The entirety of the long investment game comes down to being able to accurately spot the undervalued. Undervaluation exists for many reasons. In biotech it’s often a simple matter of lack of awareness in the market of a given company with promise. It’s easy enough to just find those and call them undervalued, but obviously it doesn’t always work that way. It’s not as simple as a game of stock hide-and-seek.
But sometimes, a company we find suffers not only from a general lack of awareness, but from a more fundamental misunderstanding of its structure even among the investors that take notice.
Market Exclusive has been following Pluristem Therapeutics Inc. (NASDAQ:PSTI) since July, and for reasons that we will detail below, we see the stock as extremely undervalued, and we don’t use that phrase flippantly, or often. Following a crucial $30 million investment in the company by leading Chinese healthcare-focused venture capital firm Innovative Medical, a subsidiary of China’s $11 billion ZSVC, our staff had the opportunity to speak with President & COO Yaky Yanay, from whom we learned much about the company’s structure, future, and prospects, including why a Chinese VC would pour so much money into what is now a $120 million small cap company.
Pluristem is an Israeli Nasdaq-listed Phase III-ready biotech developing placental cell-based therapies for critical unmet needs. Like many of the stocks we cover, it is developing stage with a promising pipeline, but the problem is that’s where most stop with their analysis. Unlike most of the young pharmaceutical firms we analyze, Pluristem’s capital resources go far beyond its treatment pipeline. What makes Pluristem stand out and what most simply overlook is that it controls its own proprietary manufacturing technology for the pipeline that it is developing.
In order to produce the placental cells that are the core of its pipeline, Pluristem must tailor each cell line to a specific indication, and it does this through 3D manufacturing technology. While the tech is precise and complicated, the concept is simple. Cells from donated human placentas are cultured in 3D incubators meant to mimic the environment of the human body, with each group of cells “poked and prodded” so to speak in such a way as to have them produce the desired cytokines for a given indication. Pluristem is currently pursuing several different ones, three of which are fast approaching Phase III.
Pluristem has in the past been approached by established pharma companies to provide contract manufacturing services making use of this tech, but has steadfastly and repeatedly refused the CMO path. It has other ambitions, which we’ll get to shortly, but just the fact that it has this capability theoretically, means that its manufacturing capabilities alone gives it high value. Cells have been cultured in Petri dishes for 70 years. This method is hopelessly outdated, and Pluristem’s patented manufacturing facilities may constitute a paradigm shift for the whole cell therapy industry.
Why is Pluristem so undervalued?
Right now Pluristem is only a $120 million company. This is exceedingly small considering that it is Phase III ready, a single pivotal trial that has the go-ahead from regulators in the United States, Europe, and most recently the United Kingdom (with a separate pivotal OKed by regulators in Japan), has $63 million in cash on its balance sheet following the Innovative Medical investment that valued its shares at a 15% premium to market even now, and has its own manufacturing capabilities. Rarely will you see this magnitude of a market misread.
Its lead pipeline candidate is called PLX-PAD (placental expanded cells) for critical limb ischemia. This condition results from a clogged circulatory system in the legs, for which the only currently available treatment is revascularization, a complicated and costly procedure that not all sufferers are candidates for. The condition generally deteriorates to the point where amputation is necessary, and death is unfortunately common for those who cannot undergo revascularization surgery.
PLX-PAD is manufactured from human placental cells with no immunogenicity, meaning they are off-the-shelf and require no immune matching. The company is about to kick off a 250-patient multinational CLI trial that will underpin a regulatory submission in both the US and Europe and the UK concurrently, and this together with another pivotal in Japan for the same product, same indication, which management expects will be sufficient to support a regulatory approval filing there as well.
The recent deal with Innovative Medical, besides giving a financial boost, gives the company an additional foot in the door of the labyrinthine Chinese regulatory apparatus. Cell therapy used to be legal in China for any hospital to engage in at its own discretion, and was only recently outlawed in favor of strict regulation. If the joint European/US/UK CLI trial succeeds, we can expect the same in Japan and regulatory follow up in China with its new partner’s help.
On the partnering front, Innovative Medical will have a seat on Pluristem’s board as long as it owns at least 12.5% of shares outstanding. This means the VC is actively with Pluristem and not just handing money over to buy discounted stock to sell at market just to make a quick buck. If this were the case, not only would Innovative Medical not get a seat on Pluristem’s board, but they wouldn’t have offered to buy shares at a double digit premium that still holds even after the news is out.
A Loaded Spring
What we have in Pluristem is a powerfully loaded spring. A dual Phase III pivotal beginning early next year in an estimated $12 billion market with virtually no competition on the horizon, another trial for the same in Japan to begin early next year as well, its own manufacturing capabilities, a foot in the door to what is a massive Chinese market estimated at 30 to 60 million CLI sufferers, $8 million in EU funding for its upcoming Phase III with $63 million in cash and a quarterly burn of less than $6M – nothing about its current valuation seems to make any sense.
We believe, first and foremost, that its manufacturing capabilities are being completely overlooked, and that if and when the U.S/Europe pivotal Phase III to begin in the coming months succeeds, investors will take notice of not just the CLI market at its disposal, but everything else about the company that should give it a much higher valuation even now, before any of its treatments have been proven beyond Phase I.
The data for those trials, by the way, are impressive as well, which we detailed back in August.
And if, indeed, the CLI trial succeeds, Pluristem will be looking for a partner to help market and distribute PLX-PAD. But the critical point here is what it will not be looking for, and that is a manufacturer. Amgen, Inc.(NASDAQ:AMGN) and Genentech, now a subsidiary of Roche Holding Ltd. (ADR) (OTCMKTS:RHHBY) both became Big Pharma by controlling manufacturing, since by doing so they could bring home much more than a meager 10% royalty on any partnership. The market hasn’t figured this out yet with Pluristem and is still for whatever reason looking at the company as just another speculative long shot with a wishful pipeline. One success though could open the floodgates on this one, as investors will suddenly realize what they have up to now ignored.
Company COO Yanay summed it up well:
“ZSVC and Innovative Medical are leading strategic institutional investors, focused on technology and life science in China, that can contribute to Pluristem’s development in the coming years and we look forward to forming a long term partnership with them. Upon closing this transaction, Pluristem will have a strong balance sheet, to advance the pivotal Phase III trials of our PLX cells towards large markets. The transaction, we believe, can significantly enhance Pluristem’s development, building value to our shareholders and supporting our strategy to demonstrate the advantages of Pluristem in the cell therapy space.”
Disclosure: At time of writing, the author was long PSTI.