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If you don't follow the company closely, you may not realize the significance of Tuesday's news announcement from NeoStem (AMEX:NBS), but the details are definitely worth noting.

NBS announced Tuesday that its Suzhou Erye pharmaceutical subsidiary in China passed government inspection by that country's State Food and Drug Administration and they will now be allowed to manufacture penicillin and cephalosporin powder for injection at the company's new manufacturing facility.

These two products were responsible for over 70% of NBS' Chinese pharmaceutical revenues ($45,000,000 of Erye's sales in 2009) and Tuesday's announcement signals that the already impressive revenue stream from these drugs just got bigger. The new facility now has official government certification and is fully operational and manufactures products on these two production lines.

The stock has been over-reacting to fear of dilution and after Tuesday morning's news, we feel it's once again a good opportunity for several reasons:

First, the commercialization of NBS' stem cell therapies in Asia has begun. As a matter of fact, like most of the other corporate goals, it appears everything is happening ahead of schedule.

As we reported in early June, in anticipation of that significant historical development for the entire sector, the company now has revenue generating Chinese customers actively seeking NBS' cutting edge stem cell orthopedic treatments and utilizing the company's collection and storage solutions.

We should be getting an update shortly on how the company's innovative anti-aging stem cell treatment commercial activities are going, but as we pointed out in our analysis, early indications are that royalties to Neostem for their stem cell based cosmetic medicine treatments could easily spell millions of dollars in royalty revenues going directly to Neostem- in short order- once those services begin to be offered.

Second, the company announced that it has been added to the broad-market Russell 3000 Index with Russell Investments' reconstitution of its comprehensive set of U.S. and global equity indexes effective June 25. Millions of NBS shares will be purchased by funds who mimic the Index. Getting included on the list was called an important milestone in NeoStem's history by company officials because they know the Company's visibility within the investment community is about to go way up. Furthermore, they get an opportunity to diversify their shareholder base and get more "sticky buying" from firms and institutions that are not going to simply day trade NBS shares.

Finally, Wall Street didn't appear to like the innovative credit line deal that NeoStem struck a few weeks ago, so shorts have gotten hold of the stock. Fear of dilution has spread after the direct offering that was announced by NBS last Friday, but this financing dog's bark is much worse than its bite. Far worse.

Most of these finance deals include 100% warrant coverage, while this one only handed the accredited investors who funded the deal 25% warrant coverage. That's far, far less dilutive than a majority of the deals we see in the sector.

In addition, the warrants may be called by Neostem in the event that the common stock trades over $4.50 for 10 consecutive trading days. If fully exercised, the warrants would result in additional gross proceeds to the Company of $1,598,837.

Sound to you like the company is feeling bullish about its future?

Still, why would the company do this financing deal now, at these prices?

Robin Smith, the CEO of Neostem told BioMedReports Tuesday morning:

We were offered capital from 2 funds which would allow us to be opportunistic and pursue additional revenue generating activity. We believe that the dilution will be outweighed by the benefits of these future activities.

Many investors feel that unless the company has a major deal in play and is getting ready to announced it, it makes very little sense for them to load up with that much dilutive cash and let it sit in the bank.

Now, given Smith's response to BioMedReports, we feel it becomes more clear that the company is planning to use the money for something that's going to make them more money.

With the markets as choppy and uncertain as they are at the moment, we think Smith (who has a great reputation for being one of the smartest and hardest working CEOs in the business) made the right call despite the backlash. Furthermore, we feel she may be getting ready to announce more positive developments.

The upside potential here even has some of the company's most recent critics upgrading them and now suddenly recommending that investors hold on to their shares. We're still big fans, especially if the shorts have to start covering on such a bad market day.

Disclosure: Long NBS

Source: NeoStem Overreacts to Fear of Dilution