As much of the background on Neostem (NBS) has been covered by prior SA articles (and by fairly ample sell side coverage, for a market cap this size), I would like to focus on the multi-pronged catalyst pathway ahead for the company and my view on the attractive risk/reward profile at current levels.
As has been covered on prior SA articles, Neostem develops therapies for chronic unmet needs around its significant IP portfolio, and operates a revenue generating service division with expertise in contract manufacturing and cell banking. The company is a leader in the emerging cellular therapy industry, and combines its therapeutic development business with a revenue-generating service provider business; the company's management team is also particularly strong and includes what might be considered some of the 'Dream Team' of cell therapy scientists.
In a rarity for a small/development stage biotech company, NBS has three distinct potential significant inflection near term drivers for the shares.
(1) The key driver for NBS shares, in my opinion, will be the outcome from the current Ph-II trial for its lead product, AMR-001, which is indicated for preserving heart muscle function after heart attack (using a patient's own cells). I concur with the consensus opinion that the early data from the Phase I trial, which showed that 10mm cell dosing was effective (specifically that 0% of patients had a deteriorated heart function vs. comparator arm of 30-40%), indicates that the Ph II lower dosing is likely to be positive as well. Specifically, the Cochrane analysis suggests that with the phase II supporting similar endpoints and design, but now measuring additional data such as perfusion, ejection fraction, the likelihood for a positive result is amplified.
a. As far as beyond the Phase II, in imagining the Phase III trial design, the company believes that the cost/size would be closer to BAX's own ph III, with 440 patients in Europe, vs. Mesoblast with 1700 enrolled.
b. Health Economic analysis is likely supportive of even a $25-30k price point once approved, if you can avoid a cardiovascular event that costs itself $50-75k, and then $200-250k over 6 months
(2) A recent seeking Alpha article outlined a potential sale of the company to Baxter (BAX). While I will not revisit all the points made by the author, I will say that the potential management ties to BAX (Dr. Losordo- Scientific Advisor at NBS and prior inventor of BAX' CD34), coupled with the current outsourced service relationship, and the links between the CD34+ cell therapy (BAX's own Phase III product for treating myocardial ischemia) make it a real possibility.
(3) Uptick in Progenitor Cell Therapy (PCT) run rate: PCT grew 73% y/y in 2Q, after doubling revenues in 2012 (run rate was $14mm in '12). For 2013, PCT has added 6 new clients, and has disclosed a partial list: BAX, Prima BioMed (PRR), Athersys (ATHX), Sotio, Coronado (CNDO), and Immunocelluar Therapeutics (IMUC). PCT is most often known as the product manufacturer for Dendreon (DNDN), but in my view, the division is significant not only for the relationships and potential partnerships for NBS, but for the revenue run rate that allows the company to sustain a low cash burn rate (funding the trials), and for a high margin drop through business that diversify the company's revenue prospects. The PCT business has already catapulted into profitability, and the potential for doing more back-end loaded deals with its clients (only 1 of which is set up right now) could position well for a revenue uptick in the out years as well.
(4) The fourth "catalyst" which is more of a longer term play, is the pipeline. NBS will be starting its Type I diabetes and steroid resistant asthma and CHF trials in 1Q/14- each of which is 1 year to enroll…and will look for intermediate targets that could lead to endpoints that roll into the Phase II in 2H/15.
Competitors: No Pure Play, Best Comps are Divisions within Well Run Peers
NeoStem often gets lumped into comparables with peers ACT (ACTC.OB), Neuralstem (CUR), and/or Pluristem (PSTI), or Cytomedix (CMXI.OB). While these appear to be natural pure play comps, the truth is that the best peers are actually divisions/products at major companies: Celgene's (CELG) cellular therapeutic division, Novartis (NVS) stake in the Corus Technology (legacy from Chiron), Lanza Biotech (embryonic stem cells), the Cardiac divisions from Mesoblast (MSB), Cytori (CYTX), and Aastrom (ASTM) [although ASTM had to pull its Ph III trial due to under-enrollment, so perhaps not the best comparator] , and the CD34+ asset at BAX. While this admittedly does not make for the cleanest comp sheet, it is important to note that NBS is differentiated from the other "stem cell" players, as evidenced by its endorsement from the Vatican (since they are sourcing only from adult stem cells), and have a more differentiated revenue and development model than some of the other players.
Financials: Solid Cash Position
Neostem is currently operating from a position of relative financial strength, with $18m in cash on the balance sheet, no debt, no preferreds/ dilutive warrants, and only 1 mortgage on its facility. Cash position is thus about $2/share. NBS was burning $2m in the heat of the trial, which should go down in a few months. The company has also received $5mm in awards to date from the DoD and NIH to advance its cell therapy products, and could potentially partner on the CHF and Diabetes trials (on the cell supply) to further mitigate burn.
Stock Profile: Liquid & Institutionalized
With a market cap of $150mm, and current price of $7.50, liquidity is at 400k shares a day, or $3mm a day notional, a very healthy amount (and helped by the recent NASDAQ listing) considering its market cap. The company has sell-side coverage from Aegis, Cowen, JMP, HC Wainwright, and WBB, which is fairly strong considering its small market cap. The stock is up significantly this year, even considering the 1:10 split on July 16th, and is up 40% in the past month alone.
Currently, ~25% of the stock is owned by management or large shareholders (who are not likely sellers), with the majority in the float. NBS has already attracted some well-regarded investors, including Iguana, Perceptive, Aspire, Eureka, and other institutions.
Management team comes well regarded, with Mr. Pecora and Preddy running PCT for 20 years, and Lasorda joining from BAX, and Potter previously at Osiris/Genzyme (cell therapies).
Conclusion: Risk/Reward is Attractive
A simple sum of the parts risk/reward framework highlights the asymmetric investment opportunity at this juncture. The downside scenario consists of NBS cash position being currently at $2/share, PCT at $1.50-2/share ($40mm 2 yr forward run rate/ 20mm shares outstanding), and, if AMR fails, the rest of the pipeline value at ~$2 a share for a total value of $5.50-$6 per share. Pipeline compounds are going after CHF, asthma, and other large markets.
If AMR succeeds (which data suggests a strong potential), upside is likely $15, which places the market cap at only $300mm heading into ph-III read out. Fully marketed compound likely places market cap around $500mm based on peer comps (see earlier) which implies a 3x from today's levels in 2 years from now.