Jan. 9 (Bloomberg) -- Five-month-old Luis Fernando Rojo was near death in a Miami hospital, suffering with blisters and bloody diarrhea after his tiny body rejected part of a marrow transplant for a rare bone disorder.

So U.S. regulators allowed Luis's doctors to try an unapproved therapy from Baltimore-based Osiris Therapeutics Inc. The treatment, designed to react with Luis's immune system to reduce inflammation, used adult stem cells taken from living people, not cells from embryos destroyed in a harvesting process that has spurred ethical and political debate.

Now, two years later, Luis is healthy and the therapy, in final testing, is one of about a half-dozen adult stem-cell products that could reach the market within two years. The treatments, from companies such as Osiris, Cytori Therapeutics and Aastrom Biosciences Inc., promise to do everything from rebuilding knees and breast tissue to treating rare disorders. The use of stem cells in medicine has arrived.

``It isn't about to be here, it is here now,'' says Christopher Thomas Scott, executive director of the Program on Stem Cells in Society at Stanford University's Center for Biomedical Ethics in Palo Alto, California. ``The companies that will emerge first in the stem cell arena will be those using adult stem cells.''

Embryonic stem cells are among the first cells created after conception. Because they can turn into any other cell type, scientists hope they may one day be used to help replace damaged or missing material in the brain, heart and immune system to cure Alzheimer's, heart disease, diabetes and other diseases. Yet scientists agree those uses remain years away.

Embryonic Concerns

Ethical concerns, related to the destruction of embryos, have limited research on the cells. In 2001, President George W. Bush put into place a ban on use of federal funding for studying all but a few U.S.-approved cell lines. This week, that ban will be debated in the House of Representatives before a scheduled Jan. 11 vote that Democrats hope will overturn the ban.

While the debate rages, research on adult cells has surged, and today scientists are studying the effects of adult stem-cell products against a range of specific medical needs.

To be sure, there are limitations. Adult stem cells, hidden in tiny numbers inside developed organs, grow into specific cell types only when the body needs them to replace or help repair a body part. As a result, some stem cell experts say the adult cells are unlikely to provide treatments for complex disorders such as Parkinson's disease and diabetes.

Additionally, adult cells are difficult to reliably extract, and they grow for only short periods compared with embryonic cells, said Jeanne Loring of the Burnham Institute in La Jolla, California.

`Pitfalls'

``There are pitfalls everywhere you go when you look at taking these cells from individuals and trying to use them for their own treatment,'' says Loring, who has studied stem cells for 20 years.

The idea that adult stem cells could be used to replace other types of cells originated in 1961 when two Canadian scientists showed that certain cells inside bone marrow could become all three types of blood cell: red, white and platelets. Their work paved the way for broader use of bone marrow transplants for some rare diseases, and spurred a new field of research into other uses.

Osiris was the first to move the field into the commercial arena, bringing to market in 2005 a stem-cell therapy that generates new bone to treat spinal defects or hard-to-heal fractures in which the bone is shattered or pieces are missing.

On the Way

More commercial products are on the way from companies using a variety of strategies.

Osiris sells stem cells from donors not related to the patient, as if they were a type of drug. Aastrom, based in Ann Arbor, Michigan, will offer a service that multiplies stem cells taken from a particular patient, then sends the cells back for that person's use. La Jolla, California-based Cytori makes a device, to be used in hospitals or clinics, that isolates stem cells from freshly drawn fat tissue.

Osiris, which first sold shares to the public on Aug. 4, was founded in 1992 using technology developed by Arnold Caplan, a stem cell researcher at Case Western Reserve University in Cleveland. Caplan showed that so-called mesenchymal stem cells can become muscle, bone, tendon or other types of tissues.

Shares of Osiris, which lost $32.3 million in the first nine months of 2006, have jumped 142 percent since their August debut. The shares rose $1.57, or 6.26 percent, to $26.64 at 4 p.m. in Nasdaq Stock Exchange composite trading, after touching $27.08 earlier in the day.

One Cell Fits All

The company collects bone marrow from adult donors, isolates the mesenchymal cells, then purifies and replicates them in labs. That produces trillions of theoretically identical cells that can be shipped in intravenous bags to hospitals and kept frozen until needed.

While Aastrom and Cytori take cells from a single individual and return them to the same patient, Osiris is mass- producing stem cells, a one-cell-fits-all approach.

That may end up being the most efficient and profitable process, says Eun Yang, an analyst with Jefferies & Co. in New York.

``From one person's donation, they can isolate and make 5,000 treatments,'' says Yang, who has a ``buy'' rating on the company and doesn't own the shares. This will mean lower costs per treatment and higher gross profit margins, Yang says.

No Immune Reaction

One reason Osiris can produce cells from unrelated people is that the mesenchymal cells it uses don't trigger an immune reaction, like an organ transplant might, says Osiris Chief Executive Officer Randal Mills. That's what allowed Osiris's product, called Prochymal, to save Luis Fernando Rojo's life.

He had received a bone marrow transfusion from a partially matching donor because no fully matched donor could be located. While that cured his bone disorder, it also triggered a severe bout of graft-versus-host disease, in which immune cells in transplanted tissue attack a recipient's tissues and organs.

Doctors used Prochymal, intended for use in inflammatory diseases, after the U.S. Food and Drug Administration gave emergency approval.

``Within a week, his skin had dramatically improved and the diarrhea had stopped,'' says Gary Kleiner, the University of Miami pediatric immunologist who treated him. Luis had to be treated a second time after two weeks, and Kleiner says he believes the disease is under control.

`Saved His Life'

``The cells saved his life,'' says Nelly Rojo, the child's mother.

The company announced Nov. 9 that Prochymal cured 23 of 31 patients with graft-versus-host disease in a recent trial. Final-stage testing is under way.

Joel Sendek, an analyst with Lazard Capital Markets in New York, says he expects the drug to be approved and enter the market in 2009, with peak annual sales of $24 million. He rates the company ``hold'' and doesn't own the shares.

The treatment of graft-versus-host disease is a ``substantial unmet medical need but a small market opportunity,'' he says.

Osiris said yesterday it received fast-track designation from U.S. regulators on Prochymal for the intestinal inflammatory condition Crohn's disease, and will soon begin final stage testing. The company's biggest potential market, though, may lie in generating knee cartilage for the 800,000 Americans who tear their meniscus each year.

The meniscus functions as the knee's shock absorber. Most who tear it have the meniscus surgically removed or repaired and accept a higher risk of developing arthritis.

Meniscus

Osiris's new product, Chondrogen, regenerated a functional meniscus in goats 78 percent of the time and has been injected into the knees of 55 people in a study the company plans to report on next month, CEO Mills says.

The company may charge as much as $5,000 to $10,000 per treatment, generating annual sales of about $800 million, analyst Yang says.

The only adult stem-cell product on the market is Osiris's Osteocel. It is made from mesenchymal stem cells that are mixed with spongy bone material obtained from human donors or cadavers. Because the cells aren't manipulated, Osteocel is seen by the FDA as a tissue transplant, not a drug. It did not have to go through the multiyear testing and approval process that will be required of the other stem cell products being developed by Osiris, Aastrom and Cytori.

Surgeons using Osteocel receive it in a bottle and can scoop out the cells and implant them into fracture sites. Osteocel is used in about 350 surgical procedures a month, with sales of $2.5 million in the quarter ended Sept. 30.

The main limit is obtaining cells from donors and cadavers. ``We have orders that are six times our ability to supply them,'' Mills says.

Aastrom

Aastrom, formed in 1991, takes bone marrow collected from patients by their doctors, processes it, then mails back the stem cells to be reintroduced into the patient's body at fracture sites. The company's method was developed by researchers at the University of Michigan in Ann Arbor. Its process manipulates and expands the cells, so extensive testing will be required to obtain FDA approval.

Aastrom is also conducting trials that use stem cells in spinal fusion, jawbone reconstruction and a rare disease, osteonecrosis, which damages the hip and often leads to repeated hip replacements.

The company plans to begin final-stage trials for osteonecrosis in the first half of this year.

``The product with the faster path to and through the FDA we will develop and commercialize,'' says Aastrom CEO George Dunbar.

Using a patient's own cells eliminates any risk of rejection and should expedite FDA approval, Dunbar says.

Stock Plummeted

Aastrom, which reported a $16.5 million loss in fiscal 2006, went public in 1997 with a share price of $7. The shares fell 29 cents to $1.56 at 4 p.m. in Nasdaq Stock Market composite trading.

Cytori's device emerged from work by Marc Hedrick, a plastic surgeon and now the company's president. Hedrick was doing research at the University of California, Los Angeles, when he found that fat tissue is rich in stem cells.

He initially created a company called Stem Source Inc., which was acquired in 2002 by Macrospore Biosurgery Inc. Macrospore went public in 2000 and changed its name to Cytori in 2005. Cytori's shares began trading on the Nasdaq stock exchange in December 2005 at $8. The shares rose 11 cents, or 2 percent, to $5.57 at 4 p.m. today.

New Device

Cytori's device, the Celution System, separates stem cells from fat. The company says it hopes to begin trials this year using its cells in patients recovering from heart attacks or suffering from chronic ischemia, impaired blood flow to the heart.

Cells processed in the Cytori device were recently used in a trial by 11 women with breast cancer who had undergone partial mastectomies in Japan. Keizo Sugimachi, a stem cell researcher and president of Kyushu Central Hospital in Fukuoka, injected the cells into their breasts.

``For mastectomies, we mix the extracted stem cells with fat, to make it easier for the cells to grow to become fat in the breast,'' Sugimachi says. ``This technology is not suitable yet for someone who lost a whole breast, but is very effective for someone whose breast was removed partially.''

Hedrick says he expects to provide cheaper treatments than potential competitors.

Automation

``You don't have the expense of cell culture,'' he says. ``The cells never leave the room. It's a behind-the-scenes procedure, completely automated. The only person you need there is the nurse to push the button and pull the cells out.''

The company hasn't yet decided whether to sell the device or charge by the treatment, and prices haven't been set.

One advantage Cytori has as a device maker is a ``much less arduous'' and less time-consuming approval process than for drugs, says Stephen Brozak, an analyst with WBB Securities in Westfield, New Jersey.

He initiated coverage of Cytori Dec. 12 with a ``strong buy'' rating and said in a note to investors that he expects ``meaningful revenues'' in 2010. Brozak doesn't own Cytori shares.

The work by companies like Osiris, Aastrom and Cytori is attracting venture-capital funds for pre-IPO stem cell companies, says Greg Bonfiglio, a special partner at Santa Monica, California-based Anthem Venture Partners. He's working to raise $150 million to start such a fund, Proteus Venture Partners.

``I don't think anyone in this field should look at each other as competitors at this stage,'' says Bonfiglio. `We're in such an early stage in the field that we need three of four companies to win.

``We're not at the Intel vs. AMD level. We're still trying to create the first computer.''

To contact the reporter on this story: Rob Waters in San Francisco at rwaters5@bloomberg.net.

Last Updated: January 9, 2007 16:26 EST