The commercial value and business of human ES cells

The human embryonic stem (ES) cell field is one of the most exciting and complex opportunities of today's biomedical industry, write Peter Mountford and Kenzo Nakajima.

As a major new field of business, the human ES cell industry must not only address the complex technical and commercial issues of an emerging biotechnology field, but also a labyrinth of ethical and legal considerations which often differ throughout the world.

The prospective commercial value of the human ES cell industry has naturally attracted wide-ranging investor interest from many different individuals and organisations hoping to benefit from potentially very large new markets. In the absence of an established market, where profitability would provide the major reference for valuation, the value of the ES cell industry will be determined and adjusted according to investor estimation of growth potential on a risk/reward basis.

A different business model

The criteria for measuring risk and reward will be different for different types of investors and also the timing and duration of the actual investment. For example, an opportunistic investor might invest in a publicly traded company without risk evaluation simply on the basis of a rumour that might deliver a short-term gain.

Alternatively, a strategic investor such as a pharmaceutical company that supplies insulin may determine that the risk of losing market share to a new cell-based therapy product may warrant, after a detailed review, a significantly longer-term investment in the emerging field.

Many different investments will be made, by many different investors, throughout the period in which the potential value of the industry is transformed into real products.

Irrespective of the nature or success of these investments, the industry must face an unavoidable fact that the real benefits and value of the human ES business will only be delivered by significant long-term strategic investment from many different sources.

Success in this field is likely to require a different business model to that of classical venture capital funded development.

A wide range of applications

An unlimited supply of laboratory grown normal human cells of potentially any cell type would find multiple applications in many, if not most, fields of human biomedical research. The most valuable commercial applications for human ES cell products are likely to be in cell-based biopharmaceutical research and cell-based gene and tissue therapies.

Projected market estimates for human ES cell products vary widely, depending upon their source, though almost all predict substantial opportunities through the replacement of existing products and the development of entirely new markets.

Industry estimates for cell-based screening products predict the total market will reach US$700 million per annum by 2009. Although it is difficult to determine the proportion of the market that human ES cell products will capture, a very wide range of applications are foreseeable when combining high-precision genetic engineering with the renewable source of virtually any human cell type. The prospect of a diverse range of highly reproducible cell screens in otherwise unobtainable format currently promises a significant and rapidly growing industry opportunity for human ES cell-based research and development tools.

Estimating value

Value estimates for the human ES cell therapy industry are more difficult to predict, given the long lead time to market and uncertainty of successful product applications.

A confirmation of the significant nature of the cell therapy market can be determined by building from simple and conservative estimates for one therapeutic product in one specific market, to a wider industry based perspective.

For example, the USA currently has approximately one million patients suffering from type 1 diabetes, with an anticipated additional 50,000 new patients each year. If a company were to treat 20,000 patients per annum with a cell therapy product that delivered $5000 of profit per patient, then a cell therapy organisation could look forward to profits in the order of $100 million per year and a resultant market capitalisation for the company of about $2 billion.

In considering commercial value from a global, industry-wide perspective it would be reasonable to anticipate market opportunities of at least twice this size.

It would also be reasonable to expect that additional markets including neurodegenerative disease, liver disease and cardiac disease could foreseeably generate a commercial value to the human ES cell therapy industry that might be 10 or 20 times greater than the diabetes market.

In determining the commercial value of the human ES cell industry, investors must weigh this significant long-term potential against equally significant risks.

Risks in the human ES cell industry

Experienced investors can readily identify many risks both unique to this industry and common to high technology companies in general. Major risks include complex biology, long product development times, a need for multiple technologies, complex intellectual property and associated freedom to operate issues, multiple competitors, high cost of product development, uncertain and changing regulatory environments, and the frequently raised ethical and legal issues.

All of these risks are undeniable and ongoing and must be overcome by companies if they are to succeed in the industry.

Weak share market conditions further compound the challenge to early businesses in this field as it is difficult for higher risk companies to maintain valuation in volatile financial markets.

US stem cell company Geron's share price demonstrates the problem that the industry faces. Having raised nearly $70 million dollars at US$12 per share late in 2003, the company is now trading at less than half this valuation despite the enhanced cash resources.

One significant and ongoing risk the entire human ES cell industry faces is the need to balance the excitement and promise of the field against scientific and logistical realities.

Overstating the probability of success, understating the time needed to develop and deliver these new therapies, and avoidable early stage clinical failures resulting from poorly conducted or premature clinical trials can only lead to disappointment and a loss of support for the industry. With undeniable medical need, science advancing rapidly in the field, and the support of an unprecedented number of Nobel laureates, the human ES cell business is sure to continue to grow.

As science drives the opportunity for human ES cell products steadily closer, the question for longer-term strategic investors is currently moving from "can human ES cell deliver real benefit?" towards "when will human ES cells deliver their benefit and when should I invest?"

The anticipated lengthy development times for human ES cell products represents the greatest risk for the industry, and many companies will fail if they cannot establish sustainable business models that address this critical investor concern.

Today's human ES cell business

Risk capital for rapidly emerging high-risk businesses has typically been provided by the venture capital industry. The rapid growth of the IT industry is a particularly good example where a close match existed between the growth needs of an industry and the VC industry desire for rapid returns.

Unfortunately for the biotech sector, advances in the biomedical field typically take longer time to achieve and frequently more capital to realise than technological advances in silico.

This is, of course, particularly true for early-stage industries such as human ES cell-based cell therapies, which despite significant challenges and risk continues to grow rapidly.

As a model of high-technology industry, the human ES cell business, with its enormous potential and matching levels of risk, represents an exciting environment for the evolution of entrepreneurial business strategies that may well pave the way for new models of risk capital investment.

The fundamental change evident in current investment markets must be accommodated by companies needing growth capital. Business plans must be changed and/or company valuations must be reduced to accommodate the investment industry's aversion to long-term risk. Clearly, decreasing industry valuation is the least attractive option for all parties and hence the only successful route can be an improved business model.

Bridging the gap

The fundamentals of the human ES cell business are its enormous potential and obvious requirements of multiple long-term strategic investors.

These investors not only include financiers but also academic and industrial scientists, business, research funding charities, national and regional governments, regulatory authorities, patient advocacy groups, clinicians, hospitals, patients and most importantly the media and the community.

Biotechnology companies have been responsible to date for coordinating the input and assimilation of the various strategic investor support. This coordination role is critical for the timely delivery of the medical potential and cannot be met by academics, governments or charities, nor is it currently of interest to major pharmaceutical companies -- clearly it is the role of the biotechnology industry.

In recognising the value of innovation to wealth creation and prosperity, many national and regional governments are now adding their direct and indirect support to biotechnology companies in the human ES cell field.

Notable examples of this include government equity investments in early-stage companies and the US$3 billion in support proposed by the Californian government, determined by a referendum.

Medical research funding charities and government research funding organisations are also extending financial support to assist biotechnology companies in bridging the gap between medical potential and real benefit.

In summary, the credible scientific evidence justifies a growing wave of hope and expectation for significant medical advancement through human ES cell research and development. Cautious management of expectation and resources will be required over an extended period in order to deliver maximum benefit in the shortest possible time frame.

Acknowledgements

The authors acknowledge Hugh Ilyine's contribution in reviewing this article, and Hitoshi Niwa's significant contribution in translation.

Dr Peter Mountford is CEO of Stem Cell Sciences Ltd, which currently employs more than 35 staff with operations in the UK, Australia and Japan. Kenzo Nakajima is CEO of Stem Cell Sciences KK, based in Kobe, Japan.