Private Cord Blood Banking Companies? Risks and Rewards of Investing

This is an equity investment focused article. It is adapted from a previous article which was intended to educate potential umbilical cord blood donors. However, the key moot points are the same. This article focuses on the investment proposition that private cord blood banking companies offer to a long term investors. Publicly listed companies like Cryo Save (UK listing), Cryo Cell International, Lifebank Corp, Cord Blood America Inc are active in this space. As are privately listed companies such as Cord Blood Registry (CBR Systems) and Virgin Health Bank (UK)

Superficially, they are great investments. They offer a long term recurring revenue business model, are highly cash generative and profitable and -via potential medical technological advances-offer significant upside possibilities to their top line growth prospects.

However, I think it fair to conclude that there is a significant risk to these assumptions. Particularly, as they depend upon future developments rather than current technologies. Future cord blood stem cell research developments may not necessarily be advantageous to their business models.

Let's look at the issues.


Therapies, Cures and Benefits of Cord Blood Banking

Cord blood is rich in the type of stem cells that make it a viable substitute for bone marrow transplantation. According to Broxmeyer (2010) the range of treatments that can be done with cord blood include many of the same variety as are treated with bone marrow and this includes acute and chronic myeloid and lymphoid leukemias, myelodysplastic, a variety of solid tumors.

Furthermore, ongoing research into stem cell therapies is raising hope for a number of future treatments.

There are two main types of stem cells which are richly stored in umbilical cord blood.

Mesenchymal Stem Cells

Mesenchymal stem cells, or MSCs, according to CELS (2007) can differentiate into cells controlling growth in bone,muscle, fat, and tendon. All of which make them ideal for use in tissue engineering. In fact, there are a number of products on the market or in trials which use MSCs for things like wound repair,cosmetics,orthopaedics, cardiac and immuno-modulatory solutions.

They offer the opportunity for future therapies. However, according to Prockop (2009), they are-despite intensive research and observation- not the best understood of stem cells. Scientists have a limited understanding of how they function and how they help tissue repair. This throws some doubt onto their future usage.

Also, MSCs might not be the only source of cells for this type of therapy: Prockop writes

"endothelial cells, or alternatively activated macrophages, mast cells, or dendritic cells may produce the same or greater therapeutic benefits as MSCs. It is also possible that therapies with the proteins or cytokines produced by activated MSCs or related cells may be more practical than cell therapies. However, they may be singularly powerful therapeutic agents. We cannot exclude the possibility that MSCs may have a unique ability to monitor the microenvironment of injured tissues and respond appropriately."

This suggests a degree of uncertainty over the usage of MSCs and therefore the importance of storing it in cord blood.

Haematopoietic Stem Cells

Haematopoietic stem cells, or HSCs, are more immediately useful. There have been over 20,000 cord blood transplants treatments done. However, according to CELS (2007) one of the problems is that cord blood is low in volume (75-100ml) and therefore has a limited number of HSC.

 "the use of cord blood HSC is therefore limited to children under 40kg. This means that currently in private banks the success rates for older children and young adults will be low."

This is backed up by Chao et al (2004) and by Hofmeister et al (2007):

"Owing to a limited number of stem cells available in a typical UCB unit and delayed engraftment when compared to marrow or mobilized peripheral blood, the prime focus for this therapy continues to be the pediatric patient. Nevertheless this form of transplant is emerging as a viable alternative in adults, provided there are sufficient cells in the UCB unit and the patient is a small to average-sized adult."

HSC transplants are limited to small adults and children. Moreover, according to CELS (2007) the chance of having to use it is small. They estimate that the probability of a child requiring cord blood for a haematological condition is as low as 1 in 200,000.

The challenge is for scientists to expand the small number of cord blood HSC in the lab, so that they could be used to treat adults. However, as Broxmeyer (2010) notes:

"Investigators have been trying to ex-vivo expand human HSCs for years, but have not succeeded in a clinically meaningful way.. ...Expansion of human HSCs ex-vivo.. ..remains a fertile, if not yet realistically accomplished, area of investigation."

Another solution, could be dual cord transplants, which could reduce the comparative advantage of private cord blood banking. Hofmeister et al (2007) note that alongside clinical trials for HSC expansion, a number of other clinical trials are taking place in order to support the use of dual cord blood units. The outcome is unclear

"This is occurring at the same time that other clinical trials exploring the use of dual UCB units as the transplant source. Although dual cord transplants may supplant our need for HSC expansion, it remains to be determined if this approach will minimize relapse and optimize immune reconstitution as compared to that seen after a living related or unrelated donor transplant. Until this is clarified, expansion studies should continue"

Private or Public Cord Blood Banking?

According to sources, the benefits of private cord blood banking, although hugely exciting, are largely in the future and contain a degree of uncertainty. If technology advances to offer HSC ex vivo expansion and extended MSC therapy then private cord blood banking will be the winner.

However, if other sources of stem cells (aside from cord blood) turn out to be the key to developing therapies than this industry faces severe structural challenges. Similarly, if dual cord transplants (in order to achieve HSC expansion) are the future than the benefits of private cord blood banking are challenged.

The consequencies for the publicly lisated private cord blood companies are obvious.





Sources:

Broxmeyer, H.E., "Cord blood hematopoietic stem cell transplantation" (May 26, 2010), StemBook, ed. The Stem Cell Research Community, StemBook

CELS Business Services Ltd "Expert's Report:Cryo-Save Group NV" Cryo-Save Website (2007)

Chao, Emerson,Weinberg "Stem Cell Transplantation (Cord Blood Transplants) Haematology page 354-359, (2004)

Prockop, Dawin J. " Repair of Tissues by Adult Stem/Progenitor Cells (MSCs):Contoversies,Myths and" American Society of Gene Therapy (2007)

Hofmeister, CC. et al "Ex vivo expansion of umbilical cord blood stem cells for transplantation: growing knowledge from the hematopoietic niche" Bone Marrow Transplantation (2007)

Joy Global's Growth is Dependent On China Housing Market

China Construction holds the key to JoyGlobal Prospects?

Mining equipment company Joy Global gave results yesterday  and not only were they impressive, but the outlook statement was very positive too...

mining companies are realizing strong demand and prices, with the expectation of significant increases in demand during the next 3 to 5 years. As a result, they are making major increases in their capital expenditures for mine expansions. Mining companies have announced capital expenditures that are up 30 to 35 percent this year, and are approaching the levels of 2008. In addition, announced capital expenditures for 2011 are expected to rise another 15 to 20 percent.

..so everything looks rosy according to Joy Global's earnings release. With Joy Global and the likes of UK's Fenner, you have upside from a few strategic profit drivers.

Firstly, there is the resolution of economic growth and industrial capacity utilisation in the developed industrialised nations. This strengthens demand for commodities such as copper and coal.

Secondly, there is the secular trend towards shifting energy production towards using coal and away from oil. Not only is this a response to geopolitical risk with oil supplies but also it is reflective of the global shift towards manufacturing in the Far East. Coal is the major commodity that China is rich in.

Thirdly, there is the significant investment being planned in infrastructural projects within emerging markets. Many of these projects are pre-planned and committed and are essential for the long term growth of these countries.

Finally, there is the marginal demand from residential housing and construction in the World.

China's Construction Market is the Marginal Demand Driver

Of all of these profit drivers, I would view the key marginal  (housing and construction) as being the most important. My view is that Europe's banking sector will face more Sovereign Debt issues next year and this will cause some disruption to their recovery in the first half. Turning to the US, frankly, I don't think the US is in a position yet to see strong increases in new construction activity...

...and this is mainly due to the ongoing high vacancy rates

and also a result of a large number of foreclosed homes still waiting to come onto the marketplace.

So much depends upon whether China's property and construction markets are in a bubble or not?

China Property Market. An Asset Price Bubble?

Poetic symmetry seems to demand a bubble here. Japan had it, the US had it, the UK had it in the 90's and even Sweden had it in the 90's. Furthermore, with China you have a situation whereby currency manipulation (they are buying US Dollars and selling RMB) is flooding their internal markets with RMB which could be causing a local asset bubble. Throw in the extra stimulus efforts made by the Communist regime and you have all the ingredients for a bubble.

However, the tricky part here is to try and quantify the nature of the mass urbanisation movement within China. Jim Chanos claims that 60% of China's GDP is due to Fixed Asset Investment whilst only 5% is due to exports. You can see the importance of this kind of growth on global steel production here...


source: worldsteel

...and with so much of other emerging markets (Russia, Brazil) dependent on commodity exports to China, the knock on effect of a slump in China's property market is significant.

China Housing Vacancy Rates?

The problem that Chanos and others have is that there are no official figures for China's vacancy rates. However, we do know that according to the National Bureau of Statistics of China (NBSC)  Investment in Real Estate Development Enterprises is currently growing at a yearly rate of 34.2%

I do not think this is sustainable and also note that the Chinese are trying to deal with overheating in commodity prices and real estate, by successively raising banks reserve requirements. They may engineer a 'soft landing'. Who is to know? I'm sympathetic to Chanos' arguments on China and housing but the exact timing is hard to predict. Nevertheless, I do not think that now is the time to be meaningfully overt in this sector.




source:

Fortune Magazine "Chanos vs. China" (accessed Dec 2010)

NBSC "Investment Completed and Growth of Real Estate Development Enterprises"  (accessed Dec 2010)

Lexicon Pharmaceuticals Reports Top-Line Data for LX2931 Rheumatoid Arthritis Drug

I previously covered Lexicon Pharmaceuticals LX2931 as part of an article here.  Today they released top-line data fro LX2931 in patients with Rheumatoid Arthritis.

"the data also suggested that patients treated with 150 mg once daily of LX2931 showed an improvement in the primary efficacy endpoint, the percentage of patients achieving an American College of Rheumatology 20 (ACR20) response at week 12 (60% versus 49% for placebo).  Patients treated with 70 mg or 110 mg once daily did not indicate improvement in the ACR20 at week 12 (44% and 41% response rates, respectively) relative to placebo. Adverse events for all three LX2931 dose groups were predominantly mild-to-moderate, with frequencies similar to the placebo group."

So, we have no improvement with the 70mg and 110mg dose and only a 60% vs. 49% (placebo) in the 150mg dose. Lexicon reported 'disappointment' that the placebo effect was unusually high in this trial. However, this could indicate a soft trial base.

Lexicon stated they want to initiate discuissions with potential partners over LX2931. However, I think the competition in Rheumatoid Arthritis is stiff and these results can, in my view, only be seen as a disappointment to Lexicon's prospects.

Robert Half Set to Continue Gains?

Robert Half International RHI is an interesting stock to look at because its earnings and –more importantly- its share price drivers and prospects tend to reflect macro-economic concerns rather micro. It is a very cyclical stock. Analysts waste a lot of time trying to analyze the finer detail of Robert Half’s numbers and execution, but in reality it is the employment environment that governs its prospects.

Having noted that, it is worth noting that this doesn’t preclude individual company analysis of Robert Half. Rather, it means that an analysis should focus on the macro-economic direction (employment gains) and then appraise prospects based on the performance of their execution. For example, the following data is a good example of how cyclical this stock is.

The first column represents a metric to analyze the turning point in Robert Half fortunes. The quarterly revenue is divided by the rolling yearly revenue. The second column is the quarterly Gross Margin. The third is the private non-farm payroll net 3-month, taken from the Bureau of Labor Statistics.

The green number represent bottoms or troughs, whereby the direction afterwards is upwards. Similarly, the red numbers are tops or peaks.

	Quarter Rev as percentage of Rolling Year Revenue	Quarter GM	Private Non-Farm Payrolls 3 Month Net
2000	0.00%	42.83%	649
q2	0.00%	43.13%	311
q3	0.00%	42.92%	440
q4	26.15%	43.11%	289
2001	25.82%	43.24%	-126
q2	23.44%	42.04%	-645
q3	21.71%	40.13%	-634
q4	20.82%	39.61%	-908
2002	21.28%	39.47%	-379
q2	23.34%	38.70%	-165
q3	25.03%	36.18%	-165
q4	25.12%	35.79%	-64
2003	24.78%	35.85%	-309
q2	25.16%	36.73%	-53
q3	25.88%	37.34%	188
q4	26.21%	37.21%	303
2004	27.59%	37.74%	489
q2	28.73%	39.71%	628
q3	29.03%	39.87%	294
q4	28.19%	40.21%	489
2005	26.80%	40.75%	471
q2	26.79%	41.18%	752
q3	27.03%	41.06%	545
q4	26.50%	41.47%	542
2006	26.87%	41.66%	869
q2	26.70%	42.57%	262
q3	26.76%	42.06%	336
q4	26.42%	42.55%	384
2007	26.33%	42.00%	478
q2	26.52%	42.88%	234
q3	26.29%	42.48%	-108
q4	26.26%	42.92%	185
2008	25.68%	41.68%	-155
q2	25.25%	42.19%	-644
q3	24.03%	41.65%	-1060
q4	21.51%	40.65%	-1948
2009	19.61%	35.67%	-2257
q2	20.14%	35.34%	-1435
q3	22.07%	36.70%	-698
q4	24.28%	37.77%	-270
2010	24.98%	36.51%	236
q2	25.90%	37.69%	353
q3	26.70%	37.82%	372

Source: Robert Half,Bureau of Labor Studies, Earnings View


The key is to note how closely correlated Robert Half's cyclical fortunes trough with a bottom in private non-farm payrolls. However, it is worth noting that Gross Margins continued to rise, right up til the employment market turned with the recession in 2008. In fact Robert Half's share price did well (although there was some stock specific weakness in mid 2006) right up until the start of 2007.

All of which indicates that there is probably more to run from Robert Half in terms of Gross Margins, share price and profits. However, it appears that Robert Half's share price is far more dictated by the direction of employment gains/losses than an underlying current profitably. If you think the economy will continue to improve in 2011 and payroll gains will remain positive than RHI has further to run.