Cellular Dynamics, Seizing the Present, Turns Stem Cells into Cash
Stories like Cellular Dynamics don’t grab venture capitalists in Boston or the San Francisco Bay Area. Stem cell biology as the basis for a low-margin laboratory “services” business? Borrrring. Most of the big thinkers and the big moneymen are more excited about stem cells as “regenerative medicines” that would cost a fortune and could potentially help paralyzed people get up and walk.
People around Wisconsin, and all over the world, have been hearing about stem cell promise for years. Regenerative medicine has been the ultimate dream ever since James Thomson, the University of Wisconsin biologist, derived the first human embryonic stem cell line in 1998.
Thomson watched that story play out unhappily at the company that first sought to fulfill the stem-cells-as-regenerative-medicine dream—Menlo Park, CA-based Geron (NASDAQ: GERN). By the time Thomson’s work advanced in the mid-2000s, he and others wanted to create a better business model to apply what they had, other than hype and hope. In 2007, Thomson and others learned how to reprogram adult cells into an embryonic-like state, making what are known as induced pluripotent stem cells (iPS).
Not only did these cells sidestep the long-running ethical debate about destroying embryos for research, but they paved the way for biologists to isolate specific, pure, human cells for research, like neurons or heart cells. Often, if scientists want to test a new drug for a neurological disorder, they’d have to use animals, human cadaver cells, or tumor cells. You could try to harvest human cells for use in the lab, but they’d usually degrade fast and be of little use, providing a poor simulation of how a drug might perform in a live human being. But with the new techniques, Cellular Dynamics saw a potentially better lab model, by creating pure human neurons that could be consistently manufactured.
Suddenly, Madison, WI-based Cellular Dynamics International (NASDAQ: ICEL) imagined it could reach academic and pharmaceutical labs all over and make a profit in the foreseeable future on those cells as lab tools. Then maybe, years later, it could be turned into one of those incredible-sounding regenerative medicines.
So, while the story may not have had the cachet of regenerative medicine, the prudent stem cells-as-a-lab-tool-you’ve-gotta-have concept has caught on. In classic understated Midwestern style, Cellular Dynamics has grown to more than 100 employees, went public last year, and saw its revenues double to $10.7 million in the most recent 12-month period. The company isn’t profitable, but it’s worth a respectable $250 million. It has gotten enough momentum to start thinking a bit bigger.
Here’s how Thomson described the company’s strategy in a recent note to Xconomy:
Our plan has always been to establish a solid industrial base for the large scale manufacture of human pluripotent stem cells and their derivatives, and to use the tools market to generate revenue initially. Since we now have established the infrastructure and expertise to generate clinically relevant cell types at scale, pursuing therapeutic targets is a more realistic option now. When CDI was founded back in 2004, I did not personally think a company would be able to survive long enough to create a therapy based on these cells, as the field was too immature and the timeline too long. However, the field has matured a lot since then, and I believe the therapeutic opportunities are now increasing.
Cellular Dynamics has carved out its initial niche by providing four specific types of cells to researchers: human neurons, cardiomyocytes (heart cells), hepatocytes (liver cells), and endothelial cells (those that line the blood vessels). Each has a clear purpose in pharmaceuticals. Neurons are useful if you’re testing a new compound in a petri dish against something like Parkinson’s disease, or Alzheimer’s. Drugmakers also want to know, the earlier the better, whether any drug candidate is going to be toxic to the heart. Many drugs get metabolized via the liver, so it’s helpful to see how drugs perform there too. And so on.
Plenty of academic labs around the world have worked feverishly in recent years to figure out how to best take an ordinary skin or blood cell, and reprogram it into an induced pluripotent state, and then coax it into becoming one of these specific kinds of useful cells. But Cellular Dynamics is the one seeking to be the dominant source that pharmaceutical companies can count on to deliver these cells at industrial consistency. Prices depend on the cell type, but Cellular Dynamics generally ships its custom-manufactured cells to commercial customers for $1,500 a vial on average, for a 96-well plate, CEO Robert Palay says. Those cells tend to last about two weeks in the lab, before the customer needs to place another order if they want to run another experiment.
“Manufacturing human cells is hard,” Palay says. “It’s very hard to do in the quality and quantity we do. You have to understand the conditions and keep them under control. The heat, light, moisture, media, reagents all have to be right. What we do that no one else does is manufacture cells in quality and volume that’s really unprecedented.”
Leroy Hood, the president of the Seattle-based Institute for Systems Biology and a scientific advisor to Cellular Dynamics, dismissed any threat to the business from academic labs. “Academics cannot even begin to mimic these scales of operation—or in general purity,” Hood says.
While competition isn’t much of a concern, the more pertinent question about Cellular Dynamics is about the market. What types of customers will get on the Cellular Dynamics bandwagon first? What will it take to convince customers in certain markets that they must have these cells, or else operate at a disadvantage? How long will it take to prove that these cells save time and money in drug development? Will they ever reduce the risk of clinical trials by providing more accurate lab models?
Palay, when I visited his office last fall, told me the same thing he said on the IPO road show. He envisions a $10 billion market that Cellular Dynamics can tap into over time. Here’s how Cellular Dynamics arrives at that calculation, according to its IPO prospectus:
Our products are currently sold into the $3.5 billion market for cells for in vitro experiments, as well as the $1.3 billion stem cell banking market. Our products position us well to participate in the growing $5.0 billion global human stem cell, tissue and organ therapy market, first as a provider of cells for research, then as a provider of cells for therapeutic trials and potentially for therapeutic use on a collaborative basis. We believe our products will contribute to the growth of our target markets.
It should be noted that Cellular Dynamics is still talking in quite futuristic, and cautious, terms about that last half of the market that you could call “regenerative medicine.” When it talks about cell therapy, it talks about being “a provider of cells” to some other company that would take most of the risk to develop the cell therapy. So there are a few leaps of logic to get to the $10 billion figure.
Still, this is a market in its infancy, and the early sales trends are moving in the right direction, said Tycho Peterson, an analyst with JP Morgan, in a note to clients Nov. 13. “Our investment thesis on ICEL remains unchanged; with first-mover advantage in industrial stem cell manufacturing, a focused pipeline and leading industry position, we see increasing customer adoption, revenue ramp, and margin expansion in the future,” Peterson wrote.
I asked Hood, the prominent biotech entrepreneur, where he thinks the big opportunities might be for Cellular Dynamics. If the human cells the company makes are so great, I wondered, might they be good enough to someday replace animal models and seamlessly enable drug companies to one day go straight from the lab to test their drugs in clinical trials?
That’s no obvious thing, because a human cell in a lab dish is in a different environment than a human cell that’s operating in a live human being. If someone came up with truly predictive human cell models in the lab, it would be an enormous catalyst for the pharmaceutical industry, which wastes years and billions of dollars on drugs that ultimately fail in clinical trials and could have been weeded out earlier.
The business opportunity for such a thing would be huge, maybe even bigger than regenerative medicine itself.
Here’s what Hood said about the opportunities:
I think CDI will create new markets. 1) homogeneous cell types for pharmaceutical assays and 2) eventually large number of cells for cellular therapy (this is a ways off obviously). With regard to animal models–I have the following thoughts. I believe that CDI will create the ability to study the development of virtually any human cell type in an environment where these changes can be followed using systems approaches (this is what we are doing with CDI). One can either look at normal development or what disease genes do to development. What CDI can do is different from what mouse models can do. The question with mouse models is ‘do they really resemble their human counterpart diseases?’ Most do not. With CDI, one is using human cells–and the question is whether the lack of spatial organization makes a difference (and it certainly does–but one can do many exciting things that will mimic biological reality).
It’s impossible to say whether any of those ideas about human cell models, or regenerative medicine, will come to fruition. The Cellular Dynamics business isn’t the most glamorous thing going today in biotech. But there’s no denying that the company has put one proverbial foot in front of the other to give itself a chance to do bigger things. Its long-term success will depend on just how successful it can make its customers.
“I want to enable my customers to do their experiments,” Palay says. “Our cells empower your discovery.”