Public Stem Cell Companies with a Market Cap > 20M

Company	Ticker	Stem Cell Type	Primary Indication(s)	Most Advanced Trial
Mesoblast	MSB.AX	Mesenchymal	Cardiovascular	Phase II
Osiris Therapeutics, Inc	OSIR	Mesenchymal	GVHD, Crohn's Disease	3-Phase III
Invivo Therapeutics, Inc	NVIV.OB	Neural	Spinal cord injuries	N/A
Pluristem Therapeutics, Inc	PSTI	Placental	Cardiovascular	Phase I/II
Cytori Therapeutics, Inc	CYTX	Adipose-derived	Cardiovascular/Soft Tissue	Phase II
Advanced Cell Technology	ACTC.OB	Embryonic	Retinal disease	Phase I/II
TiGenix NV	TIG.BR	Adipose-derived	Cartilage Regeneration	EMA Approved
Neostem	NBS	Bone marrow-derived	Cardiovascular	Phase II
Athersys	ATHX	Bone marrow-derived	Cardiovascular, IBS	Phase II
Fibrocell Science, Inc.	FCSC.OB	Fibroblasts	Aesthetic Dermatology	Phase II
EpiStem	EHP.L	Epithelial	Oncology and IBD	Pre-clinical
Neuralstem, Inc.	CUR	Neural	ALS	Phase II
StemCells, Inc.	STEM	Neural	CNS Disorders	Phase I/II
Cytomedix, Inc.	CMXI.OB	Bone marrow-derived	Stoke	Phase I
Brainstorm Cell Therapeutics Inc.	BCLI.OB	Bone marrow-derived	ALS	Phase II(a)
Aastrom Biosciences, Inc.	ASTM	Bone marrow-derived	Critical limb ischemia	Phase III
International Stem Cell Corp.	ISCO	Unfertilized eggs	Brain, Liver, Cornea	Pre-clinical
RegenoCell Therapeutics, Inc	RCLL.OB	Hematopoietic	Cardiovascular	Pre-clinical

World's Inc: The next big patent play

Worlds Inc. (WDDD.OB) is suing Activision Blizzard (ATVI) for patent infringement in the U.S. District Court for the District of Massachusetts. The lawsuit alleges that two of Blizzard Inc.'s massively multiplayer online role-playing games (MMORPG), World of Warcraft and Call of Duty, are directly infringing on a suite of patents (6,219,045; 7,181,690; 7,493,558; 7,945,856; 8,082,501; 8,145,998 & 8,161,385) owned by World Inc.'s collectively known as "System and Method for Enabling Users to Interact in a Virtual Space." These patents describe how to generate a virtual three-dimensional space designed to enable multiple users to interact in real time. Furthermore, the lawsuit claims that these patents describe the exact same virtual architecture utilized by Massive Multi-Player Online Games (MMORPG) in general. Worlds counsel is the renowned Houston-based Lawyer, Max L. Tribble, who agreed to take the case on a staged, contingency basis.

With shares of WDDD set to soar on a positive Markman hearing set for June 27th, 2013, EPE recently sat down with Worlds CEO Thom Kidrin. In this article, I give the key takeaways from this interview, and an assessment of the risks vs. rewards of this speculative tech stock.

One of EPE's primary concerns with Worlds was the company's financial statements, which read as if the company is teetering on bankruptcy. Mr. Kidrin conveyed to us that the Worlds is financially viable going forward, with access to capital from a number of private investors on an "as needed" basis. Even so, Worlds has not needed to access this type of capital, nor has it needed to resort to debt financing. Instead, Mr. Kidrin has put his own money into the company when needed. Overall, Worlds should thus have adequate capital to see the lawsuit through to fruition, although it may require some form of dilution.

In regards to the logistics of the lawsuit, we asked Mr. Kidrin about the District of Massachusetts scheduling process, especially in regards to a trial, if needed. He thought the case would likely see trial, if needed, within 8 months after the Markman hearing, based on the Court's history with patent infringement cases. This would place the trial date somewhere around the 1st Quarter of 2014. That said, a positive Markman hearing would probably doom any chance for an Activision Blizzard win at trial due to the large number of claims being brought in the suit. For investors new to the patent infringement scene, a plaintiff only needs to show infringement on a single claim. As such, the odds clearly favor plaintiffs that claim infringement on a large number of claims across several patents. Worlds is claiming infringement on a total of seven patents, giving them an excellent chance of winning at trial.

While the expert damage reports are a long way off, Mr. Kidrin did inform us that they are seeking an award that would compensate them for both past and future damages based on the U.S. revenues for the two infringing gaming systems. Moreover, future damages would likely come in the form of a Running Royalty. Another important point is that Worlds is seeking treble damages for willful infringement, as they claim to have substantial evidence that Activision Blizzard was fully aware of these patents during the creation and marketing of these two gaming systems. Unfortunately, Activision Blizzard has made it extremely difficult to get a handle on the U.S. revenues for these two gaming systems, so even a rough estimate of the damages cannot be given at this time. Nevertheless, the number of virtual worlds users in the broad sense continues to nearly double year after year (see figure below); so it's hard to imagine that a base award for damages wouldn't be at least in the hundreds of millions.



Given that these patents clearly describe literally any variation on multi-user interaction in virtual space, we were interested in the possibility of other future patent infringement suits in sectors other than gaming. Mr. Kidrin was forthcoming about this issue, and stated that he believes the major social networking sites are also infringing on some or all of these patents. Simply put, more lawsuits are coming down the road, adding further value to WDDD.

Conclusion
Our take on Worlds Inc is that the stock is a strong speculative buy. Mr. Kidrin has access to enough capital to keep the company afloat through the duration of the Activision Blizzard suit, and the suit appears to have merit in my lay opinion. Indeed, I highly doubt Mr. Tribble would be taking the case on a staged contingency basis if it wasn't a strong case. Overall, there are too many claims for Activision Blizzard to dodge them all in my opinion, and the patents appear to outline the exact same virtual architecture used by these two gaming systems. Moreover, unlike the Vringo (VRNG) vs. Google (GOOG) case where treble damages weren't initially claimed, Worlds is claiming willful infringement, and is a practicing entity in the online gaming space. So Worlds would be entitled to an injunction against the infringing systems if they prevailed at trial, thus increasing the risks of a trial for Activision Blizzard.

In addition to a settlement or a win at trial, Worlds offers a third opportunity for investors to walk away with substantial gains. With a paltry market cap of only $17M, I would imagine that a positive Markman hearing should spark buyout interest in Worlds by other patent holding companies (PHC's). I believe this scenario is likely because these patents clearly extend beyond gaming systems, and therefore offer opportunities for licensing deals or other lawsuits against major social networking sites such as Facebook (FB), LinkedIn (LNKD), amongst others. Indeed, EPE has already received "unconfirmed" info that the PHC Vringo is interested in the Worlds' patent portfolio, pending a positive Markman hearing. Interestingly enough, when we attempted to confirm this lead, we were informed that it cannot be discussed at the current time. Overall, Worlds tiny market cap could present an interesting buying opportunity for another PHC looking to increase their own patent portfolios.

In sum, our take on WDDD is that it is a strong speculative buy at current levels, and offers investors numerous avenues to win with limited downside risk. The biggest risk with Worlds' would appear to be its ability to remain financially solvent, and the worst case scenario appears to be a rapid acquisition by another patent holding company.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WDDD.OB over the next 72 hours.

Arena Pharmaceuticals: Puts are the way to go

Arena Pharmaceuticals (ARNA) has been dropping on heavy volume since the company's flagship anti-obesity drug Belviq was left out in the cold at the recent Committee for Medical Products for Human Use (CHMP) in Europe, and speculation is mounting that Belviq will be rejected in Europe altogether. Interestingly enough, shares of ARNA had been pushing towards the $11 dollar mark on anticipation that Belviq would be approved, and the stock would finally begin its long awaited ascent into the teens. In a previous article, I posited that ARNA would continue to rise into the low teens prior to the launch of Belviq, and its potential approval in the EU. Furthermore, I stated that Belviq's launch would be a "sell the news" event, and investors should lock-in profits well ahead of this event. In this article, I outline an even more intriguing investing strategy centering around the launch of Belviq that should be beneficial to Longs and Shorts alike.

In a recent Seeking Alpha article (hyperlinked above), Spencer Osborne aptly noted that savvy traders have been taking advantage of the swings in ARNA. Nevertheless, relatively few authors have commented on the subsequent movement in ARNA options, despite several trades with 100-200% upside potential. From a personal standpoint, I tend to prefer employing options in volatile stocks like ARNA because they offer both a defined risk level, and substantial leverage. Even so, options in volatile stocks do come with a significant problem, in that the Greeks tend to be utterly useless in providing investors with an accurate feel for how the option will track the stock. Why this is the case is beyond my options knowledge level quite frankly, but I have found it to be true time and again. Indeed, I believe this is one reason the highly intriguing options plays available in ARNA right now are being broadly overlooked. Essentially, options on stocks that make huge moves on material news events tend to be more of a "gut" play, which probably turns off a large number of investors. Even so, I think investors should at least consider the option play outlined below, as it offers a large upside with a defined risk profile.

ARNA Options
Before launching into the specific option play I find most intriguing right now, I believe it's helpful to first look at the general trends within ARNA Options. In this way, we can understand the irrational movement of the market, and try to move in the opposite direction.

One of the first notable trends is that the open interest in ARNA Calls tends to be 2-4X higher than Puts for all available time frames. I find this surprising because one would think that Longs should be hedging their position against a poor launch of Belviq. There can be no doubt that ARNA is going to move big, either up or down, when the initial sales numbers of Belviq hit the market. So hedging a long position with Puts is the smart play, yet the open interest for Puts is miniscule compared to Calls.

The next interesting trend is that open interest in Calls, and hence, their price, has been steadily moving to all-time highs in the past few trading sessions. I find the movement of the $10 dollar July Calls to be quite telling. By July, the initial sales numbers and the EMA decision for Belviq should be known to the market. So July Call buyers are essentially betting on a very strong launch for Belviq, and have thrown caution to the wind by not taking out insurance in the form of Put buying. In sum, the bullish movement in the stock has been coupled to a subsequent bullish movement in the Calls.
With the Calls already seeing new highs and a strong launch of Belviq unlikely, Call buying is thus irrational. Specifically, Calls at these levels no longer offer substantial leverage, and offer no hedge whatsoever against a negative catalyst. In other words, Call buying now offers all the risks of Options (i.e., having the Option expire worthless or taking a rapid downturn) without the benefit of maximum leverage.

Why these July Puts are a BUY for Longs and Shorts alike
The market widely believes that ARNA is going to make a major move this year, with the direction depending mainly on the strength of Belviq's launch. With that in mind, I believe that it's a waste of capital to buy Puts either at or near the money for hedging purposes (i.e., $8-$10 strikes). First off, the $8-$10 Puts are currently overpriced in my opinion, and are thus only a strategic buy for ARNA bulls looking to increase a Long position (i.e., exercise the Put) in the event of a major downturn in PPS. To do so, however, I believe you would be passing up a much more lucrative Options play, and not putting your money to work in the most effective manner.

Specifically, I believe that the July $5 and $6 ARNA Puts offer maximum Alpha. To understand why these two strikes are excellent buys, we need to think carefully about how the market will react to a weak launch of Belviq. Namely, Belviq's initial sales numbers need to be huge in order to sate the ravenous retail crowd. If these numbers are way off the mark and there is good reason to believe they will be, I would expect investor fatigue to finally set-in. At that point, ARNA bulls are more than likely going to hit the exits at full speed, causing the stock to crash in a similar fashion as VVUS after its calamitous launch of Qsymia. Under that scenario, ARNA will likely retrace to pre-FDA approval levels (sub $5). For Longs thinking this is not possible, the high short interest in ARNA says a lot of smart money thinks otherwise.

Now let's think of this in terms of the $6 July Put option. This option is currently trading at a measly 48 cents, well off of its earlier highs of 91 cents. In the event that ARNA plunges around April-May, this particular Put should appreciate somewhere in the neighborhood of 100-200%. Again, this is my "gut" feeling, as I put little faith in the Greeks for ARNA options. By contrast, a short position at current levels would only offer something around a 40-50% gain, and comes with the nasty risk of a strong launch propelling the stock into the teens. Overall, the $5-$6 July Puts offer maximum leverage due to current prices, a defined risk profile compared to a short position, and an extremely cheap hedge for Longs. Overall, the July $5-$6 Puts are a win-win for Longs and Shorts alike.

Disclosure: Enhydris Private Equity has no position in ARNA, and no plans to initiate any positions within the next 72 hours. This blog is for entertainment purposes only, and should not be construed as investing advice in any way, shape, or form.