NeoStem: A Potential Blockbuster for Investors

Shares of NeoStem, Inc. (NASDAQ:NBS) have been very good to investors over the last nine months, gaining 40 percent based on the close this past week. A leader in the stem cell sector, NBS is beginning to garner the attention of investors and institutions alike as stem cell technology becomes more mainstream. Currently, NBS has four distinct divisions: Amorcyte, Athelos, VSEL Technology, and PCT Contract Manufacturing. The Amorcyte division is where the lead product candidate can be found — AMR-001, the area of NBS that investors are rightly focused on at the moment. AMR-001 uses a patients own adult stem cells derived from their bone marrow to treat an acute heart attack (STEMI), a multi-billion dollar market.

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The Athelos division is focused on immune disorders. The Treg program recently was granted a patent in Japan on February 4, similar to their industry peer Athersys (NASDAQ:ATHX) that announced Japanese patent allowance as well in mid January. VSEL Technology is focused on regenerative medicine and PCT is focused on contract manufacturing. PCT is the revenue generating side of the company. Each of these divisions has very interesting candidates with potentially large potential. For this article, we will focus on the largest of those markets — AMR-001.

The Billion Dollar Drug

AMR-001 is a bone marrow derived stem cell treatment designed to prevent major adverse cardiac events following acute myocardial infarction (heart attacks.) The potential market for AMR-001 is simply huge. According to Million Hearts, 2,200 people die from cardiovascular diseases every day. That is 800,000 a year or 1 in every 3 deaths. The cost of this has been estimated to be in excess of $312b per year.

Of the 800,000 events each year, 20 percent or approximately 160,000 patients have a ST-Elevation MI (STEMI), resulting in a reduced Left Ventricular Ejection Fraction (LVEF) of less than 50 percent. What this essentially means is that the heart attack was big enough and the heart so damaged that the remaining heart muscle could not compensate for the damaged heart tissues and, over time, the heart failed. It is these patients that are at significant risk for more adverse events including congestive heart failure, re-current heart attacks and/or premature death. It is also these patients that are a large part of the growing healthcare costs for cardiac events because many times they have repeated cardiac events that must be treated. This is the population that AMR-001 is targeting and it represents a potential market of over $1.2 billion annually for AMR–001 according to NBS.

AMR-001 is currently in Phase 2 trials with results expected in the third-quarter of this year. The Phase 2 trial is being conducted at 60 medical centers across the United States with 160 patients. The primary endpoint of the trial is a change in cardiac perfusion (RTSS by SPECT) from the baseline to 6 months. NBS is also currently looking to initiate filings for a Phase 1b/2a for chronic heart failure, a potential market of 23 million patients and billions in potential revenue.

Below are the companies anticipated milestones for 2014 from an investor presentation given a few days ago.

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Financials

NBS currently has a market cap of $190m, but has seen its market cap in excess of $300m recently. There are currently 27.14m shares outstanding, 17 percent of which are owned by insiders, and 4 percent by institutions. This low participation rate by institutions could be very beneficial to investors in NBS as the story on the lead product becomes more widely known. NBS is currently sitting on $50m in cash as of November 7, 2013. The average cash burn per quarter for NBS is approximately $7m giving NBS adequate funding for the next two years. All of NBS’s revenue is generated by its contract manufacturing division PCT. Last year, this division delivered $13m in revenue. PCT currently boasts a “who’s who” list of the cell therapy industry’s top clients and developed the manufacturing process for Dendreon Inc.’s (NASDAQ:DNDN) Provenge cell therapy during clinical trials.

The NBS chart is also poised for a possible breakout in the coming days. A move over $7.25 could see shares retest the recent high of $8.29. The stock has found very strong support at the 200-day moving average over the last three months at $6.75. For investors considering an investment in NBS the chart set up, along with the compelling story, suggest now is a good time.

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NBS has been making numerous investor presentations in the last few months. This active road show by NBS is typical before an influx of institutional interest. With only a 4 percent institutional ownership and a relatively small float of 24m shares, the increased pressure from fund buying could lead to a nice move higher in shares of NBS. NBS has a very large pipeline that is entering late stages now. With drugs targeting billion dollar markets, as well as the increased interest in stem cell derived medicines, NBS is a stock investors should take a very close look at.

The focus of this article was the main product candidate AMR-001. There is much more to this company, however. Its very small embryonic-like stem cell VSEL Technology platform is currently in preclinical models with the goal of advancing into early clinical studies for bone repair, healing skin and soft tissue wounds, and age-related macular degeneration. The PCT division helps to reduce the cost of in-house developed drugs while at the same time helping cash flow, a big benefit for early stage biotech companies. An active pipeline with a large cash balance, NBS makes for a very interesting investment.

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