NeoStem: A Biotech In Need Of A Catalyst

Nov.24.13 | About: Caladrius Biosciences, (CLBS)

The biotech sector has certainly been growing by leaps and bounds this year, with the NASDAQ Biotechnology Index (^NBI) up 55% year to date. Even so, not every biotech has been participating in this broad based rally. In fact, there are a number of losers in this sector that have failed to be lifted by the sector's overall rise. And one of the leading stem cell companies NeoStem (NBS) is certainly one of those cases.

Year-to-date, NeoStem shares are down about 2% at the time of writing this article. Suffice it to say, NeoStem investors are frustrated that their pick hasn't participated in this sector wide rally, and have missed out on tremendous gains as a result. And indeed, NeoStem's lethargy is surprising given that the company has grown it's cell manufacturing business at a nice clip, strengthened its balance sheet, raised its share price via a reverse split, and most importantly, shepherded its lead clinical candidate, AMR-001, into the final stages of a mid-stage trial.

I think the situation is best summed up by my fellow Seeking Alpha writer Chemistfrog, who gives the following apt synopsis:

"NeoStem has had an exciting year with many positive developments. Unlike Athersys (NASDAQ:ATHX), its shareholders have not yet experienced a significant return on their investments for 2013. On an adjusted reverse-split basis, shares that closed December 31st, 2012 at $5.96 are now trading at $6.35 for only modest gains, although 52-week highs of 9.89 back in September did represent possible gains of 66% YTD."

As I noted, however, NeoStem has given back all these gains, and is sinking into the close of the year.

So why has NeoStem started to dive in the last few months?

Well, the answer is inane unfortunately. A Seeking Alpha article made an erroneous comparison between NeoStem's bone-marrow-derived CD34+/CXCR4+ cells and a study (CADUCEUS) using cardiosphere-derived stem cells (NASDAQ:CDC). As a refresher, the CADUCEUS trial showed that cardiosphere-derived cells reduce cardiac scar tissue and facilitate the growth of healthy heart tissue, but fail to improve overall heart function. The author thus concluded that this was bad news for NeoStem's AMR-001, and the stock has faltered ever since.

The mind pool has been poisoned.

Why was this comparison inappropriate?

Just ask NeoStem's CEO Robin Smith. In a rebuttal to the article, Dr. Smith stated that, "These cells are completely different from the cells used by NeoStem. It's comparing apples to oranges." Getting more pointed in her rebuttal, Dr. Cook points to the CD34+ literature saying, "[The CD34+] story is very well documented and it has been reiterated by multiple labs in pre-clinical and clinical models. As well as many randomized double-blinded, controlled human clinical trials that showed a positive signal for efficacy and safety of CD34 cell therapy for ischemic tissue repair."

Was Dr. Smith right in her assessment?

Dr. Smith was dead on. And I have good news for fellow NeoStem investors: the AMR-001 trial is going to be successful.

Why am I so confident? Because the science has already been done, and this approach has been shown to improve global heart function. All of that was strangely absent from the article that started this marked slide in PPS, however.

Nonetheless, I waxed intellectual about this very issue on April 1st this year, and sadly it had little effect on the stock's PPS. Perhaps this was because I published on April Fool's day? Not sure, but the science is clear on AMR-001's prospects. CD34+ cells improve global heart function but not overall mortality.

Why CD34+ cells don't seem to improve your chances of dying following a heart attack is still an open question, and I said as much before. After making some calls to my cardio contacts following my last article, however, I got some interesting insights into this vexing problem.

Their humble opinion on this matter is that heart disease patients often fail to make requisite changes in their lifestyle over the long-term. While it's true that genetics play an important role in heart disease, it doesn't help being a chain smoker whose diet looks like it came straight from a fast food menu. And high stress jobs certainly don't help the matter.

My contacts seemed to largely echo the same opinion: people will swear to make all the necessary changes to get through the immediate danger, but once the danger has passed, they go right back to doing the things that got them into trouble in the first place.

In terms of stem cell therapies for heart patients, this means that mortality should probably be assessed in patients lacking confounding variables such as smoking, high stress levels, etc. And instead, mortality would best be assessed in patients that have modified their behavior following a heart attack. This is the only way to truly know if any type of stem cell can affect long-term survival rates.

Ok, so NeoStem's science is going to work? What are my options?

I think NeoStemers have a couple of different options here. The stock looks to be experiencing the January effect right now, meaning that people are dumping their shares to create a tax loss. I suspect this because the stock has continued to head south in the face of a strong sector wide rally over the last two weeks. So one option is clearly to sell your shares to create a loss, which might be advisable given that there are no near-term catalysts to reverse this trend.

Another option is to use this downtrend to dollar-cost average your position. I strongly suspect that NeoStem is going to be a winner in the first half of next year as AMR-001's data readout approaches. So tolerating a short-term paper loss might be a good idea in this case. It's rare in the biopharma world to have such strong indicators of a clinical trial's potential success as we have with AMR-001. Accumulation at depressed levels may thus be the best decision of all.

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