NeoStem (NBS) has several moving parts that work together to accelerate development and reduce costs creating shareholder value. The company has made countless investments over the last few years to become an unquestioned leader in regenerative medicine. NeoStem has made high-profile hires, has a diversified pipeline, and is already producing 7-digit revenues. Essentially, NeoStem is a clinical company, but in a growing space with a pipeline that could earn billions over the next decade. One thing that makes NeoStem special is that its fate is not tied to any one product, but rather the development of several clinical products. With that said, let's try to breakdown this multifaceted and promising company, but by separating it into four separate divisions.
Division #1 - Amorcyte
Amorcyte is the company's most well known division, and is why many investors own stock in NeoStem. This segment includes AMR-001, a Phase 2 product that is developing a therapy to treat patients following an acute myocardial infarction (heart attack). The company is testing this product on patients to prevent worsening of the heart muscles after a heart attack and, if successful, this product for this lone indication could create sales of over $1 billion.
AMR-001 uses bone marrow-derived stem cells, or CD34+/CXCR4+ cells. Last year, the company had a breakthrough, and found a threshold dose at 10 million cells. With this dose, not one patient treated with AMR-001 experienced a deterioration of heart muscle function as measured by left ventricular ejection fraction. On the other hand, at least 30% of patients saw deterioration with fewer than 10 million cells. Then, earlier this month, a report in the European Heart Journal Advance Access was published essentially validating the therapeutic approach and workings of CD34 cells and products such as AMR-001.
The results found by NeoStem compliment the results from Baxter's CD34+ Phase 2 clinical trial. Baxter is studying CD34 cells in a Phase 3 study on patients with refractory angina and chronic myocardial ischemia. In its Phase 2 trial, Baxter reached endpoints that had never before been seen, reducing reports of angina while increasing exercise capabilities. These results coupled with NeoStem's data speak volumes for the outlook of such therapeutics.
Moreover, NeoStem recently hired Dr. Douglas Losordo as their Chief Medical Officer (CMO). Losordo was the developer of Baxter's CD34+ product. Thus, NeoStem has great experience on board to help develop AMR-001 properly and to reach its full potential. Early in September, NeoStem had 131 patients infused in its Phase 2 study, and expects 160 by year-end with data by mid-2014.
While AMR-001 may be lucrative for NeoStem, I think what's most impressive is the relationship of CD34+ cells to treating cardiovascular diseases. Already, NeoStem is treating AMI and has plans to start testing in congestive heart failure, and Baxter is using the same cells to treat chronic myocardial ischemia. Cardiovascular disease is the number one cause of death, and many such diseases have no treatment option. Hence, companies like Baxter and NeoStem have a large market opportunity.
Click here to read a very telling and informative interview between Dr. Losordo and I, discussing CD34 cell development prior to him joining NeoStem as their CMO.
Division #2 - PCT
Progenitor Cell Therapy (PCT) is NeoStem's manufacturing segment, which has worked with the likes of Dendreon (DNDN) and is currently working with companies like Baxter, Coronado (CNDO), Athersys (ATHX), SOTIO, and ImmunoCelllular Therapeutics (IMUC) on clinical products along with countless universities and hospitals.
PCT is the company's revenue generating service and, in 2012, NeoStem saw its revenue nearly double. During NeoStem's most recent quarter, PCT's revenues continued to increase; this is a fast-growing segment of NeoStem's business.
Theoretically, NeoStem earns higher revenue per client as the companies progress into larger clinical trials and more of PCT's services are needed. As a result, this process explains the revenue growth that NeoStem has seen from this segment.
In this particular space, PCT is considered a market leader. PCT has more than 55,000 square feet of facilities and has manufactured more than 30,000 cell therapy products over the last decade. So what is the potential for PCT? One scenario to look at is if $50 billion is spent annually in the regenerative therapy market, and if contract manufacturing accounts for 10% of that, you would have a market of annual service revenues equivalent to $5 billion dollars.
In retrospect, with NeoStem being a leader in contract manufacturing, if PCT can capture just 10% of that $5 billion market, then peak sales of $500 million is possible. Accordingly, PCT becomes a revenue generating "company" to monitor over the coming years.
Division #3 - VSELs™
Very small embryonic-like stem cells (or VSELs™) are a collection of cells that have the regenerative capabilities of embryonic cells without the negative attributes. Unlike classically defined "pluripotent" stem cells, it is believed that VSELs™ do not contribute to teratoma formation. Independent investigators in preclinical models have demonstrated the regenerative potential of VSELs™. The potential for VSELs™ is enormous, because if proven successful, these cells could create a new segment within healthcare, or could become a new type of treatment such as antibiotics or chemotherapy.
As a result of this promise, universities, government organizations, and even the Vatican have raced to be a part of this program. Embryonic cells are the most effective in regenerative medicine, but are also highly controversial. Thus, if VSELs™ are essentially embryonic cells without really being embryonic cells (confusing I know), then it could open a slew of opportunities within healthcare to treat diseases that have no options.
Already in mice studies, VSELs™ have created bone from cells, and countless high-profile professionals from universities such as Michigan, Stanford, and Yale have endorsed VSELs™, saying that they have been able to identify these cells. Therefore, with Phase 1 trials underway for VSELs™ as a treatment for periodontitis, it is likely that developments from this space will create significant stock movement in the near future.
In addition, VSELs™ are being studied on macular degeneration and retinal disease, osteoporosis and bone regeneration, chronic wounds, and for radiation exposure. If successful in these programs, revenue could be in the multi-billions. But as of now, periodontitis is the only program with Phase 1 studies planned and, according to the press release, it is a $1.25-$1.5 billion per year opportunity. Clearly, VSELs™ are very exciting and could prove to bring great shareholder value in the future.
Division #4 - Athelos
Up until this year, Athelos was the missing link, the one "company" without any catalysts, and a segment that flew under-the-radar. However, in the month of September, NeoStem announced a collaboration with three experts in the field of asthma research to determine appropriate endpoints for a trial in steroid resistant asthma. Treating asthma currently costs over $56 billion a year, so this is a large market with a clear need. Then, NeoStem announced licensing rights to three families of patents covering its "Treg" platform.
Human Regulatory T cells ("Treg") therapy represents a novel approach for restoring immune balance by enhancing T-regulatory cell number and function. NeoStem continues to advance its T cell program with the goal of developing treatments for immune-mediated diseases such as type 1 diabetes and other inflammatory conditions. In July, NeoStem executed agreements with the University of California, San Francisco ("UCSF") and the laboratories of Jeffrey Bluestone, PhD, and Qizhi Tang, PhD, to collaborate on the development of a therapy for the treatment of type 1 diabetes. This collaboration will advance the company's Treg program towards a Phase 2 trial to evaluate the efficacy of autologous Tregs in type 1 diabetes, effectively advancing the company's pipeline more quickly than if it had developed a program for this clinical indication independently. This is an effort to develop the next generation of Treg products for treating new onset type 1 diabetes.
These developments (NeoStem's Treg platform) are in connection to Athelos though Becton Dickinson (BDX) maintains ownership. As NeoStem is preparing to test these cells on both type 1 diabetes (34 million diagnosed worldwide), steroid resistant asthma (60 million worldwide), and organ transplant rejection, there are many more autoimmune diseases T-regulatory cells could potentially be used to treat however. These three indications are in massive markets and, if successful, could create billions in annual sales.
While it is still too early to draw any conclusions regarding Athelos, Seeking Alpha's Chemistfrog wrote a great article in August regarding human regulatory T cells. In the article, he concludes that NeoStem's experience and success in PCT gives them an added developmental advantage over much of the industry. He notes that regulatory T cells are an important part of our immune response as they help to mediate and even suppress immune response.
Chemistfrog believes that, if developed and utilized correctly, this immune suppression can be used to regulate or cure autoimmune diseases such as type 1 diabetes, multiple sclerosis, and rheumatoid arthritis. Looking throughout the market, some of the largest biotechnology valuations awarded (companies like Vertex and Gilead) go to companies that are developing drugs to treat diseases that NeoStem is hoping to treat with Treg. Strangely, very little value has been awarded to this "company" and Athelos remains very much under-the-radar. However, with upcoming Phase 2 and Phase 1a/2b trials with Treg, Athelos is likely to attract many Wall Street eyes.
While Vertex, Gilead, and Regeneron have similar programs that are being met with multi-billion dollar annual expectations, a conservative estimate as of now is $1 billion for the Athelos division. The reason is because we simply don't know enough about this "company"; but if successful, $5-$10 billion might be in store due to the nature of the noted diseases.
How Much Potential Upside?
Placing a number value on NeoStem's four divisions is very difficult, as Amorcyte is the only one with substantial human data. In treating AMI, $1 billion in peak sales is possible, and then there's an upcoming Phase 1 study on congestive heart failure that could be another $2 billion indication. In the case of PCT, we know that the market opportunity is large and that NeoStem is growing rapidly in the space. With VSELs™, we know that bone was created from cells, and that periodontitis has a potential of over $1 billion annually, but we do not know the market potential for the countless other indications. Lastly, we know that Treg therapy has massive market potential, and that the therapeutic approach being used is biologically validated; but without robust data, it would be irresponsible to assign more than a billion dollars in peak sales until we see further data.
Therefore, with all things considered, here is how a best-case scenario for NeoStem would appear:
Congestive Heart Failure
Like I said, the above chart is not taking into account other VSEL™ programs nor is it accounting for the realistic sales potential of Treg programs if successful. However, with these programs we're looking at $5 billion in possible annual sales. So, how does this translate into valuation and stock performance? According to research from NYU, the drug industry trades at 2.9 times sales, which represents a fair multiple of biotechs for peak sales potential. Thus, NeoStem with $5 billion in peak sales could support a near $15 billion valuation long-term.
Now, before you start screaming that my analysis is insane, and pointing to the fact that NeoStem is only a near $200 million company, it is important to realize that NeoStem does not need each of these programs to be a success in order to produce large long-term gains. My point in showing the chart above is to illustrate that NeoStem doesn't need success with all companies in order to produce massive returns.
In fact, looking at NeoStem's four divisions; it needs mediocre success to return very large gains. Let's say PCT never exceeds $100 million in peak revenue, AMR-001 only creates $400 million max, and neither VSELs™ nor Athelos appreciate to add any value, then NeoStem could still become a $1.5 billion company. Simply put, NeoStem's diversification creates safety. It is a rare biotechnology company that is not placing all of its eggs in one basket, and is thinking long-term to become a leader in cell therapy. For this reason, the analyst community is beginning to take notice, as 5 analysts give the company price targets between $16.00-$30.00. Personally, I am encouraged at the literature, grants, collaborations, and preclinical data from VSELs™. I like AMR-001's data and I think the hiring of Dr. Losordo is huge for its development. And I think PCT's experience gives NeoStem an edge as regenerative medicine continue to grow. Overall, NeoStem has a lot of promise, and judging by its three month 60% return, investors are starting to take notice as well.