There are very few circumstances where a public offering is considered a good thing by investors, with the most notable reason being that it dilutes shares. However, if you choose to invest in biotechnology then you realize that public offerings and other types of financing is the nature of the beast. Unfortunately, during the clinical testing phases, a company must raise money in order to survive. For NeoStem (NBS), the fear of financing has led to an underperforming stock for the better part of two years. However, with this recent offering, those fears may now be a thing of the past, and investors can now focus on an exciting data packed year ahead.
A Different Kind of Offering
Last week I saw a comment in response to a bearish outlook regarding NeoStem's recent public offering. The writer pointed to the fact that both Eli Lilly (LLY) and Merck (MRK) have spent nearly $30 billion in the last five years alone. And with the exception of Merck's Anti-PD-1 studies, neither company has much to show, especially Eli Lilly, a company expected to lose nearly 30% of its annual revenue in 2014 due to the patent cliff. Yet, these massive R&D budgets on behalf of big pharma are often overlooked. Instead, this spending should outrage investors, more so than any public offering from small biotechs, as billions could have been spent in buybacks, quarterly, or special dividend payments to shareholders.
In the case of NeoStem, it has always had to make due with the tiniest of offering proceeds. In April of 2012, NeoStem raised $6.8 million in an offering, which funded operations for about six months. In May 2013, NeoStem raised $11.5 million, also funding operations for six months in an aggressive enrollment period. Hence, the overhang of possible dilution has always existed, and NeoStem shareholders have never had breathing room to act and invest on the developments of this company.
Thankfully, NeoStem gave itself some breathing room over the last three months, adding more than 50% to its company valuation prior to its recent offering in a period of three months. The reason was due to a number of catalysts, which involved high-profile executive hires, progression of clinical trials, strong quarterly revenue growth, etc. Moreover, as of the company's last quarterly report, the company had $14.7 million in cash, added an additional $3.9 million in warrant exercises, and has received several million dollars in grants/awards. This cash position gave NeoStem some room to wiggle, and as a result, we've seen the stock fly on the progression of the company.
More Wiggle Room
Now initially, NeoStem's five million share offering was met with a fair share of unfounded panic on twitter and on message boards. But as investors began to soak in the information, I think many have realized that it isn't that bad. For example, NeoStem priced its offering at $7.00, and despite two less-than-great trading days after the company's offering announcement, NeoStem actually traded above the offering price. Since I first purchased shares at $0.37 (or $3.70 post-reverse), I cannot recall a time when NeoStem traded above its offering price following the offering announcement, in part because investors knew that the proceeds were not large enough to protect from future dilution.
So, with this offering, NeoStem raised $40.25 million in gross proceeds after the over allotment was fulfilled. Therefore, if we take the $40.25 million raised, combine it with the near $20 million in cash that NeoStem has on its balance sheet, then NeoStem has roughly $60 million (counting grants). In the last year, NeoStem has posted a net loss of $39 million - during the costly enrollment period - thus NeoStem now has more than a year of operating cash, eliminating the overhang of future dilution.
Why is this Important?
What's so good about the cushion, or wiggle room, provided with this offering is we will know so much more about NeoStem one year from today. NeoStem is expected to complete enrollment for its Phase 2 CD34+ cell therapy product, AMR-001, by year's end. This therapy repairs damaged heart muscles following an acute myocardial infarction (heart attack). The company's CEO, Dr. Robin Smith, has said that data following complete enrollment will be six-eight months later. Thus, we will know data before any future financing is needed.
This fact is incredible for shareholders, as it will allow the anticipation following complete enrollment to push shares higher. So far, we have seen no negative data from AMR-001. Last year the company found that not one patient had a deterioration of heart muscle function when treated with 10 million cells, compared to 30-40% when treated with fewer cells. Moreover, AMR-001 mimics Baxter's (BAX) Phase 3 cell therapy, a product that also treats a cardiovascular condition, reaching endpoints never before met. These facts, along with other publications and research, support a positive outcome for NeoStem's study. With that said, conservative estimates for AMR-001 are for peak sales to exceed $1 billion annually with this one indication alone. Seeing as how many biotech companies are trading at one times peak sales potential after solidifying data, NeoStem could be transformed to a $1 billion company with the presence of strong Phase 2 data, which we will know before the next round of financing.
Also, the company's revenue generating manufacturing business (PCT) continues to grow rapidly. Last quarter sales increased 73% year-over-year, and that was on top of a year where sales doubled. In 2013, PCT has added six new clients, including a "large un-named pharmaceutical company" entering the cell therapy space. This un-named company could be Pfizer, and once disclosed this could be a catalyst that attracts other big name companies. Already, PCT has Baxter, Prima BioMed, SOTIO, Athersys, Coronado, and ImmunoCellular Therapeutics among many others. As these companies progress into larger studies, NeoStem's revenue from PCT grows larger, which will also be a major catalyst over the next year as margins improve.
Finally, NeoStem's autoimmune platform will begin new studies in the coming year. The company has already stated plans to begin a Phase 2 trial in treating type 1 diabetes in early 2014. The company's t-cell platform, also called TREG, plans to begin a second study next year targeting steroid resistant asthma in a Phase 1b/2a trial. The initiation of these trials and the excitement/speculation created could be a blessing to the stock, as yet two more billion-dollar indications.
Initially, I said that offerings are never a good thing. However, in the case of NeoStem, this short-term pain might be best for the long-term gain. This is a company with billion-dollar catalysts at every turn, with a massive pipeline, and a very cheap stock. Aside from the typical risk of product failure that exists with all biotechs, the one significant risk has always been financing, even after an offering. NeoStem has simply never been able to raise enough money to provide a cushion to investors. But as of now, and over the next year, it appears that NeoStem is in prime position to trade with its catalysts, and perhaps price in the upside that lies in its pipeline.