The recent initiation report on International Stem Cell
Corporation (OTCQB: ISCO) by Edison Investment Research looks at the company
from a novel perspective. Although described as ‘an early-stage cell therapy
company currently in Phase I/IIa clinical trials to treat Parkinson’s disease
(PD)’, the company is much more. It has two wholly-owned subsidiaries that are
currently generating revenue. “These commercial businesses,” reads Edison’s
report, “provide a floor under ISCO’s current valuation, creating an essentially
free option” on ISCO’s biotech business devoted to the treatment of Parkinson’s
disease. In other words, the analysts at Edison are saying that prospective
investors can pay for the two subsidiaries and get the biotech business free.
The two subsidiaries are Lifeline Skin Care (LSC) and
Lifeline Cell Technology (LCT). Lifeline Skin Care (LSC) develops and
manufactures a line of luxury skincare products. The company globally markets
these products through dermatologists, plastic surgeons, medical clinics,
resort spas, other specialized channels and its website. Its major distributors
are Amazon (NASDAQ: AMZN) and Dermstore. The LSC product line includes
cleansers, exfoliators and a range of specialized moisturizers and serums.
LSC’s potential for growth is enormous. The global skincare market is estimated
at over $100 million and is growing at a CAGR of 3.3 percent, and LSC is
certainly realizing its potential. Its revenues in recent years exploded at
four times the industry rates, which were roughly 17 percent from 2012-2015.
Lifeline Cell Technology (LCT) is ISCO’s biomedical
business. LCT develops, curates and markets human stem cells. Over the period
from 2012-2015, revenue from ISCO’s biomedical business grew at a CAGR of 19
percent, or nearly three times the industry rate. These two subsidiaries
comprise ISCO’s cosmeceutical and biomedical business lines.
Together, LSC and LCT had revenues of $7.5 million for the
fiscal year ended December 31, 2015, with LSC reporting $3.5 million and LCT reporting
$4 million. Edison expects revenues at the skincare business (LSC) to grow by
37 percent over the next 10 years, reaching $4.8 million by 2025. The
biomedical subsidiary (LCT) is expected to do much better, more than doubling
in size to get to $10.5 million over the same period.
Students of Brealey and Myers will remember that ‘we can
think of stock price as the capitalized value of average earnings under a
no-growth policy, plus PVGO, the present value of growth opportunities’. Such
an approach values the cosmeceutical and biomedical businesses at a
risk-adjusted net present value of $26 million, or $9.30 per share. To arrive
at net present value (NPV), future cash flows were discounted at 10%. The risk
adjustment to the NPV was 90%.
ISCO’s biotech business, revolving around the treatment of
Parkinson’s disease, is valued at $31 million, or $10.90 per share, and the NPV
of future general and administrative expenses works out to -$30 million, which
just about cancels that out. Edison is estimating the chance that biotech
revenues will materialize at about 1 in 13, or 7.5 percent. Also, there’s no
valuation placed on the rest of the biotech business. If you like bargains,
this might be one.
For more information, visit www.internationalstemcell.com
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