Investment Thesis and Overview
Neuralstem's (CUR) clinical trial programs and accompanying results for its two key drugs, the neural stem cell product NSI-566 (its lead drug) and its small molecule drug NSI-189, are picking up a good deal of momentum. This year holds the promise for several events that could meaningfully impact the stock. The purpose of this report is to highlight potential key events of 2014.
Results from the clinical trials of NSI-566 in ALS are the most important near term drivers of the stock. I believe that a paper summarizing the complete results of NSI-566 in its Phase I trial soon could be published in a peer reviewed journal by the lead investigator on the trial, Dr. Eva Feldman. She is Director of the A. Alfred Taubman Medical Research Institute and Director of Research of the ALS Clinic at the University of Michigan Health System and an unpaid consultant to Neuralstem. She is also the past President (2013) of the American Neurological Association.
Because of her credentials and the great interest in this program by the neurological community, this paper could lead to much greater awareness of the promising signals of activity seen in Phase I, to the benefit of the stock. In regard to the Phase I trial Dr. Feldman has said "Collectively, these preliminary results suggest that intraspinal stem cell transplantation of ALS subjects, with no bulbar symptoms, early in the course of their disease, could slow disease progression and even allow for functional improvement."
A Phase II trial in ALS has now begun enrollment and because this is an unblinded study, we may see interim results on patients. One of the early participants in the Phase II trial has a blog called April's Blog in which she has tracked her progress from diagnosis of ALS to her surgery in October 2013 and now in the aftermath of the surgery.
Neuralstem has applied for breakthrough drug status for NSI-566 from the FDA. If this is approved it could provide significant validation of the use of NSI-566 in ALS. I don't know whether FDA will give NSI-566 this designation or the timing of when this might occur, but we should know one way or another in 2014.
The Phase Ib trial of the small molecule drug NSI-189 has finished and the trial is being unblinded. Because this dose escalating trial was done in patients with major depressive disorder, there is the possibility of a signal of efficacy. In animal studies, NSI-189 was shown to increase the size of the hippocampal region of the brain by as much as 20%. This is believed to result from increasing the number of synapses or nerve connections in the brain. This is one of the most novel small molecule drugs in development in biotechnology and I am anxious to see the results of Phase Ib which should be available in 1Q, 2014.
The company is about to start a Phase I trial in the US using NSI-566 cells in the treatment of chronic spinal cord injury. It is also starting a Phase I trial using NSI-566 cells in China in ischemic stroke patients. Both of these trials could start in 1Q, 2014 and we could see some data in late 2014 or 2015. The primary takeaway message at this point is that there is significant interest in Neuralstem's neural stem cells in the scientific community in multiple neurological disorders.
The company recently completed a financing in which it sold 6.8 million shares at a price of $2.91. In addition, each share was accompanied by 0.5 warrants exercisable for five years at a price of $3.64. Net proceeds from this offering were $18.8 million so that year-end cash was $33.0 million by my estimates. The recent burn rate has been about $2.5 to $3.0 million per quarter and at this rate this cash would fund the company into 2016. However, I think that the burn rate may accelerate if the company moves into later stage and more expensive trials.
There are lots of events that can move the stock in 2014 and my base case is that this will create a great deal of interest and excitement. I estimate that there are 79.7 million share issued and outstanding, 23.2 million warrants and 16.3 million options. Under GAAP accounting the outstanding share count is 79.7 million. However, I prefer to assume that all warrants and options will be exercised and this would bring the potential share count to 119.2 million. The exercise of all options and warrants would bring in approximately $82 million. Based on fully diluted shares of 119.2 million and the current price of $3.05, the current market capitalization is $363 million. I think that there is room for expansion if the news flow is positive as I think it will be.
Now let me add a few sobering thoughts on the company and the stock to balance the investment outlook. ALS is a particularly devastating disease that has seen failure after failure in attempts to develop an effective drug. Scientists are not really sure what causes ALS and the approach that Neuralstem is taking is based on a hypothesis rather than a well understood biological mechanism of action. Also therapies based on the use of living cells such as NSI-566 are still in their infancy and it could take decades to develop effective therapies based on experiences that we have seen with other paradigm changing biotechnologies. Neuralstem is taking on a disease that has frustrated drug development by many, many companies, almost all of which have greater resources and it is doing this with an unproven technology.
The results in ALS that have interested me in Neuralstem were essentially based on results in just four patients. Ordinarily, I would ignore results based on this small a number of patients, but this is ALS. In this condition, we see in most patients an inexorable decline in neurological function and ultimately death. These four patients have shown stability or just a gradual decline in their disease over a period of 800 to 950 days and this is extraordinary for the general ALS population. However, there is the risk that there are factors which no one yet understands that make these patients outliers and that the broad base of ALS patients may not see benefit.
NSI-189 is an exciting small molecule drug concept, but we have not yet seen any human data that could be interpreted as a signal of efficacy. The trials of NSI-566 in ischemic stroke and chronic spinal cord injury mirror the risk of the ALS trials. There has been failure after failure in attempts to develop effective drugs so that these are extremely high risk drug development efforts. And of course, there is no human data that has provided a signal of efficacy.
It is often the case in drug development that there are setbacks in clinical trials. Sometimes, these can be overcome with redesigning the trial. We have seen recent examples of this with Acadia (ACAD) and Neurocrine (NBIX). However, this often leads to considerable pressure on the stocks and the need to finance at depressed valuations to continue the trials. Neuralstem is thinly capitalized so that any setback, even if it ultimately could be overcome, could be devastating to the stock. In a worst case scenario, it could threaten the existence of the company.
I am recommending this stock as an asymmetric investment opportunity in which I think that the upside in the event of success is so great that it warrants undertaking the risk of losing all or most of your investment. Unless you are willing to accept this reward risk equation, you should not invest in Neuralstem. This report only deals with key events that I am watching for in 2014; it is not a comprehensive report. If you are new to this stock and are interested in doing more due diligence, I would refer you to past reports that are available on my website.