NeoStem: Major Developments You Might Have Missed

Oct.30.13 | About: Caladrius Biosciences, (CLBS)

While investing in biotechnology, investors often overreact to key developments such as IP news, interim data, new hires, etc., all of which investors believe either increase or decrease a lead product's chance for clinical success. However, what investors tend to neglect is updated company presentations. For example, NeoStem (NBS), a company whose stock I own, updated an investor presentation earlier this month, yet surprisingly saw no stock gains as a result of this action. In this particular presentation, investors can quickly learn the details surrounding the company, but also gain access to new information that may not be realized by the investment community. I would like to focus on this particular NeoStem presentation, spotlighting five key takeaways from it.

NeoStem: What You Need to Know

In case you're not familiar with NeoStem: The company is often called "complicated," but is mainly a clinical cell therapy company. It operates in four areas of clinical development, all of which are at different stages of development. NeoStem has a late phase product called AMR-001 that treats cardiovascular diseases; it has two early phase and preclinical programs using T-cells and embryonic-like cells to treat autoimmune diseases and degenerative diseases respectively; lastly it has a revenue-generating cell manufacturing business. As a result of having so many moving parts, questions and misconceptions often develop. Hence, the noted investor presentation helps to clarify many of these questions and misconceptions.

An Integrated Business Model

Seeking Alpha author Brian Nichols wrote a good article last month that called NeoStem an "investment in four different divisions." His goal was to explain what some might consider a very complicated company by breaking it down into four parts. Yet, this thought process might be a misconception, as NeoStem clearly sees its business model as an integrated collection of assets that all tie to its contract development and manufacturing organization, PCT. This is the NeoStem asset that produces revenue and that, in turn, aids in the development of all NeoStem's clinical products. This is important for the progression of the company, implicating PCT as the rope that ties everything together.

Page 7 - PCT Clients

Most investors who follow NeoStem know the basics of PCT; this is the company's manufacturing business. We know that PCT has a 15-year track record of success, including the treatment of more than 6,000 patients, with 55,000 square feet of facilities. However, one unknown has always been the identity of these clients and the number of PCT clients that exist.

Investors know a few clients, such as Baxter (NYSE:BAX), ImmunoCellular Therapeutics (NYSEMKT:IMUC), and SOTIO. However, NeoStem notes 35 clients in its presentation, many of which include universities and hospitals. Looking closer, on the bottom of page 7 there is a list of several companies. NeoStem never particularly mentions these companies or says whether or not these companies are clients. However, one has to wonder why the likes of Dendreon (NASDAQ:DNDN), Pfizer (NYSE:PFE), Coronado, Osiris Therapeutics (NASDAQ:OSIR), StemCells (NASDAQ:STEM), and Prima Biomed are included.

Of course, investors already know that Prima is a client and that PCT manufactured Provenge while it was in clinical testing. Hitherto, NeoStem has always been a bit secretive in naming specific clients, other than those included in press releases, as some companies likely request confidentiality. Perhaps this list gives us an idea of the companies that NeoStem is working with in clinical development.

If so, we can conclude that such a list is impressive, and gives longs a reason to be bullish, as PCT continues to add clients quickly.

Page 9 - Potential Revenue

NeoStem investors have always wondered just how large PCT could become. Last year PCT's revenue nearly doubled over 2011, and during its last quarter, sales rose more than 70%. Still, this is a segment that is very much in its infancy as all of its clients are developing clinical products with NeoStem's revenue over the last 12 months just $14 million.

Perusing page 9 of the presentation, NeoStem provides a chart that shows just how lucrative PCT could become for the company (and shareholders). Essentially there are 15 stages, including low, medium, and high complexity products. These three product types then have five levels: pre-clinical, Phases 1-3, and then commercial manufacturing. As studies progress and PCT is forced to manufacture more products, its revenues increase.

Notably, a low complexity product in the preclinical phase might only produce revenue of $50,000 annually for PCT. However, a high complexity product in the same stage might earn $1 million. As products progress and enter Phase 3, PCT's sales range from $1-$10 million; then in the commercial stage peak sales can reach $250 million on just one high complexity product.

This chart or explanation of revenue clearly explains why PCT's revenue has soared over the last 2 years. As the company gains new clients and old clients enter larger studies, PCT's revenue grows larger. In particular, Baxter's CD34+ product is now in a large Phase 3 trial (most likely deemed high complexity) and could now produce $4-$10 million alone over the next two years.

Additionally, ImmunoCellular Therapeutics also entered into a Phase 2 trial for its brain cancer drug and could likely begin enrollment for a Phase 3 trial sometime next year. Or if data from its Phase 2 trial is robust, it may skip Phase 3 altogether and go straight to commercial manufacturing. While it's likely a medium complexity product, there is a $1-$2 million difference in the amount of revenue earned for PCT in the changing of Phase. This level of clarity further suggests that PCT could become a very large business in NeoStem's future, as it gains new clients and keeps current ones.

Page 11 - Understanding the Pipeline

Many investors who own shares of NeoStem, or many biotech investors who are familiar with the company, believe that NeoStem's clinical pipeline revolves around its Phase 2 product AMR-001. However, NeoStem is very diversified.

The following chart might not be news to current investors, but does show how diversified NeoStem is in its clinical approach. As can be observed, many of NeoStem's programs have advanced further, particularly autoimmune disorders. Nonetheless, NeoStem is treating diseases with large patient populations and continues to advance these studies, using PCT for manufacturing purposes to save with cost synergies.

Program

Indication

Status

Cardiovascular disease (AMR-001)

Acute myocardial infarction (AMI)

Phase 2

Congestive heart failure

Phase 1b/2a preparation

Traumatic brain injury

Preclinical

Autoimmune disorders (TREG)

Type 1 diabetes

Phase 2 IND preparation

Steroid resistant asthma

Phase 1b/2a preparation

Organ transplant tolerance

Phase 1 IND

Tissue regeneration (VSELs)

Periodontitis

IND

Macular degeneration

Preclinical

Osteoporosis

Preclinical

Acute radiation syndrome

Preclinical

Wound healing

Preclinical

Click to enlarge

To reiterate, you likely already know the above information. Though if you didn't, then you can now understand the pure size of NeoStem's pipeline.

Page 15 - Clinical Data

AMR-001 is the company's most advanced product, being used to treat AMI. In the presentation, NeoStem showed how patients responded to different doses. The goal was to decrease left ventricular ejection fraction, or deterioration in heart muscle function.

When NeoStem used zero cells, approximately 30% of patients saw deteriorating heart function. When upped to five million cells, 40% of patients experienced deterioration. These results suggest nothing more than a dose under five million cells being placebo, in effect. However, when using 10 million cells, not one patient displayed heart function deterioration.

In case you don't know, this process is how clinical testing takes place. No company in the world has ever mixed a bag of chemicals together and found the solution to a complicated disease. Unfortunately, such a process takes trial and error and NeoStem went through this process to find a threshold dose, which had never before been defined. Hence, it was a medical breakthrough when NeoStem arrived at the threshold dose of 10 million cells and this has led to the pursuit of treating other diseases with AMR-001.

Page 26 - Cash

In addition to the 11 pages I've covered, there are another 10 pages with pictures, charts, and graphs explaining both TREGS and VSELs that you will find highly useful. But I want to conclude with the company's cash position.

As a result of warrant and option exercises and also the issuance of new stock, NeoStem raised $47.5 million from July 1 to October 15. This adds to the company's cash position of $14.7 million to give $62.2 million in cash to NeoStem's balance sheet.

In one year, NeoStem posted an operating loss of $33.89 million, but investors must remember that this came during the process of enrollment and site expansion for AMR-001. Accordingly, the next year should have lower costs during the waiting period for AMR-001 data. Either way, NeoStem now has enough cash to fund its business for the next two years!

Conclusion

Considering the amount of positive momentum in the stock, the company's impressive clinical data and large pipeline, and its large revenue upside and client expansion in PCT, NeoStem's updated presentation is one that all investors should've read. In the future, such presentations should be a source of initial research and also an update of all new information regarding a company.

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.