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Expert Financial Analysis and Reporting

Neuralstem: Previewing Upcoming Important Events and Some Thoughts on the StemCell Patent Infringement Lawsuit (CUR, $3.62 Buy, August 26, 2014)

Key Points

  • The phase 2 trial of NSI-566 in 15 ALS patients has completed enrollment (surgeries) and final topline data could be available in 1Q, 2015. However, there may be some interim data released at the ANA meeting during October 12 through 14.
  • If the phase 2 data is compelling, it raises the possibility of a phase 3 registrational trial starting in 2015.
  • There could be the announcement of the phase 2 trial design for NSI-189 in major depressive disorder by the end of 2014. This might be a 150 patient trial that would last 18 to 24 months.
  • The phase 1 trial in chronic spinal cord injury plans to enroll four patients. These surgeries should be completed by November of 2014 and we could hear anecdotal reports in early 2015 and more complete results in mid-2015.
  • There will be a bench trial on the Stem Cell litigation starting in December to determine if the lawsuit has standing. If so, the actual lawsuit will begin in 2015. If not, the lawsuit probably will not proceed.
  • I see the worst case for Neuralstem in the event that they are found to infringe on StemCell patents to be the requirement to pay royalties on their products of 1% to 4% over the approximate period 2018 to 2021. However, this is a layman’s opinion and should be taken as such.


Historical Perspective on My Research Coverage of Neuralstem

When I initiated coverage of Neuralstem nearly two years ago, one of my friends looked at my report, chuckled and said that the Company was a science project whose technology was much too early in development and uncertain to warrant serious investment consideration. There was good reason for his skepticism as the company was developing a living stem cell therapy targeted at ALS. He pointed out that living cell therapy was extremely early in development as evidenced by major pharmaceutical companies not being involved. Moreover, he stated that ALS has been a graveyard for drug development.

There was no denying those points. However I responded that large pharmaceutical companies are risk adverse and are almost never at the forefront of development for paradigm shifting technologies. I related a story about my experience with the development of monoclonal antibodies; a saga that started with my visiting a small company in 1981 that was among the first try to develop monoclonal antibody products for commercial use. Unfortunately, that company ultimately failed.

In 1985, OKT-3 was the first monoclonal antibody product introduced; it was approved for in organ transplants, but never became an important product. There followed a long period of frustration because the method of manufacturing monoclonals left mouse antigens in the product that triggered serious immune responses. That obstacle was finally surmounted and in 1999, Idec in cooperation with Genentech introduced the cancer drug Rituxan. This was the first truly important monoclonal antibody product; it went on to reach sales of $7.6 billion in 2013 and is still growing.

Now over 30 years since I made my first visit to that tiny and ill-fated monoclonal antibody company, this has become the hottest sector for drug research on the planet as worldwide sales in 2013 were roughly $57 billion. There are currently about 35 marketed products based on monoclonal antibodies and 350 in the research pipeline. Moreover, some analysts are forecasting that the new checkpoint inhibitors based on monoclonal antibody technology and about to reach the market will reach $35 billion of sales in ten years. However, major drug companies like Merck and Pfizer only embraced this technology in the last five years underlining my point that big pharma is a follower, not a leader. I could tell the same story with products based on recombinant DNA technology.

The point is that small entrepreneurial companies are most likely to lead the way on technologies that truly move science forward. However, like the small company I called on in 1981, there are many failures along the way. Only one or two out of a very large number (perhaps hundreds) of companies working with a paradigm shifting technology will be successful. The time scale for development is also important to note as it has taken over 30 years for monoclonal antibodies to become the premier product development technology in the world pharmaceutical industry.

I next responded to his point about ALS being a difficult to treat disease. This is undeniably the case as there have been failed attempt after failed attempt with the most recent examples being Biogen’s dexpramipexole and Cytokinetics’ tirasemtiv (although this product may yet enter into phase 3 trials). I pointed out that I had heard the same arguments that viral diseases like HIV and HCV were intractable diseases that were considered graveyards for drug development. However, this bleak view on HIV and HCV proved incorrect. Led by small companies (when they first started working on these diseases) like Gilead and Pharmasset (later acquired by Gilead), these have become major drug category success stories. Gilead/ Pharmasset’s introduction of Sovaldi this year for HCV promises to be the most successful drug launch ever with estimated sales of $8 billion.

Please don’t think that I am trying to say that Neuralstem will achieve the same commercial success as IDEC, Gilead and Pharmasset. Nor am I in any way trying to point to the success in HCV and HIV as being predictive of success in ALS drug development for Neuralstem. The basic point I am making is that in my experience, the development of paradigm shifting technologies will largely spring from small companies that are initially disdained. I do believe that human technology is unlimited and we will come to understand and conquer ALS. Of this I am convinced. It remains to be seen if Neuralstem will be at the forefront of this quest with its living stem cell therapy, but I think that we have seen enough data to suggest that they are in the hunt.

Anyway, I have become intrigued with living stem cell therapy because its biological mechanism of action may offer the potential to interfere in or reverse a myriad of diseases, many of which are not treated or poorly treated by current drugs. There were several companies that I looked at, but in my screening process, I thought that the approach of Neuralstem for developing individual lines of stem cells and their ability to propagate and maintain the cell lines were critical elements for success. This does not mean that other approaches may not be as good or better. I was also intrigued by reports in CUR’s ongoing phase 1 ALS trial of stabilization of disease in a handful of ALS patients. Because ALS is a disease in which a patient experiences a consistent month after month decline in function that usually leads to death three to five years after diagnosis, stabilizing the disease for a patient is a major therapeutic win.

All of this was characteristic of a company at the venture capital stage, but Neuralstem was priced like a venture capital investment which had a $50 market capitalization at the time. This caused me to do some in-depth research and eventually to recommend the stock. I think that CUR has reached an inflection point in its development in which it is moving from a “science project” to a more clinically and scientifically established company that my cynical friend and others of a like mind may begin to look at. In Wall Street parlance, it is becoming more de-risked.

Over, the next year, I see a number of catalysts that have the potential to induce large institutional investors to seriously consider investing in Neuralstem. If that occurs, we could see sustained buying interest that would move more and more of the stock away from retail investors and manipulative “short and distort” hedge funds into portfolios that are long term investment oriented. This would also induce analysts from major Wall Street firms to cover the stock and raise the level of awareness. All of this would be very positive for the stock. It is the purpose of this report to discuss these catalysts.

Upcoming Investment Catalysts

Neuralstem has moved forward impressively on product development on several fronts in the last two years. We are now at a point where we have seen clinical results that while short of establishing proof of concept have given clear signals of clinical activity for its NSI-566 neural stem cells in ALS. The phase 1 trial produced some extremely interesting results. For five patients who were sufficiently healthy to hope for some kind of therapeutic effect, we saw stabilization of ALS in each patient and in one patient, Ted Harrada; his condition actually seemed to improve. ALS is a disease which inexorably progresses. There may be a period of stabilization for a month or two, but improvements are not just seen. Hence, stabilization of the disease is the major goal of therapy and a noteworthy signal of activity against the disease.

The last surgery in the phase 2 trial of ALS was completed in July, 2014. This trial enrolled 15 new ALS patients (remember the promising phase 1 data was based on only five patients). The most important catalyst over the next half year could be the release of interim results from the phase 2 trial of NSI-566 stem cells in ALS. This is an open label trial and as was the case with the phase 1 trial, interim results will be released prior to the completion of the trial. It is possible that these interim results could be reported at the American Neurological Association annual meeting in Baltimore on October 12 to 14, 2014.

The lead investigator in the study, Eva Feldman, has already stated publicly that patients in the phase 2 trial appear to have had their ALS stabilized. This hints at good phase 2 data. Because ALS inexorably progresses causing a steady month over month deterioration, stabilization is a very positive outcome. With the phase 2 data, there will be meaningful clinical data on 20 ALS patients. This is admittedly a small number of patients, but in an intractable disease without therapeutic options like ALS, it might be sufficient to start a pivotal phase 3 trial in 2015. Obviously, this is dependent on the data being positive, but the results from phase 1 and Eva Feldman’s encouraging comments suggest that there is a reasonable possibility for this.

Ted Harrada gave an interview that was reproduced on the Neuralstem website. Because he is such a pivotal part of the Neuralstem story, his comments and progress carry great weight in thoughts about the Company.  About three years after his initial surgery he reports that he is doing well. However, he notes that ALS is 100% fatal and there are no survivors. He made an interesting comment that is well worth noting. He said “I am waiting with baited breath for more documented stories like mine. I believe what really complicates all treatments for ALS stem cells or otherwise is that ALS is really a syndrome. So there are most likely many forms of ALS therefore as my Neurologist has said to me I may have found what can help your form of ALS but I have no idea what your form is or anyone else’s form.” This is an important observation that we need to keep in mind as we await the phase 2 data. .

I usually don’t like to suggest that a stock might be boosted by media speculation. However, I am surprised that the ALS awareness campaign that involves getting celebrities and other people to dump ice water over their head hasn’t found its way to putting the spotlight on NSI-566. After all, the aim of this craziness is to increase awareness of ALS with the aim of coming up with a treatment. Here we have a product which appears to actually be producing a therapeutic effect, albeit in small numbers of patients. Once, the media gets away from watching people like Bill Gates and Mark Zuckerberg bounce ice cubes off their cranium they might get around to the point of view that helping a small drug developer like Neuralstem is a more effective way of helping ALS victims.

Most investors have focused on the ALS program and have paid little attention to its small molecule drug, NSI-189. Neuralstem hypothesizes that NSI-189 is able to stimulate regrowth of neurons in the hippocampus area of the brain and that this could be a unique new way to treat major depressive disorder. Neuralstem was uniquely able to develop the drug by screening compounds against its proprietary stem cell lines to determine those that could stimulate neuron growth in the hippocampus.

Earlier this year, results were reported from a randomized phase 1 trial of NSI-189 in 24 major depressive disorder patients. There was strong evidence of benefit in clinical measures and qEEG measurements suggested that there was regrowth of neurons in the hippocampus in accordance with the drug’s hypothesized mechanism of action. This is pretty wild stuff for such a small company. The Company will be meeting with the FDA to discuss the design of a phase 2 trial in perhaps 150 patients to confirm the phase 1 results and to establish proof of concept. With an FDA agreement, the trial could start in 1H, 2015 with topline data available in late 2016 or 2017. This would signal to investors that NSI-189 should be taken seriously.

The NSI-566 neural stem cells are involved in three other clinical trials beyond ALS. A phase 1 trial in chronic spinal cord injury has just started. The goal is to determine if NSI-189 can restore neural signaling in patients who have been paralyzed because of a spinal cord injury. The first four surgeries in the phase 1 trial could complete by the end of November, 2014. Because this is an open label trial we are likely to hear anecdotal comments on the outcomes of these patients in 2015. The functioning of NSI-566 cells in treating this condition is very different from ALS. I don’t think we can extrapolate encouraging results in ALS to spinal cord injury. I am making no predictions of the potential outcome of this trial. I am waiting for the data. I would note that any anecdotal reports of a meaningful response in spinal cord injury patient would likely trigger widespread media coverage.

A phase 1 trial of NSI-566 in acute spinal cord injury should start in the next few months in South Korea. There is also an ongoing trial of NSI-566 in treating ischemic stroke victims in China. Like the chronic spine injury trial, I make no projections on the outcomes of either of these trials

Finally, I have been asked to comment on the patent suit filed against Neuralstem by StemCells that alleges patent infringement of StemCells patents. Patent law is extremely complex and as a layman I make no claim that I can predict the outcome of this trial. I am not sure that patent attorneys can either. There has been some misunderstanding of a recent announcement by Stem Cells that a trial is scheduled for December 12, 2014. This is not a trial to examine the merits of the case. Rather, it is a bench trial to determine if the case should be dismissed for lack of standing. I have no prediction on the outcome.

Neither company would speak to me on pending litigation but let me offer some thoughts based on regulatory filings by the companies, press releases by StemCells and court documents. Some bloggers have suggested that if Neuralstem loses the patent infringement case that it would be subject to harsh penalties. I saw one actually suggest that its products and the work supporting them would be transferred to Stem Cells. From my layman’s perspective, I see zero chance of this happening.

There are six patents in question and I believe that two have expired and the others could expire in the 2018 to 2021 time frame. Let me emphasize that we are dealing with patents on living cells which are much more complex than small molecules. A patent on a small molecule for composition of matter could block other companies from developing the drug. This is not the case with living cells. Here the technology involves getting stem cells to differentiate in a certain way that leads to the desired final cell. This differentiation among other things is controlled by interaction with other cells and the effect of growth factors. It is infinitely more complex than for a small molecule.

I see the worst case scenario as being one in which the court judges that the Stem Cell patents aided in the development the technology that led to the discovery of NSI-566 and NSI-189 along with discoveries by Neuralstem and others in the field. As such, Stem Cells might be entitled to a commercially reasonable royalty for their patents. I estimate this as 1% to 4% of revenues. This would not be a financial impediment to commercail success. Again, these are the arguments of a layman without any input from the companies.

Price Target Thinking

ALS is an orphan drug disease with about 5,000 new cases per year in the US and a prevalence of 35,000. However, pricing for orphan disease drugs for life threatening conditions can be set very high. Insurance companies regularly reimburse such drugs at $100,000 to $300,000 per year as opposed to $10,000 per year for drugs dealing with less severe diseases and $60,000 to $100,000 per year for cancer treatments.

It is unlikely that NSI-566 will be applicable to all patients. There is strong reason to believe that it is not that effective for bulbar disease and there may be other subsets of the disease in which it will not be effective. We don’t have enough information to answer this important question. It is just guesswork at this point as to how broadly NSI-566 will be used in ALS. However, the opportunity seems sizable even if it only helps a small number of patients, For example, if we assume a price of $100,000 per treatment, each 1000 patients treated per year would represent $100 million of sales and 5,000 patients would be $500 million. I think the $100,000 estimate for the price is conservative.

How does this translate into share price? I think that the market capitalization could be 6 to 8 times sales achieved by NSI-566 based on an analysis of what other biotechnology companies with breakthrough, proprietary products have sold for in the stock market. Hence, $500 million of sales would possibly result in $3 to $4 billion of market capitalization. Using the same thought process and assuming a $200,000 price per treatment and assuming 10,000 patients treated would lead to a market capitalization of $12 to $16 billion.

You can see that small shifts in assumptions can lead to wild swings in market capitalization/ price target. I know that everyone would like to have a precise target price at a precise time. However, there are so many variables involved in estimating a price target that any price target is arbitrary. However, I think we can all agree that from its current market capitalization of $350 million there is significant upside if NSI-566 is used in a meaningful part of the ALS population. Let’s also not forget that there is the potential that NSI-566 will not be effective in sufficient number of patients or have a side effect issue and that this prevents it from being approved. I am encouraged that this could be an approvable product, but it is far from a sure thing.

Without more data, I am not going to try to estimate the potential of NSI-566 in chronic spinal cord injury, acute spinal cord injury or ischemic stroke. Like ALS, these have been intractable disease states. Also, I am not sure that the mechanism of action in ALS that seems to produce positive outcomes will be effective in these diseases. I just don’t want to put a number on the potential in any of these diseases. The same goes for NSI-189 in major depressive disorder.

ALS Phase 2 Trial Enrollment Has Been Completed

The last surgery in the phase 2 trial was completed in late July 2014. Before discussing its design, when results might be available and what we may expect, let me refresh you on key points of the earlier phase 1 trial. There were 12 patients enrolled in phase 1. Initially patients were non-ambulatory patients in the terminal stages of ALS for whom there was no hope of seeing a therapeutic effect; the objective was to see if the surgery could be safely performed. As safety was established with the initial handful of patients, the trial enrolled healthier ambulatory patients who might be aided by the surgery.

The phase 1 trial involved primarily injections in the lumbar or lower region of the spine. Neurons originating there largely control movement in the limbs. The cervical or upper region of the spine gives rise to neurons that control muscles involved in respiration. Most ALS patients die because of breathing problems; as muscles controlling respiration weaken they are put on mechanical ventilators and ultimately fail. It seems logical to hypothesize that patients given cervical injections are more likely than those given lumbar injections to experience an improvement in breathing function that can lead to an improvement in quality of life and survival time. However, safety concerns caused the phase 1 trial to focus on lumbar injections.

Patients 10, 11 and 12 in the phase 1 trial were a healthier group of ambulatory patients who received 10 bilateral injections of 100,000 neural stem cells in the lumbar region of the spine for a total of 1 million cells. This group included Ted Harrada whose dramatic response has been well documented. Another patient in this group of three also experienced significant benefit. After the initial surgery, patients 10, 11 and 12 were then brought back for another surgery that was five cervical injections of 100,000 cells each. In total, they received 1,500,000 cells.

The phase 2 trial was much more focused on cervical injections with the hope that we will see an improvement in breathing. The phase 2 trial enrolled ambulatory and non-bulbar patients. Generally ALS begins in the lumbar region and moves up to the cervical region. However, in bulbar patients the disease begins in the cervical region. Phase 1 studies in a few bulbar patents were disappointing and the initial feeling is that this surgery won’t work in bulbar patients.

The phase 2 trial began in September 2013. The first 12 patients in the phase 2 received injections in the cervical region of the spinal cord only. The dose was escalated by cohorts (composed of three patients) with the first cohort (patients 1, 2 and 3) receiving five cervical injections of 200,000 cells for a total of 1,000,000 cells. This was the same number of cells that Ted Harrada received in his first surgery although his were transplanted in the lumbar region; later he received cervical injections. The fourth cohort (patients 10, 11 and 12) received 20 cervical injections of 400,000 cells each for a total of 8 million cells. The fifth and final cohort of three patients received 20 cervical and 20 lumbar injections of 200,000 cells each for a total of 16 million cells. Animal studies have suggested that 16 million cells might be the optimal dose in humans.

The phase 2 trial requires six months of observation for each patient. For the last patient treated, this will conclude in late January, 2015. Final results should be available in late 1Q, 2015. However, this is an open label trial and it has been the practice of Neuralstem to release data on an interim basis. We might then see interim data presented at the American Neurological Association Annual Meeting during October 12 to 14 in Baltimore.

My hope and expectation is that we will see positive results on breathing. The ALSFRS-r scale is being used to evaluate patients and 3 of its 12 components include measures related to breathing. I would also hope and expect that the much greater number of cells being transplanted would also increase the therapeutic benefit. Remember that the final three patients are receiving 16 million cells as opposed to Ted Harrada receiving 1.5 million.

Some of the patients in phase 2 are blogging about their experience so that incremental pieces of information may surface at any time. A woman named April Moundzouris has chronicled her experience following a surgery nine months ago that implanted 4 million cells. She reports that she is holding steady. Because ALS is a disease in which a patient experiences a consistent month after month decline in function, a stable condition is a win. There are also other blogs starting. However, these are just anecdotal reports and could be misleading.

Phase 1b Results for the Small Molecule Drug NSI-189 in Major Depressive Disorder

The investment focus on Neuralstem has largely been on its neural stem cell product NSI-566. However, the stem cells that it has discovered and isolated have allowed the Company to take a unique approach to the development of a small molecule drug (NSI-189) for central nervous system diseases. I have written extensively about this development effort in two recent reports. For those that would like a refresher on NSI-189, I would recommend that you refer to : Phase 1b Results for NSI-189 are Very Encouraging but It Is Early Days  and  An In-Depth Look at NSI-189, A Novel Small Molecule Drug Being Studied in Major Depressive Disorder

The phase 1 trial was a 28 day placebo controlled trial that enrolled 24 patients in cohorts of 8 patients. These patients suffered from major depressive disorder or MDD. Each cohort was made up of six patients who were on one of three doses of NSI-189 and two placebo patients. The three doses were 40 mg given once a day, 40 mg given twice a day and 40 mg given three times a day. During this 28 day period patients were confined to a hospital for close monitoring and observation. Recall that the mode of action of NSI-189 is hypothesized to be growing new neurons in the hippocampus region of the brain. Growth of new tissue, especially in the brain, is not something that the FDA is familiar with and they naturally had safety concerns.

Neuralstem presented data from the phase 1 trial of NSI-189 at two recent academic conferences. The first was at the American Society of Clinical Psychopharmacology (ASCP) Annual Meeting, on June 17th. I discussed this information in depth in the report I just cited- Phase 1b Results for NSI-189 are Very Encouraging but It Is Early Days.  Here is a brief description of that data.

Clinical results in depression trials are measured by using scales that convert observations of investigators and patients into quantitative scales. Encouraging trends were reported for all four scales employed in the study: Montgomery-Asberg Depression Rating Scale (MADRS), Clinician Global Impression–Improvement (CGI-I), Symptoms of Depression Questionnaire (SDQ), and Cognitive and Physical Functioning Questionnaire (CPFQ). In the CPFQ scale, NSI-189 showed a statistically significant improvement versus placebo with a p value of 0.01 at 28 days and a p value <0.01 at 84 days.

There is a measure called the Cohen d which is a descriptive statistic that conveys the estimated magnitude of a relationship between the placebo and drug group without making any statement about whether the apparent relationship in the data reflects a true relationship in the population. In this way, statisticians feel that it complements inferential statistics such as p-values. This was also strongly positive in the CPFQ. For such a very small study, there was a strong signal of efficacy even when weighed against a very high placebo effect that is common in depression studies.

A second set of data from this trial was presented at the International College of Neuropyschopharmacology (CINP) Annual Meeting. Electroencephalography or qEEG is the recording of spontaneous electrical activity within the brain using multiple electrodes placed on the scalp. It is felt to be an electrical biomarker of depression. This measure showed that in NSI-189 treated patients there was a statistically significant difference at day 28 in electrical wave patterns emanating from specific areas of the brain, the left posterior temporal lobe and parietal region (p<0.02).

Investigators believe that these electrophysiological changes are consistent with the hypothesis that the mechanism of action of NSI-189 is regrowth of neurons in the hippocampus. In combination with the signals of clinical improvement seen with the depression scales, this is encouraging evidence that NSI-189 may have a meaningful therapeutic effect in depression. This might also extend to other diseases that cause cognitive impairment such as Alzheimers and Parkinson’s disease.

The main drugs used in treating depression alter brain chemistry through an effect on neurotransmitters. However, depressed patients may also have reduced volume in the hippocampus. Neuralstem believes that stimulating the generation of new neurons in the hippocampus could potentially address the pathology of the depression itself. We shall see.

Potential Phase 2 Trial of NSI-189

The phase 2 trial of NSI-189 in MDD is anticipated to start in 1H, 2015. It will have three arms with two doses of NSI-189-40mg, once a day and 40 mg, twice a day- plus a placebo arm. There will be about 150 patients enrolled in the trial with a confirmed diagnosis of MDD. The goal of the study is to confirm findings from the Phase 1b study.  It probably will take 18 months to 24 months to complete. We could see the topline data in late 2016 or early 2017.

The Company closed the second quarter of 2014 with a cash position of nearly $30 million, which gives a solid foundation to execute on the company's business plan through mid-2016. The cost of this phase 2 could be somewhere between $5 million and $10 million dollars. Neuralstem has the resources to begin and possibly complete the phase 2 trial, but may have to raise more money in late 2015 or 2016. This makes more sense than partnering off of the phase 1b data. It should significantly increase the value of any partnering deal.

Phase 1 Trial in Chronic Spinal Cord Injury Has Begun

The same NSI-566 neural stem cells used in the ALS are now being studied in a phase 1 trial in chronic spinal cord injury.  These are patients who have suffered a traumatic injury that has severed the spine and neural connections causing loss of all neurological function in the area below the site of their injury. Patients entered in this trial suffered their injury some time ago and have had their condition stabilized, hence the word chronic. Investors should not confuse this trial with a Geron sponsored trial of stem cells in acute spinal cord injury patients who had just suffered their injury; that trial was difficult to enroll and was stopped. I will go into this in more detail later.

The therapeutic objective for the neural stem cells in chronic spinal cord injury is somewhat different than in ALS. The hope is that these cells will “bridge the gap” in the spinal cord by providing new cells to help transmit the signal from the brain to points at or below the point of injury. In animal studies, it has been shown in animal studies that the NSI-566 cells differentiate into other cells including neurons. These neurons grow long axons that extend across the severed area in the spine forming synapses with host cells and are able to resume the transmission of electrical signals to the formerly paralyzed region.

ALS patients are different in that neurons throughout the spinal cord are dying. It is hypothesized that the transplanted neural stem cells in the case of ALS engraft and secrete neurotrophic factors which prevent or slow the death of surrounding cells.

The initial surgeries will be performed at the University of California, San Diego School of Medicine. Its institutional review board approved the trial on April 16, 2014 and the first surgery is planned for September. As in the ALS trial, the first surgeries will take place in the lumbar region and later cohorts may receive cervical injections. According to, the primary outcome measure is the incidence of adverse events in the study population as assessed over a six month period. The functioning of the graft will be assessed by MRI over various time points in the stud y. Other secondary endpoints will assess potential changes in neurological function such as the spinal cord injury motor and sensory index score; bowel and bladder function; pain; sensory and motor potentials; and electromyograms (EMG). Another secondary measure will assess the effectiveness of immunosuppression as determined by absence of donor-specific HLA antibodies.

As originally designed, the target enrollment was eight patients and as in ALS, there was to be a titration of dose with the first four patients getting six injections of 100,000 cells per injection followed by the next four patients getting six injections of 200,000 cells per injection. All injections will take place in the thoracic area of the spinal cord with injuries between T2 and T12.Because of the safety of the surgery demonstrated in the ALS trials, the protocol has now been changed. There will be just four patients enrolled and given six injections of 200,000 cells per injection. As I previously mentioned, the first surgery will be performed in September and all four surgeries may be completed by November, 2014.

This is an open label trial and as in the case of the ALS trial, we may see results on a patient by patient basis. It is difficult to project if this trial will produce any meaningful clinical results in 2014. However, the start of enrollment is a significant achievement on its own right and this will eventually, say in late 2014 or 2015, produce data (hopefully significant and positive).

This trial will be easy to recruit. Readers may recall that Geron was only able to recruit two patients in three years into their spinal cord injury trial because it was an acute spinal cord injury trial. This was because the patient had to be treated immediately after their accident so that unless the accident occurred near an investigational site and they were brought there for stabilization, they were not eligible for the trial. Neuralstem will be treating patients who have been stabilized. They can be transported over some distance to centers participating in the trial.

Data from a preclinical rodent studies with NSI-566 in acute spinal cord injury were encouraging. In these studies, NSI-566 plus growth factor cocktails were embedded into the spinal cords of rodents whose spinal cords had been intentionally severed. Results showed that grafted cells differentiated into several types of cells. Some of these were neurons whose axons extended over long distances and formed synapses with host cells. The neurons resulting from the grafting were able to transmit electrical impulses. In these studies, the cells were safe and were judged to have reduced post-injury motor and sensory deficits. However, these studies were done in a more acute setting than the current human study.

A trial of NSI-566 cells in acute spinal cord injury is scheduled to start in South Korea in the next few months. This trial is like the Geron trial I previously mentioned. It will be conducted by Neuralstem’s partner CJ Cheil Jedang.

Litigation with Stem Cells

I am not a lawyer and the following discussion on the patent litigation between StemCells and Neuralstem should be viewed with suitable skepticism. Patent law is extremely complex and I make no pretext that I fully understand the issues involved in this case and can predict the outcome of any potential litigation. There are many patents that have been issued in this field and they overlap each other in difficult to predict ways. An entire law firm dedicated to litigating patent law might not be able to predict the outcome with any confidence. The information contained in this report is based on regulatory filings by both companies, records made public by the court and from several press releases put out by STEM. Because the companies are in litigation, neither is available for comment on my thoughts. With all of these caveats, let me give a layman’s view of what is going on.

STEM is alleging that Neuralstem is infringing six patents owned by Stem Cells that claim populations of human neural stem cells, their proliferation, and their use. According to Stem Cell’s 2013 10-K, STEM filed a law suit against Neuralstem in July 2006 alleging infringement of four patents licensed from NeuroSpheres; this was a spin out company from the University of Calgary. It was co-founded in 1991 by Dr. Samuel Weiss and Dr. Brent Reynolds who were professors there. NeuroSpheres held a portfolio of patents, some of which are the subject of this litigation. StemCells had initially been granted an exclusive worldwide license to this patent portfolio. Then in2013, it acquired NeuroSpheres and its patent portfolio

Stem Cells identified six patents in its 2013 10-K as being the subject of litigation. I have listed these patents by number, title and date of issuance as follows. The litigation started in July 2006 in regards to four patents:

•           U.S. Patent No. 6,294,346:  Use of multipotent neural stem cells and their progeny for the screening of drugs and other biological agents. This patent issued on September 25, 2001

•           U.S. Patent No. 5,851,832:  In vitro growth and proliferation of multipotent neural stem cells and their progeny. The patent issued in December 1998.

•           U.S. Patent No. 6,294,346: Use of multipotent neural stem cells and their progeny for the screening of drugs and other biological agents. The patent issued on September 25, 2001

•           U.S. Patent No. 7,101,709:  Detecting modulator of cell proliferation, differentiation, viability, phenotypes or activity; prepare culture, incubate with modulator, monitor adjustment in cell characteristics, adjustment in characteristics indicate modulator. The patent was filed on July 2, 2002. I am looking for the date of issuance and while doing so I am estimating an issuance data in 2004.


In May 2008, STEM filed a second patent infringement suit alleging that Neuralstem’s activities infringe claims of two other patents which were exclusively licensed at the time from NeuroSpheres. These were:

•           U.S. Patent No. 7,361,505:  Composition of matter of human neural stem cells derived from any source material. The patent was filed on June 7, 1995. I am looking for the date of issuance and while doing so I am estimating an issuance data in 1997.

•           U.S. Patent No. 7,115,418:  Methods for proliferating human neural stem cells. The patent was filed on July 19, 2002. I am looking for the date of issuance and while doing so I am estimating an issuance data in 2004.

Based on the above patent listings, it appears that two of these patents-, 832 and 505 have expired and that the four others will expire in the 2018 to 2021 time frame. I will make no attempt to discuss the strength of each patent, how they may crosslink or how they interact, if at all, with patents issued to other companies. This is beyond my ability.

During its 2Q, 2014 conference call, the opening comments of Stem Cell’s management indicated that the judge presiding in the trial had ordered a trial to be started on December 9, 2014. Many investors have taken this to mean that the trial in which StemCells is seeking damages and injunctive relief from Neuralstem for patent infringement will begin then and STEM will have its day in court. As I read it, this is not correct. Rather, it is a bench trial in which the judge will rule on Neuralstem’s motion to dismiss the lawsuit on lack of standing.

In patent law, in order for a lawsuit to be brought all owners of the patent must agree to bring the lawsuit. If one owner refuses, the lawsuit cannot be brought. In the case of the patents which Stem Cells is alleging that Neuralstem has infringed, Neuralstem has sued to dismiss the lawsuit on grounds of lack of standing. The patents in question were issued to researchers at the University of Calgary who agreed to assign half of the property rights to the company NeuroSpheres which they formed in 1991 and half to the University of Calgary.

Stem Cells claims that there are two scientists to whom patents were originally issued. They were Dr. Samuel Weiss and Dr. Brent Reynolds, founders of NeuroSphere. I explained earlier that Stem Cells was the original exclusive licensor of NeuroSphere and then ultimately acquired the company outright. Stem Cells maintains that the owners of the patents were Dr. Weiss, Dr. Reynolds and the University of Calgary. However, Neuralstem has produced a document signed by Dr. Weiss and Dr. Reynolds in which they agree to a split in profits with a third scientist, Dr. Wolfram Tetzlaff. This document signed by the three scientists in 1991 agrees to a split among Drs. Weiss, Reynolds and Tetzlaff of 45/45/10 according to a document released by the court. .

Dr. Tetzlaff moved from the University of Calgary and was presumably not involved in the transactions which led to the patent rights being ultimately licensed and then sold outright to Stem Cells. On February 14, 2011, Neuralstem signed an agreement with Dr. Tetzlaff in which he assigned all of his rights on patents at issue to Neuralstem. Neuralstem is claiming that because Dr. Tetzlaff has not agreed to pursue the lawsuit that Stem Cell’s case should be dismissed for lack of standing.

Stem Cells argues that the 1991 agreement is invalid and that Dr. Tetzlaff is not an owner so that Neuralstem’s motion to dismiss on lack of standing in invalid. Stem Cells contends that Dr. Tetzlaff represents in the consulting agreement that he does not own any of the subject stem cell technology. The bench trial now scheduled for December 9th through 12th of 2014 will determine whether the case is dismissed on the basis of lack of standing or is allowed to go forward. If the motion to dismiss because of lack of standing is upheld in the bench trial, I think this will end the litigation. If not, a trial to assess the patent infringement issues could begin in 2015.

If the case goes forward, Stem Cells will have to prove that Neuralstem infringed patents owned by STEM which were essential to the development of Neuralstem’s products. They will seek damages that they have incurred as a result of CUR’s actions and for a commercially appropriate royalty on any sales of these products. They will also seek injunctive relief. As I mentioned before, the tangle of patents in this area is so dense that I could not even begin to anticipate and analyze the issues that will be argued. However, it is safe to say that patents issued to Neuralstem and many others will have to be weighed against the STEM patents to determine whether CUR infringed. This could be a long trial.

The STEM patents are relatively old. I believe that two of them have expired and the four remaining will expire in the 2018 to 2012 period. It may be difficult for STEM to argue that it has suffered commercial damage since neither company has launched a product and realized revenues. They might try to make an argument that their stock price and ability to raise capital has been impaired by CUR’s actions, but this may be difficult to prove or quantify.

STEM is also asking for an injunction against CUR. An injunction is an equitable remedy that has traditionally been given when a wrong cannot be effectively remedied by an award of money damages. Some investors have interpreted this as presenting the possibility that Neuralstem should turn over all or most of their technology and products to STEM. Even if the STEM patents were essential to the discovery of NSI-566 and NSI-189, this would be harsh beyond all imagination and I give it a virtually no chance of occurring.

In a reasonable worst case scenario, I think that Neuralstem would have to pay some type of royalty commensurate with the role of the patents in development of their products. I think that this royalty would be on the order of 1% to 4% based on discussions I have had with consultants on this issue. However, there is no hard and fast rule. I do not see this issue as being of sufficient importance as to affect the investment outlook for Neuralstem.

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  1. ” Once, the media gets away from watching people like Bill Gates and Mark Zuckerberg bounce ice cubes off their cranium they might get around to the point of view that helping a small drug developer like Neuralstem is a more effective way of helping ALS victims.”

    Well said. Investing in Neuralstem is my ice bucket challenge.

    The phase II data must be good. Dr Eva Feldman even said “I wouldn’t be spending all my waking hours on writing the next phase trial, if I do not believe in the phase II data.”

    For ALS, even a meager 20% slow of progression is considered clinically significant. I guess the results should be at least VERY clinically significant.

    However, in May this year, Dr. Feldman said the pivotal trial would be a 128-patient 1:1 controlled trial. And she recently anticipated next phase would involve 32 patients or 45 patients (three cohorts maybe?) depending on which day you listened to her. I guess NIH or FDA is more conservative, which is a little disappointment to my heart. But I could easily content myself with good or prominent phase II data.

  2. Very useful comment as usual.

  3. Robert Dorney says:

    I have small positions in CUR and STEM. Given their patent disputes, they appear to be using similar stem cell technology to address different afflictions. Both appear to be in or near Phase 2 trials, CUR for ALS and STEM for AMD. It is not apparent to me why, at this time, a speculation in CUR is preferred over STEM. Do you have any opinion on comparing these two companies?

  4. The patent issue is not a reason to decide to invest in or not to invest in either company as is laid out in this report. The investment case is presented for CUR. It depends on clinical results in their ongoing trials and is not meaningfully affected by what STEM is doing, in my opinion.

  5. Here is a good biography of Dr. Tetzlaff:

    I doubt that Neuralstem would have bothered to obtain an assignment of the patents in question if they were not absolutely sure that he was was a part author. Nor would a man of his stature sell an ownership interest that he didn’t own. Case closed

  6. I think that the fact that Dr. T chose to assign his rights to the patent(s) to CUR rather than to STEM (or to neither one) tells us which side he is on, so I think there is a chance that he will show up in December. As to Weiss and Reynolds, I think that they have nothing to gain by appearing. So rather than see the patent(s) nullified, STEM may seek a settlement. Im any event, on or before Dec. 10, we shall have an answer.
    As to the validity of the 832 progenitor patent, I think it id both obvious and overly broad. I think you can compare it to an Easter egg hunt. The patentee claims to have found a novel way(s) to discover, grow, and use effwctive stem cells – the “eggs” – to combat disease. So to join the hunt, you must buy a ticket from me to join in the hunt. On the other hand, the hunters say to the patentee, “We know how to search for eggs. Just get out of our way”.

  7. I lack the expertise to try to interpret how patent litigation may turm out and I think that this probably holds for patent attorneys as well.

  8. Of course you are correct. Thanks for the work you do.

Trackbacks & Pingbacks

  1. Neuralstem: An Update on Potential Catalysts for 2015 (CUR, Buy, 3.38) | Expert Financial Analysis and Reporting | Smith on Stocks

    […] wrote a report on Neuralstem on August 26, 2014 in which I projected the timing of important investment catalysts for 2015. […]

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    […] The question is how good the data is and how investors encouraged will be by the data. The lead investigator for the drug, Eva Feldman, has given some strong signals that she was encouraged by the results. In fact, she said some time ago that she is working on the protocol for what could be an upcoming pivotal trial. For those who would like more detail on the phase 2 trial, you can follow this link. […]


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