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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