Back in July, I authored a rather scathing Seeking Alpha article about Neostem (NASDAQ:NBS), in it I chastised the way in which the company had appeared to lose focus after having initially offered biotech investors in the stem cell sector so much promise.
Imagine my surprise when CEO Dr. Robin L. Smith -- unlike many others who run away from negative press and opinions -- offered to meet and/or answer my questions. She offered the opportunity to go over specifics about her firm; in as much detail as I wanted.
I jumped at the opportunity because I believe that Dr. Smith, like all other CEOs, needs to be held accountable for not only leading their companies, but also for clarifying their intentions to their shareholders.
Instead of hiding behind flowery news releases and statements made through carefully screened IR professionals and attorneys, like countless others, Dr. Smith, who received a medical degree from Yale University in 1992 and a master's degree in business administration from the Wharton School in 1997, gets points with me for not only reaching out, but also for -- true to her word -- answering some of the hard questions her investors have about plans for the company going forward.
What follows is a transcript of my Q&A with Dr. Smith, who joined Neostem as Chairman of its Advisory Board in September 2005. Shortly after, she became the Chief Executive Officer and Chairman of the Board.
Q: Why do you think NeoStem is positioned to take a leading role in the stem cell space?
Medicine is changing and the way in which we treat patients is going to be very different in ten years from the way it is today. We believe that cell-based medicine will part of the treatment regimen for many medical conditions. NeoStem is a global cell therapy company that is focused on transforming the way in which heart disease is treated through a cell based approach. What separates us from many of our peers is a clinical philosophy based on traditional drug development coupled with a foundation in cell therapy manufacturing and a high level of regulatory expertise.
NeoStem has gained this footing through acquisitions, successfully buying two companies for equity in 2011. The first acquisition, Progenitor Cell Therapy, the industry leader in commercial cell therapy manufacturing gives NeoStem East coast and West coast operations. They have manufactured products for over 6,000 patients worldwide and prepared over 30,000 cell therapy products since inception. This asset includes an 80% ownership in Athelos (20% is partnered with Becton Dickinson). Athelos is a company focused on developing T regulatory cell therapies for diseases such as Diabetes, Asthma, Graft vs. Host disease and Solid Organ Rejection. The second acquisition of 2011 gave the company a Phase 2 product in the cardiovascular space with significant IP, exciting Phase 1 data (the data demonstrated both safety and efficacy as well as established a biological threshold, minimal dosing) that shows a clinical benefit. NeoStem’ s earliest program is our VSEL platform, which has regenerative properties and great promise for indications such as boney defects, macular degeneration and wound healing.
Q: The way NeoStem looks now, versus how it looked a year or even two years ago is quite different. Where have you been and where are you going?
The company is staying true to its mission of having a strategic combination of revenues combined with therapeutics. We have advanced considerably over the year on two fronts, with our therapeutics effort and with our revenue diversification strategy. As mentioned we are working to enroll our first patient in a phase 2 trial with what we believe is a game changing asset, AMR-001 for the preservation of heart function, post heart attack while at the same time working with a robust pipeline of contract manufacturing clients whose own products are advancing to large trials as they head to commercialization. Each of these clients has the potential to generate millions of dollars in revenues with NeoStem as their contract manufacturer of choice.
Q: You have raised quite a bit of capital for the firm. How has that been used and how has it made your company stronger?
We are a small cap biotechnology company and raising capital is part of what’s required to bring high value therapeutics to the marketplace.
Drug development is not cheap. We use our capital very efficiently and have been executing more cost controls to extend our capital runway. The development costs for AMR-001 are among the lowest in the industry. This is a direct result of the efficiencies that Progenitor Cell Therapy creates for us as a company. In time as PCT’s clients' products advance, we expect free cash flow to offset our burn rate and extend our capital runway even further.
Q: What are some of the regulatory challenges you face as a company today and what are you doing to address them?
We believe on this particular front we have a significant competitive advantage in the marketplace. PCT has worked closely with the FDA for the past decade and regulatory consulting is one of the reasons why clients select PCT. We believe our ridged approach to asking basic questions such as what is the active cell type? How does it work ? What is the dose ? What is the clinical effect ? These principals have been developed in concert with very strong scientific advisory board members who have the experience to help us make sure our product profile, manufacturing approach, and trial design will hold up under regulatory scrutiny.
Q: Tell us about Progenitor Cell Therapy (PCT) and how it fits into NBS
PCT itself can be thought of as an independent company under the NeoStem umbrella. We maintain an active wall between PCT’s clients and our own pipeline of products. PCT leadership in quality assurance, regulatory expertise, logistical transport and regulatory consulting create a low risk option for clients. At the same time this subsidiary, as I mentioned earlier, has the potential to offset our cash burn as its clients mature and generate larger contracts and the manufacturing services can be used as currency to take an ownership stake in the companies we manufacture for and receive back end royalties. In fact, we believe that PCT currently has one of the strongest pipelines of Phase 1, Phase 2 and Phase 3 assets in the industry.
Q:What have you done or what are you planning to do with VSELs?
We are very excited about the potential of VSELs and their application in regenerative medicine. These unique cells left over from our very own formation when we were beginning life represent a natural pluripotent cell. The promise of VSEL’s is to move the field beyond just paracrine based regenerative medicine (where cells down regulate inflammation and promote blood vessel formation) but to regenerate damaged tissue. Our researchers are now looking for cost effective ways to acquire these cells in larger quantities while we determine which clinical indications to pursue initially.
Q:What does the financing/revenue picture look like at NBS right now?
We reported just over $15 million in cash as of Q3-2011. We are planning to divest our ownership in the China generics company and believe that will strengthen our balance sheet even further. With the divestiture of Suzhou Erye (China generic pharmaceutical company) one positive impact it will have will be to increase the clarity in our financial statements. As you can imagine, accounting rules for a majority ownership of a complex Chinese (profitable) company with $65 million in annual revenues and a high inventory turn-over rate are complex. As a company today, on a cash basis, minus the non-cash expenditures, we reported a net loss of $10 million in the first 9 months of operations in 2011. We feel this burn rate is well below our peers given the number of programs we have in development.
Q: Can you tell us about the divestiture of Erye and how you will use the proceeds from the sale?
We have made the strategic decision to divest this asset and focus on the cell therapy manufacturing business, the cell storage business and developing our pipeline of cell therapies. This decision is a direct result of what we feel are the potential upside, ROI if you will, on the opportunities we see as the paradigm shift to cell therapy becomes real. Depending upon the amount of proceeds, we will review our options for how to deploy the cash asset in addition to advancing our cell therapy products. Some use of the proceeds may include improving our capital structure by eliminating the preferred equity instrument, lowering the shares outstanding by buying back some shares and or M and A activity such as to growing revenue generating business (collection and storage).
Q: Is this a good time to consider buying into NeoStem and if so, why?
We believe the answer is yes. All of our senior management and board members are committed to the company. We have many catalysts ahead. Cell therapy just like mono-clonal anti-bodies did in the 1990’s is going through a period of non-believers who see clinical failures, companies with manufacturing issues or regulatory problems. We see more cell therapy products in Phase 2 and 3 clinical development and believe as these products come to market it may trigger a gold rush.
As blockbuster drugs like Lipitor now go generic, pharma and even big biotech face large holes in their pipelines. We believe one way to fill those holes will be with well designed, well vetted, cell therapy products that work and create pharmacoeconomic value.
Q:Many companies in the stem cell space have been restructuring or even re-inventing themselves lately. You are not set up as a typical biotech, stem cell play. How should investors view your business model and what it offers them in terms of ROI?
We are set up for investors to win in multiple ways. PCT itself is a value proposition as it has a robust pipeline that leverages clients' therapeutics advancement. As new therapies come to market (not if but when) it is likely to drive more demand for collection and storage. The penetration rate in the collection and storage business is low, (low single digits). These revenue generating businesses diversify risk for investors while at the same time the clinical advancement of our pipeline has the potential to create tremendous shareholder value.
Q: Is there any sort of goal or endgame as far as you see it when it comes to NeoStem?
Right now our focus is on operations and execution including getting the Phase 2 trial completed, run PCT to profitability and build our collection and storage business while advancing our clinical pipeline. We have a very active business development effort and are always talking to major pharma and biotech companies as well as those in our industry and think we are well positioned for JV’s and strategic partnerships.
Q: If you would, please review with me, What are the advantages of AMR-001 (NeoStem’s Cardiovascular Cell Therapy)?
AMR-001 has a confirmed mechanism of action. In pre-clinical experiments and confirmed in clinical trials in man we have defined exactly how these cells work. What’s also exciting to us is that outside research also confirms and supports our product profile. I’d like to keep it simple but here are the basics. We are focused on a product with tight specifications. We sort the product to meet specific criteria so that we know from patient to patient, how many cells and what type, must be present to create the clinical effect. We know that the cells must be delivered, in the right quantity, at the right time, to follow the ischemic conditions and alleviate them. Our hypothesis have been tested and demonstrated with p-values in the P1 study.
It all begins with manufacturing, or access to a cGMP (current good manufacturing practices) facility: Prior to commercialization, we need to establish an economical, safe, and FDA-approved means of manufacturing AMR-001 or any cell product (ours or a commercial clients). PCT offers just that with bicoastal cGMP facilities, more than a decade of cell manufacturing experience, and experience manufacturing a cell therapy through all stages of clinical trials, leading to an FDA approval and commercialization.
Q: What’s the Dose?
Cell therapy is unique because unlike small molecules with a half-life, cells “stick around”, especially when they are your own cells or autologous. The Amorcyte phase 1 trials established a biological threshold that must be met to achieve a clinical effect. , below which the effect drops off. This was critical for us in heading into a Phase 2 program and is an uncommon data advantage for a cell therapeutic developer in a phase 2 trial.
Our cells are autologous and as such have no risk of rejection. This is a significant safety advantage over allogeneic (donor) cells and this cells stick around longer. In fact recent scientific publications show one allogeneic therapy sees its efficacy go down as dose goes up. This is unusual and likely a result of the cells being recognized as not your own. In our case it has been established that autologous transplanted cells will remain in the heart and potentially continue to work years later, as demonstrated in pre-clinical animal experiments.
Lastly we do not expand our cells and as such we believe we are eliminating potential concerns associated with manipulation This is because we are able to deliver a clinically significant dose with the cells we derive directly from a patient’s bone marrow. The fewer steps in the process the better and safer the product for the patient. This means that the product can be delivered with what we feel is perfect timing, in the 6-11 days after an AMI occurs, when the hypoxic signal begins to peak and the cells are needed to rescue over-worked healthy cells that are compensating for the initial damage from the heart attack.
We have very strong IP. AMR-001 has a very strong IP estate with an issued patents that include composition of matter, methods and processes claims all with long remaining life. It is relatively unique to have this level of intellectual property protection in all of these areas, showing that NeoStem stands to benefit commercially for many years. It is also a testament to the precision with which Amorcyte’s team has established its product.
I would welcome investors to look through the information not only at the company's website but also in their latest SEC filing. In addition a visit to www.amorcyte.com may help us all learn a great deal more about this extension of Neostem's product pipeline.
I will try to bring you more information about Amorcyte’s market opportunity in the future, especially since this appears to be a big focus for the firm and may be one of the more compelling reasons for investment at these price levels.