Stem Cell Research - The Bubble of 2009?

It is anticipated by many that President Obama will lift the ban on federal funding for stem cell research, a historic move that is expected to boost the US health industry. Just last week, the Federal Drug Administration (FDA) revealed that Geron (GERN) will be allowed to initiate phase I clinical trials of its early-stage treatment for spinal cord injuries. Obviously, short-sighted investors welcomed the news.

Firstly, this is a phase I trial, it will be expensive to carry out and there is no guarantee of success. Geron (GERN) is burning through cash at a rapid pace (in excess of $30 million a year), which is obviously a very dangerous thing to do in a recession, especially for a company which has practically no sales! The company is trading at over 80 times annual revenue and at a yearly high. Clearly investors are riding the "Obama Wave" and this one has to come back down to Earth soon. This is clearly all hype and no hard evidence of profitability. Yes, Geron (GERN) may turn out to be the next "Microsoft of the biotech industry" and make some investors incredibly wealthy, but at this stage it's far too early to make that call.

Also in the news is the company StemCells (STEM) which holds a significant stake in ReNeuron - a company that is about to undertake clinical trials in the UK. StemCells (STEM) also hit new highs this week, despite having no evidence of profitability. Geron (GERN) and StemCells (STEM) do own close to 300 patents between them, however, the question remains whether their research can bring either company through to profitability.

In these difficult economic times I am not brave enough to roll the dice on GERN or STEM, and not lucky enough to know when to hold them and when to fold them. Stem cell research may prove to be the bubble of 2009 as weary investors try to recoup some of their heavy losses from 2008. At times such as these, I will be looking to invest in solid, proven market leaders with low debt and a high degree of free cash flow. A decent dividend would also be nice.

Disclosure: At the time of writing the author did not hold shares in Geron (GERN) or StemCells (STEM).