Seeking Alpha
Long/short equity, growth, long-term horizon, biotech
Profile| Send Message|
( followers)

It has been a busy month for NeoStem (NASDAQ:NBS). The company has moved to the NASDAQ, made four new hires in leadership roles, and completed a successful reverse stock split. These events combined have led to NeoStem's 40% gain over the last month. However, many believe that these gains are just the beginning, including Aegis Capital, who initiated a buy rating and a pre-reverse price target of $2.50 (now $25.00).

Aegis Capital, a highly respected firm, set a price target representing a 400% gain from the day that the reverse split was issued. While Aegis did note that NeoStem is a unique participant in the stem cell sector - with four different technology platforms and a lead product with vast potential - the real upside lies in a near inevitable partnership or buyout from Baxter (NYSE:BAX). Already, plans are coming together nicely to support the notion. For the readers I'm presenting three reasons why Baxter will either partner with or purchase NeoStem.

#1 Clinical Development

The potentially company-changing product for NeoStem is AMR-001, which is in Phase II testing. The therapy repairs heart muscles and restores its function following an acute myocardial infarction (AMI) or heart attack. While data from this Phase II study is still needed to draw any conclusions about future success, we do know that last year NeoStem found optimal dosing of 10 million cells with AMR-001. When using 10 million cells, no patient experienced a deterioration of heart muscle function, compared to the 30% to 40% of patients who did when receiving less than the optimal level. This discovery has sparked a belief in the future success of AMR-001.

AMR-001 is in fact a stem cell therapy comprised of autologous bone marrow derived CD34+/CXCR4+ cells. In this particular context, the use of CD34+ cells is what is really important, and this is what makes NeoStem attractive to Baxter.

The reason for the interest is because Baxter has its own CD34+ cell therapy, which is a Phase III product being tested to treat chronic myocardial ischemia. In its Phase II study, Baxter's CD34+ product became the first therapy to increase exercise capabilities while reducing angina episodes. It was at this point that the use of CD34+ cells was considered a real hope in treating the most difficult of cardiovascular diseases.

The fact that both products have similar structures, but different approaches - AMR-001 repairs while Baxter's strengthens - creates product synergies. Some analysts already believe that Baxter's CD34+ therapy could become a very great success, a growth driver for the company. NeoStem has made claims that AMR-001 can produce annual sales that exceed $1 billion annually. Combined, these two products would make Baxter the number one company in the world in fighting cardiovascular disease, which is likely why so many Baxter/NeoStem rumors exist.

#2 Leadership Synergies

Baxter's CD34+ product was created by cardiologist Dr. Douglas Losordo, who was Vice President of New Therapies Development at Baxter. He is world renowned and considered by many to be among the most knowledgeable in CD34+ therapeutic development. Losordo and his team were responsible for Baxter's Phase II success, and now he is NeoStem's Chief Medical Officer.

Back on 6 August, Dr. Losordo's position at NeoStem was announced, and instantly the stock moved with significance. Losordo had served on the company's Scientific Advisory Board prior to accepting this new position, which I view as a testament to AMR-001's potential and its possibilities, as someone such as Dr. Losordo is unlikely to associate his name to anything that is ineffective. Most importantly, Losordo has the knowledge to make any changes needed to ensure AMR-001's success, and bolster its therapeutic effect.

Dr. Losordo's involvement with NeoStem and his connection to Baxter might have no meaning at all, but it does strengthen NeoStem's connection to the company. It gives NeoStem an "inside man" who is familiar with the upper level management at Baxter. This relationship adds to the belief that NeoStem is on the radar of Baxter, and that a buyout/partnership is highly possible.

#3 PCT

NeoStem is more than just a developmental company; the biotech is also a leader in cell manufacturing. NeoStem's business, Progenitor Cell Therapy (PCT), is a rapidly growing segment. PCT manufactures clinical products, stores therapeutics, and provides regulatory guidance. During its last quarter, revenue from PCT grew 73% YOY, and this was on top of a year when revenue doubled in 2012.

In 2013, PCT has added a half dozen new clients, which include companies, universities, and hospitals. While PCT has many clients, one of those clients includes Baxter, and its CD34+ therapy.

Clearly, the fact that NeoStem's PCT business manufactures Baxter's cell therapy strengthens the relationship between the two companies. One important query is why Baxter might be using PCT in the first place. Baxter is a $40 billion company and, effectively, there is not much that Baxter is unable to afford. In fact, Baxter could likely build its own manufacturing facilities and hire its own staff, but elects to use the facilities of a $150 million company to manufacture one of its most promising products.

The reason that Baxter is using PCT is because PCT is simply the best in this particular business. PCT has over 55,000 square feet of facilities, has performed more than 30,000 cell therapy procedures, and has over a decade of experience. This advantage is something that cannot be built with money, but is earned through experience.

Most NeoStem investors are aware that PCT performed the entire product manufacturing for Dendreon (NASDAQ:DNDN) while Provenge was in clinical trials. PCT did a good job, which then led to Provenge's FDA approval. Dendreon then chose to manufacture Provenge in-house, and built large and elaborate facilities. Last year, Dendreon's largest facility, Morris Plains, was shut down and already Dendreon has posted two consecutive quarters of YOY revenue loss.

Dendreon made a dire mistake and should have stayed with PCT. NeoStem has a solid network in place, and the benefit of using PCT is that it enables companies to transport products cheaply throughout the U.S. due to location. Dendreon closed a crucial facility in the northeast region of the U.S., and has been unable to replace its benefit.

In regards to Baxter, most investors believe that its CD34+ therapy will be FDA approved, based solely on the success of its Phase II study. However, Baxter will be marketing a cell therapy product, and will need a manufacturing and delivery system in place. By acquiring PCT, Baxter would solve this problem. Combined with Baxter's already impressive network, the acquisition of NeoStem would lower the costs associated with building, employing, and the training that is needed to successfully manufacture such a product.

Final Thoughts

The combined benefit of having PCT (a most-impressive manufacturing business) and AMR-001 must look very appealing to Baxter. The relationship between Baxter and NeoStem is strong, and continues to strengthen year after year. The question is whether or not Baxter will "tie the knot" with NeoStem and spend some of its $6 billion in cash to acquire the $150 million company.

In my opinion, if there has ever been an acquisition that makes sense, this may be the one. NeoStem is a very diverse company and, by acquiring it, Baxter would not only gain a billion-dollar product and a large manufacturing facility, but the giant would immediately become a potential leader in stem cell therapy. Regenerative medicine is a $50 billion industry and growing. If AMR-001 data proves positive early next year, I would watch for Baxter to snatch up the company … and fairly quickly.

Disclosure: I am long BAX, NBS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Could Baxter Acquire This Small Company?