NeoStem: Huge Potential In The Cell Therapy Sector

| About: Caladrius Biosciences, (CLBS)

As the cell therapy sector starts growing, it gains the attention of institutional investors, although it's known as a risky venture. Moreover, private investors are looking for the next hidden gems after the hype which followed Aastrom Biosciences (ASTM) announcement that it had completed a $40 million private placement with Eastern Capital Limited in a financing deal structured and arranged by MLV & Co. Funds will be used primarily to fund its Phase III trial in critical limb ischemia. This was followed by Bellicum Pharmaceuticals, Inc., a privately held Delaware C Corporation headquartered in Houston, Texas, announcing that it had raised $20 million in a Series B financing. Then the news from Athersys (NASDAQ:ATHX) announced a PIPE financing of $9 million presumed to be largely dedicated to its current pipeline of Phase I and II trials.

Active traders with years of experience and eccentric stock- pickers with a knack for finding under-the-radar gems are looking for beaten companies, those that fell hard due to overreaction of the shareholders selling after secondary financing news. Dilution is a feared event in the biotech market. Most investors try to prevent dilution; however, it can create an entry point for investors if the company is financially well established. Raising capital in the micro-cap biotech space is never easy.

The company

NeoStem (NBS) continues to develop and build on its core capabilities in cell therapy to capitalize on the paradigm shift that is occurring in medicine. In particular, NBS anticipate that cell therapy will have a large role in the fight against chronic disease and in lessening the economic burden that these diseases pose to modern society.

The January 2011 acquisition of Progenitor Cell Therapy (PCT) provided NBS a foundation in manufacturing and regulatory affairs expertise. This expertise, coupled with the existing research capabilities and collaborations will, allow NBS to achieve their mission of becoming a premier cell therapy company.

PCT's subsidiary manufacturing base is one of the few current Good Manufacturing Practices (cGMP) facilities available for contracting in the burgeoning cell therapy industry. Amorcyte, LLC, which NBS acquired in October 2011, is developing a cell therapy for the treatment of cardiovascular disease. Amorcyte's lead compound, AMR-001, represents NeoStem's most clinically advanced therapy and has commenced enrollment for a Phase II trial to investigate AMR-001's efficacy in preserving heart function after a heart attack. NBS also expects to begin a Phase 1 clinical trial by 2013 to investigate AMR-001's utility in arresting the progression of congestive heart failure and the associated co-morbidities of that disease.

Athelos Corporation [Athelos], which is approximately 80%-owned by NBS's subsidiary, PCT, is engaged in collaboration with Becton-Dickinson that is exploring the earlier stage clinical development of a T-cell therapy for autoimmune conditions. In addition, NBS pre-clinical assets include VSELTM Technology platform as well as MSC (mesenchymal stem cells) product candidate for regenerative medicine.

NeoStem's origins are in adult stem cell research and the collection and storage of adult stem cells. The new therapies are developed utilizing one's own stored cells (autologous), and the market penetration rate for the collection and storage business will rise sharply from its current low single digits percentage level. NeoStem is now ideally positioned to be an integrated leader in the cell therapy industry. They have strong basic research capabilities, manufacturing facilities on both the east and west coast of the United States, the support of regulatory and logistical expertise, and the experience of a decade of clinical practice.

The opportunity

NeoStem succeeded in raising $6.8 million. These funds will be used for working capital purposes, including research and development of cell therapy product candidates and expansion of business units. After the financing news, Dr. Robin Smith, NeoStem's Chairman & CEO stated "NeoStem's management remains focused on our key objectives of expanding our stem cell therapeutic contract manufacturing business, enrolling the PreSERVE AMR-001 Phase II clinical trial for preserving heart function after a heart attack, and monetizing our China pharmaceutical subsidiary through divestiture".

The dilution news had a big effect on the share price, dropping hard due to an overreaction of the shareholders, bringing it to a new 52 week low. NBS currently has a market cap of $41 million and appears to be very undervalued. Experienced biotech traders will recognize that the company is oversold at this time and will start accumulating; making NBS is a very good investing opportunity.

On April 18th, the healthcare-focused Sabby Management, headed by Hal Mintz, and with $44 million in 13-F assets at the end of the latest available Q3, filed SEC Form SC 13G indicating that it holds 7.5 million or 5.8% of outstanding shares. It came along with other institutions, like Perceptive Advisors LLC holding 2.56M shares & BlackRock Fund Advisors holding 1M shares.

NeoStem has revenues from contract manufacturing in the east and west as well as from its family cell storage business. These days NBS has $8-$10 million in revenues from PCY division. If PCT is selected by any of its current P3 clients to do commercial manufacturing in the future, the revenue potential becomes significant.

PCT is engaged in a broad range of services in the cell therapy market for the treatment of human disease. PCT offers cGMP compliant cell transportation, manufacturing, storage, and distribution services and supporting clinical trial design, product process development, logistics, regulatory, and quality systems development services. Through its network of contacts throughout the cell therapy industry, PCT is able to identify early stage development opportunities in the cell therapy field and opportunistically develop these cell therapies through proof of concept. From that point, products can be further developed and ultimately commercialized through NeoStem's developing commercial structure.

PCT's expertise in the cell therapy arena includes cell-based therapeutic vaccines (with applications in oncology), other cell therapeutics, and regenerative medicine. From this platform, NBS hope to develop cell-based therapeutics. In addition to using PCT's facilities and expertise to develop Amorcyte's product candidates, as well as NBS's MSC and VSELTM technologies, they may develop internally, or through partnerships, other allogeneic (cells from a third-party donor) or autologous (cells from oneself) therapeutic technologies.

PCT is accredited by the Foundation for Accreditation of Cell Therapies ("FACT").

JMP Securities reiterated its market outperform rating and $3 price target for NeoStem, after BAXTER International (NYSE:BAX) named the stem cell company's Progenitor Cell Therapy unit [PCT] as the contract manufacturer for a Phase III stem cell trial with the Baxter CD 34+ cell. This news is validation for NeoStem's own CD34+ bases Amorcyte trial, in market niche STEMI [heart attacks] and the close relationship between these two companies. NeoStem looks like a compelling value play with the expected divestiture of the China Generics business as the next major catalyst.

JMP's analyst, Jason N. Butler, said: "In our view, Baxter's continued commitment to develop CD34+ cells in cardiac indications provides external validation of the scientific and mechanistic rationale for NeoStem's CD34+/CXCR4+ candidate therapeutic, AMR-001. Furthermore, Baxter announced that NeoStem's PCT division will be the contract manufacturer for the Phase III product, representing approximately $5-10MM in revenue, in our view. Our $3 price target is derived through a sum-of-the-parts analysis including AMR-001, manufacturing service revenue from PCT, and sales from the company's Chinese pharmaceutical division Suzhou Erye."

Technical Analysis

On March 29th, the price gap down breaking out the support line at $0.44 with extremely large volume after the news about the dilution, the selling pressure lead the price to a new all-time low.

The sentiment started changing when the price reached the $0.31 point, creating a strong base represented with a double bottom pattern; buyers started picking up with increasing volume causing the price to rise 16% to the $0.36 point.

In the last 5 trading days the price start going sideways and the Bollinger Bands getting closer, indicating "volatility squeeze". Meanwhile, the momentum turns positive with a "Positive Divergence" in both indicators, the RSI & the MACD.

If we look at the chart we can identify a "Falling Wedge". This is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical triangles, which have no definitive slope and no bias, falling wedges definitely slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout with large volume. Volume is an essential ingredient to confirm a falling wedge breakout. Without an expansion of volume, the breakout will lack conviction and be vulnerable to failure.

Picking this stock in this area gives the investor a huge long term potential, in case and the falling wedge pattern breakout with a large volume to ensure the new trend. The first target is the resistance line at $0.44, then braking out to close the gap at $0.51 point, while the longer term target is the last high at $0.90 where you can triple your investment.

On the other side, it's easy to define the risk as the support line is close at $0.31 and can stop the trade if the price breaks down this line.

(Click to enlarge)

Disclosure: I am long NBS, ASTM.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my 'opinion' and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

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