negative effects of embryonic stem cells. Specifically, ISCO's stem cells don't have the problems of immune rejection as other stem cells do. ISCO has signed agreements with a couple invitro centers in California whereby carefully selected egg donors can donate their unfertilized eggs to ISCO. Through a process that takes roughly 9 months from receipt of the donor egg, ISCO can then create an "immortal" stem cell line that lasts forever. ISCO has estimated that roughly 50 to 100 carefully selected donors representing the various races and ethnicities can cover all of the distinctive genetic differences of the global population. In addition to its stem cell bank in California, ISCO is looking to partner with companies in other parts of the world whereby it can identify the right donors from different ethnic groups.

Third, ISCO is focusing some of its in-house research on treatments for the eye. Using its stem cell technology, ISCO has developed the first cornea ever created in a petri dish. ISCO plans on selling these corneas to pharmaceutical and research companies. This is another important ethical development from ISCO because traditionally, pharmaceutical companies use live rabbits to test toxicity on their eyes. ISCO's corneas may finally put an end to this horrible practice. ISCO expects to derive revenue from its cornea toxicity testing tools in the near future. Sticking with the eye, ISCO is also close to a "breakthrough" for a therapeutic application for the retina; no other details were provided.

Fourth, ISCO is focusing some of its in-house research on treatments for liver disease. Specifically, the company is focusing in on applications for acute liver failure. ISCO's liver cells created from its stem cells may be able to cause some level of "regeneration" of the liver. While Aldrich does not foresee whole livers being recreated, he does see the potential for some regenerative features. No timeline was provided as to when we might expect an announcement on its liver technology but Aldrich said that the company is getting "close."

Finally, and perhaps the most exciting news of all, is that ISCO currently has a skin cream application that is being tested and verified by independent third parties. He expects this process to take a month or two. Previously, ISCO announced the hiring of an experienced executive from the skin care industry who will be charged with developing a marketing and distribution plan for the skin care product. ISCO's skin cream has been tested in-house on facial wrinkles around the eyes and lips. Aldrich described the results from in-house testing of its skin cream as a "significant" difference, a "demonstrable" difference from other skin care products currently on the market. Aldrich sees this advanced skin cream, which was also created from its stem cell technology, as "distinctive" from anything else out there. Aldrich did not provide a timeline but I gather from his remarks that the company will start selling a skin care product some time this year. I've done some research on price points and distribution, and I think that ISCO can sell a vial of this cream for a minimum of $200 for each vial; I would like to see the price point closer to $300 to $400. Aldrich said that no decision has been made as to whether it will distribute the product through an established skin care company or whether it will distribute it alone. For long-term shareholders, it is best if ISCO sells the skin cream itself. While this approach will have significant upfront capital requirements (ISCO doesn't have much cash... which means ISCO would have to use some form of debt financing), over the long term the earnings and profit potential from producing the skin cream in-house will far outweigh the short-term costs. My guess is that we should know more in the next couple months about which way ISCO will go. I also think that ISCO should contact the folks at Oprah and see if they can get the product on her show.

In 2010, we can expect more key hirings and more patents to come down the pipeline. And for those concerned about its cash position, Aldrich did not seem too concerned. He says that the company is in a "strong" position in terms of its capital requirements. Aldrich also said that he doesn't want to see too much more dilution of its shares, so I am not sure where he is expecting to get the cash from... unless he expects to start generating significant revenue sooner rather than later. Stay tuned. And for a further boost of confidence, Aldrich says he is not at all concerned with competition in the field.

My take from the call is this: in 2010 we can expect ISCO to start seeing revenues from at least three streams - (1) cornea toxicity testers... probably within months, (2) stem cell lines... probably by the end of the year, and (3) an advanced skin cream... my guess is we will see the cream in the market by the fall and certainly before the holiday shopping season. My guess is that we also see ISCO's shares being traded on Nasdaq by the end of the year. I'm still not sure how the company plans to finance its operations in the near term. I know Aldrich is not at all concerned about this, but shareholders nevertheless should be because according to what I am reading from the company's most recent financial filings, ISCO has less than half million left in cash and it burns at least that much cash each month. We'll know soon enough how Aldrich plans to address this issue.

Disclosure: I do not currently own shares of ISCO... but I am a prospective investor.

Peace

Jeremy