StemCells, Inc. Reports First Quarter Financial Results and Announces Reduction in Force

StemCells, Inc. has reported financial results for the first quarter ended March 31, 2011. The Company also announced it is reducing its US-based workforce by 30 percent to reduce its cash burn rate and extend its financial resources in order to focus on advancing the clinical development of its lead product candidate HuCNS-SC® cells (purified human neural stem cells) as a potential treatment for spinal cord injury, myelination disorders, age-related macular degeneration, and other central nervous system disorders.

“While decisions of this nature are never easy, we believe we are taking the necessary and appropriate steps to execute our clinical agenda and thereby maximize shareholder value,” said Martin McGlynn, President and CEO of StemCells, Inc.

McGlynn continued, “For the past several years, we have been investing significant resources to conduct the extensive research and preclinical studies needed to advance our HuCNS-SC neural stem cells into human clinical testing, and to manufacture a sufficient number of cGMP compliant cell banks to conduct those clinical trials. Now, with multiple clinical trials underway and others soon to begin, we will be generating clinical data regarding the therapeutic potential of our HuCNS-SC cells as these trials run their course. We anticipate that this reduction in force, combined with other initiatives to reduce our infrastructure and overhead costs, will put our burn rate on a downward trajectory for the next several years as we reap the rewards of those earlier investments.”

StemCells is currently conducting a Phase I/II clinical trial in chronic spinal cord injury in Switzerland, and expects to enroll and dose the first cohort of that trial this year. The Company has completed patient enrollment in a Phase I trial in Pelizaeus-Merzbacher disease (PMD), a fatal myelination disorder in children, and results of this trial are expected to be reported in early 2012. In addition, the Company plans to file an IND in the fourth quarter of this year to initiate a Phase I/II clinical trial of HuCNS-SC cells in age-related macular degeneration, which is the leading cause of vision loss in people over the age of 55.

First Quarter and Recent Business Highlights

Therapeutic Product Development

• In February 2011, we completed enrollment and dosing of the fourth and final patient in a Phase I trial of our HuCNS-SC cells in PMD. Results of this trial will be reported in early 2012.

• In March 2011, we initiated a Phase I/II clinical trial of our HuCNS-SC cells in chronic spinal cord injury. This trial will accrue patients with both complete and incomplete degrees of paralysis who are three to 12 months post-injury. The trial is being conducted in Switzerland at the Balgrist University Hospital, University of Zurich, a world leading medical center for spinal cord injury and rehabilitation.

• In April 2011, we discontinued a Phase Ib clinical trial of our HuCNS-SC cells in neuronal ceroid lipofuscinosis (NCL, also referred to as Batten disease). NCL is a rare and fatal neurodegenerative disorder in children, and this Phase Ib trial was designed to enroll patients with less neuronal degeneration than patients in our Phase I NCL trial. However, despite six months of effort, no patients meeting the eligibility criteria for the trial were identified and we terminated the trial due to lack of patient accrual.

• In April 2011, we entered into a research collaboration with Frank LaFerla, Ph.D., a world renowned leader in Alzheimer’s disease research, to study the therapeutic potential of our HuCNS-SC cells in Alzheimer’s disease. Dr. LaFerla is director of the University of California, Irvine (UCI) Institute for Memory Impairments and Neurological Disorders (UCI MIND), and his published research has shown that mouse neural stem cells enhance memory in a mouse model of Alzheimer's disease. The goal of this collaboration is to replicate these results using our human neural stem cells.

Tools and Technologies Programs

• In January 2011, we launched two new antibody reagents that have utility for the detection of a range of different human cell types. These new reagents expand our SC Proven® portfolio of innovative stem cell research products.

• In March 2011, we launched nine new purified nucleic acid and protein stem cell lysate products and three related kits to further broaden our SC Proven portfolio of media and reagents. These new, serum-free reagents enable stem cell researchers to more accurately test and validate stem cell lines and associated genes and gene products.

• In March 2011, we launched three new cell culture supplements for the derivation, culture and differentiation of human and mouse embryonic stem cells, induced pluripotent stem (iPS) cells, and tissue-derived neural stem cells. These new SC Proven supplements provide stem cell researchers with well-defined reagents that are free of the serum and animal protein-derived contaminants that can cause variability of performance and impair analyses.

Financing Activities

• In January 2011, we raised gross proceeds of $10,000,000 through the sale of 10,000,000 shares of common stock to selected institutional investors at a price of $1.00 per share. The investors were also granted an option to purchase an additional 6,000,000 shares at $1.00 per share. The option was not exercised and expired on February 18, 2011.

First Quarter Financial Results

For the first quarter of 2011, the Company reported a net loss of $5,747,000, or $(0.04) per share, compared with a net loss of $6,124,000, or $(0.05) per share, for the first quarter of 2010. Loss from operations in the first quarter of 2011 was $7,509,000, which was 1% lower than the $7,601,000 loss from operations in the first quarter of 2010.

Total revenue during the first quarter of 2011 was $221,000, compared to $230,000 in the same period of 2010. Revenue from product sales in the first quarter of 2011 was $149,000, which was a 28% increase compared to the same period of the prior year.

This growth was driven by both increased unit volumes and new product launches in the Company’s SC Proven media and reagents business. Revenue from licensing agreements and grants was $72,000, which was a 37% decrease compared to the previous year primarily due to the completion and termination of several projects funded by grants.

Total operating expenses in the first quarter of 2011 were $7,676,000, compared to $7,787,000 in the same period of 2010. Selling, general and administrative expenses of $2,076,000 were 20% lower in the first quarter of 2011 compared to the first quarter of 2010, while research and development expenses of $5,525,000 were 10% higher than the first quarter of 2010 as the Company continued to prioritize its product development efforts.

Other income in the first quarter of 2011 was $1,762,000, compared to $1,477,000 in the first quarter of 2010. This increase was primarily due to a decrease in the estimated fair value of warrant liability, which totaled $1,783,000 in the first quarter of 2011 and $1,516,000 in the first quarter of 2010.
 
Cash, cash equivalents and marketable securities at March 31, 2011 totaled $21,623,000, compared with $19,899,000 at December 31, 2010. The Company raised approximately $9,400,000 in net proceeds in a financing in January 2011. For the first quarter of 2011, net cash used in operating activities was $7,418,000, which was 5% lower than the same period in 2010.

Reduction in Force

The Company is eliminating 20 full-time positions in its US-based workforce, primarily in the research and general and administrative areas, while maintaining a critical translational science capability to support the advancement of its preclinical and clinical development programs.

The Company estimates this action will generate annual expense reductions of approximately $2.3 million, primarily from savings in salaries and benefits and reductions in laboratory supply costs. When combined with previous steps taken to reduce operating expenses and cash burn, the Company is targeting an annualized cash burn “run rate” of approximately $18 million going into 2012.

The Company estimates it will record a one-time charge for severance and related expenses of approximately $300,000 in the second quarter ending June 30, 2011.