STEM Scoops up SCS

In the first of what many are predicting will be a rash of vulture-like acquisitions, Stem Cells, Inc (NADSAQ:STEM) has gone basement-level bargain shopping for brand-name goods and has surfaced with a deal.

As much as STEM's McGlynn loves to find a deal, I love being right. I suspect we were both a little lucky. I won't say I predicted this but in my Jan 2 Industry HiLites post I wrote the following:

Stem Cell Sciences plc, which is listed in Australia and the United Kingdom announced that it had received a GPB200,000 ($A426,348) loan to use for working capital. In return, the third-party lender has been granted an exclusive period to conduct further due diligence in relation to Stem Cell Science's business and assets. Stem Cell Sciences said it was not in talks with any third parties that might lead to an offer for the issued share capital of the company....

Wading now into deep speculation, this tickles the senses like a move Stem Cells Inc might make (I have no information upon which to base this except their past actions) though the SCS assets would not seem to fit with STEM's portfolio. In that respect, this would seem like more of a natural acquisition by Pfizer which did a 5-year deal with SCS in November. I suspect we shall soon see...

As we know, STEM has been kicking a lot of tires over the past couple years looking for the right deal at the right time. The agreement to sweep up Stem Cell Sciences plc (AIM: STEM, ASX: STC) when they were down and out certainly seems to have the kind of value you would expect from acquisitions in these tough times.

STEM is buying the "operating subsidiaries and certain related assets of Stem Cell Sciences ("SCS") for 2,650,000 shares of StemCells common stock and approximately $715,000 of waived loan entitlements."

According to exchange filings today, this deal entails the "Trading Subsidiaries of the Company and certain ancillary agreements, assets, properties and rights for a maximum total consideration of approximately US$4,849,000. "

The closing price for StemCells shares traded on Nasdaq on 27 February 2009 (being the last practicable date prior to publication of the circular) was $1.56 per share.

According to an update in the Wall Street Journal, "shareholders representing 30% of Stem Cell Sciences have backed the deal. "

Under the terms of the asset purchase agreement, StemCells will acquire substantially all of the operating assets and liabilities of SCS, including its research and development operations in Cambridge, UK and near Melbourne, Australia, and substantially all its intellectual property portfolio. It is expected that most of SCS' approximately 20 full-time current staff will remain
with StemCells upon completion of the transaction.

The transaction is expected to close within two months, after which SCS expects to wind down its operations and distribute proceeds from the sale of the acquisition shares, less its transaction and wind-down expenses, to its stockholders.

President and CEO of StemCells, Inc., Martin McGlynn, is quoted as saying:

"The industrial logic of this acquisition is compelling.

StemCells has established itself as a world leader in tissue-derived stem and progenitor cells for therapeutic uses, while Stem Cell Sciences has focused on non-therapeutic applications for embryonic and tissue derived stem cells, such as cell-based assays for drug discovery and screening. This proposed acquisition will combine three distinct stem cell platforms, adult, embryonic and iPS cells, for both therapeutic and drug discovery applications, and will position StemCells to diversify and pursue near-term commercialization opportunities while continuing to develop our cell-based therapeutic products."

I certainly agree with Marty that the value is compelling. I stand by my original observation that I don't see a great fit as STEM is currently positioned but it may well be that this signals a strategic shift in STEM's direction and focus.

We do know that STEM was looking for value and, if possible, a revenue stream that would lighten the burn rate of therapeutic product development. Not only does this acquisition significantly strengthen STEM's IP position in a wide-range of platforms, it potentially positions the company to enjoy a revenue stream that it doesn't need to survive but certainly helps alleviate the bottom burn.

It is possible, of course, that this was part of a much grander overall vision for the company that is only know becoming obvious to us but I suspect not. I suspect STEM is being opportunistic and building value where it can find it. And there's nothing wrong with that!

One of my first blogs here was a discussion of the impending pefect M&A storm brewing in the cell therapy sector. I'm certainly not claiming that post was the result of any original thought or earth-shattering observation but it does remind us that we saw this coming and this is likely just the beginning of a re-shaping of the cell therapy industry.

The good news is that SCS was bought rather than let twist in the wind letting good assets, IP, and people drift off in the storm. The sector is better off for this value being captured and reinvented in a more viable business model. Let's hope we're lucky enough to see the same for other companies in similar straits.