Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
One of the hardest things to do is to try and identify the best stocks in the biotechnology world. Each biotech company claims to have the perfect science to address unmet needs in the medical field. However, investors must do a lot of careful analysis in order to determine which stocks are, in fact, the "best" stocks. When analyzing biotech stocks, investors must understand the whole picture, including the science, the fundamentals, upcoming catalysts, potential for dilution, cash on hand, and burn rates. One stock that I think meets all the requirements for consideration is NeoStem, Inc. (NBS).
NeoStem is quickly becoming one of the leaders in the cellular therapy medical field. The company is involved in the development of novel proprietary cell therapy products in addition to operating a contract development and manufacturing organization that provides services to others in the regenerative medicine industry. One advantage that NeoStem has over its competitors is that it combines a therapeutic development business with a revenue-generating service provider business. This combination allows NeoStem to develop in-house and generate substantial cash flows.
As mentioned above, the company is currently developing an active and exciting portfolio of product candidate assets based on a diverse array of technology platforms. A few examples are:
- Amorcyte's AMR-001: Autologous bone marrow-derived adult stem cells targeting the substantial market of cardiovascular treatment
- Athelos: T-cell therapeutic targeting autoimmune conditions
- VSEL Technology: Pluripotent adult stem cells that can regenerate tissues and potentially treat conditions ranging from macular degeneration to liver regeneration to osteoporosis
- Wound Technology: Contract with U.S. Army Medical Research allows NeoStem to evaluate stem cells for rapid wound healing
- Intellectual Property: Building a dominant IP portfolio within the field of cell therapy to protect its cutting edge technology platforms
The hope is that this diverse array of technology platforms will pay dividends in the future as the science continues to grow and prove itself in trials and studies. Perhaps the most potential rests with Amorcyte, which will release the results of an ongoing Phase II trial in the summer of 2014.
Amorcyte's product is AMR-001, used in the prevention of major adverse cardiac events following acute myocardial infarction (AMI). The company has been enrolling patients in the PreSERVE AMI Phase II trial since January 2012. On March 7, 2013, the company received approval to continue the Phase II trial for AMR-011. NeoStem intends to enroll 160 patients in a placebo controlled, double-blind study. The enrollment is expected to be completed during the 4th quarter of this year. Once the enrollment is complete, it should take the company 6 to 8 months to compile the data and make an official announcement to both the medical community and investors. Now Amorcyte's AMR-001 is not the only area of NeoStem that has an incredible amount of potential. The other is the company's Athelos program.
Athelos is a therapeutic program with the potential to treat a wide range of autoimmune diseases. Immune mediated diseases, autoimmune diseases, and allergic diseases are a result of imbalance between T-effector cells and T-regulatory cells. T-regulator therapy represents a novel approach for restoring immune balance by enhancing T-regulatory cell number and function. Phase I work is ongoing globally. In addition to Athelos, the company's VSEL Technology program is also demonstrating a lot of potential for the future.
Since 2007, NeoStem has been engaged in the research and development of new therapies based on human very small embryonic-like stem cells, or VSEL Technology. In collaboration with the University of Louisville Research Foundation, VSEL Technology has demonstrated the potential for cellular regeneration. The studies to date suggest that human VSELs have the potential to differentiate into cells of each of the three germ lineages in animal models. Recently, NeoStem and its partners at the University of Michigan demonstrated that VSELs can regenerate bone in a mouse model. In light of these developments, NeoStem intends to begin the first human clinical trial for VSEL Technology in 2013. NeoStem currently is pursuing 5 studies that include bone regeneration and osteoporosis, macular degeneration and glaucoma, chronic wound healing, sciatic nerve regeneration, and radiation exposure. Each of these 5 studies is currently in pre-clinical status. In addition to VSEL Technology, the fourth therapeutic program in development is wound technology.
In April of 2009, NeoStem entered into a license agreement, in which the company acquired a global, exclusive license to certain stem cell technology and applications for wound healing. NeoStem has been awarded a $700,000 contract from the U.S. Army Medical Research and Material Command, Telemedicine and Advanced Technology Research Center. This contract will serve the purpose of evaluating the use of topically applied bone marrow-derived adult mesenchymal stem cells for rapid wound healing.
In addition to the company's therapeutic development programs, NeoStem is currently building a diverse and valuable intellectual property portfolio. NeoStem Intellectual Property focuses on immunology, cardiology, orthopedic, wound healing, age related tissue restoration, stem cell isolation, collection, and storage, and VSEL discovery and applications.
The patent portfolio includes composition of matter patents for Athelos and AMR-001. The portfolio holds over 30 issued patents, over 90 patent applications, composition of matter and method claims, and a geographic reach that includes filings in North America, Europe, Asia, Australia, Israel and South Africa. On May 16, 2013, NeoStem announced the geographic expansion of intellectual property around its lead product candidate, AMR-001. The company has been granted a patent in Malaysia and a notice of recommendation for patent allowance in the Philippines. These patents are in the family of U.S. patent number 7,794,705 titled "Compositions and Methods of Vascular Injury Repair." Additionally, NeoStem was granted a second South African patent titled "Infarct Area Perfusion-Improving Compositions and Methods of Vascular Injury Repair." These patents will bring AMR-001's total worldwide patent coverage to nine patents. Dr. Andrew Pecora, Chief Medical Officer of NeoStem, said the following about these additional patents:
The Asian and African geographic expansion of Amorcyte's patent protection, which also includes Japan as previously announced, creates the potential to access markets where heart attack and cardiovascular disease are significant threats to public health.
Amorcyte's Market Potential
Since the most potential for NeoStem rests with AMR-001, it is important to analyze the market potential for the treatment of Acute Myocardial Infarction. Approximately 800,000 events of acute myocardial infarction occur in the US each year. Of these 800,000 events, approximately 20% end up suffering from a reduced Left Ventricular Ejection Fraction of less than 50%. Essentially what that means is that their heart was so damaged from the event that over time, despite treatment, the heart will begin to fail. These patients are at risk for suffering from the following:
- Congestive Heart Failure
- Significant Arrhythmias
- Premature Death
- Acute Coronary Syndrome
These patients who suffer from the above are the primary target for AMR-001. The 160,000 patients who suffer from these afflictions represent an annual market of over $1.2 billion.
It's quite common to find stem cells company with deteriorating fundamentals. Dilution is a common theme in this biotech space, but luckily, NeoStem seems to be improving. For a stem cell company such as NeoStem, one of the most important areas to look at is the amount of cash on the books. At the end of 2012, NeoStem had a cash position of $13.7 million, an increase of $9.8 million from the end of 2011 when the company only had $3.9 million. In addition to first quarter spending and a secondary offering in May, the company currently has roughly $20.0 million of cash available. With a cash burn rate of approximately $2 million per month, the company should have enough to last at least the rest of the year without having to issue additional shares. Additionally, the cash burn rate is highest right now due to the fact that the PreSERVE Phase II trial is at its peak enrollment. The company was also able to reduce its long-term debt by approximately $200,000 from 2011 numbers. At the end of 2012, NeoStem only had long-term debt of $273,000. The company was also able to reduce a category called "other liabilities." This number stood at $29.5 million at the end of 2011. The company paid off $21.8 million of that and only had other liabilities of $7.8 million at the end of 2012. So the balance sheet looks extremely strong with the company growing its cash and at the same time, reducing its long-term liabilities.
If we turn our attention to the income statement, we will see that NeoStem is again making all the right moves. NeoStem was able to generate total revenue of $14.3 million in 2012, an increase of $4.3 million from 2011 levels. Additionally, the company was able to improve its operating loss despite spending an additional $3 million in research and development. The operating loss for 2012 came in at $30.4 million, an improvement of $3.6 million from 2011.
Investors are often interested in biotechs with upcoming catalysts due to the fact that these catalysts have the potential to cause significant share price appreciation. NeoStem has several upcoming catalysts that investors should be paying attention to:
- On May 29, 2013, NeoStem will be participating in the National Institutes of Health's Center for Regenerative Medicine 2nd Annual Stem Cell Industry Symposium
- On May 30, 2013, NeoStem will be participating in the 2nd Annual Marcum Microcap Conference
- During 2013, NeoStem will provide an update on its plan to use its VSEL Technology to begin a Phase I trial
- During the 4th quarter of 2013, NeoStem will announce full enrollment of its AMR-001 PreSERVE Phase II trial
- In 2014, approximately 6 to 8 months after enrollment ends, NeoStem will announce the Phase II trial results for AMR-001
Again, these upcoming catalysts offer the potential for tremendous share price appreciation; but conversely, they can also cause shares to fall rapidly. Although I don't anticipate the latter, investors must understand the risk that these biotechs face.
As good as the company appears, it's always important to note the risks. My biggest fear for NeoStem is additional secondary offerings in the future. As an early stage stem cell company, cash is king. And although the company does currently have approximately $20 million cash on hand, it may need more in the future to continue funding operations. Additionally, the stem cell industry is extremely competitive and there are a variety of companies trying to treat different areas using stem cell research. In spite of these risks, I am impressed with the fact that the company seems to be developing a deep pipeline of future revenue generators. Whether they pan out is another story; but the company certainly seems to have a lot of potential.