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In my article NeoStem's Comeback In The Making, I was focused on the completion of the sale of the China generic pharmaceutical business and the fact that it would bolster NeoStem's balance sheet. This would ultimately lead to more focus and resources spent on the development of the company's stem cell applications for heart diseases, as well as other biotech products.

Digging deeper in the stem cell research field, I came to another theoretic possibility: NeoStem (NASDAQ:NBS) is a perfect M&A candidate for a Chinese company with international ambitions.

Chinese Stem Cell Research

China's output in fundamental stem cell research has increased markedly in recent years. Vigorous public investment and infrastructure development have enabled major productivity gains, but challenges in regulation, governance, and the management of clinical expectations must be addressed to ensure scientific quality and sustainable growth.

Although China's regulatory environment had previously been more accepting of cellular-based therapies, in December 2011, the Chinese Ministry of Health announced that companies using stem cells must register their clinical activities and asked local health authorities to halt unapproved use of stem cells in their regions. They also asked for a moratorium on new clinical trials and that patients in existing clinical trials should not be charged. As a result of this and other factors, NeoStem has determined to take steps to restrict (and expects to ultimately eliminate) its regenerative medicine business in China.

Regulation

China will halt new applications for clinical trials of stem cell products until July 1st as part of a year-long campaign to regulate the development of the industry, according to a Ministry of Health spokesman's statement in December 2011. Previously, China had one of the most unrestrictive embryonic stem cell research policies in the world.

In May of 2009, the Ministry of Health in China announced new regulations for the clinical application of stem cell therapies. These rules will require stem cell centers to provide evidence of the safety and efficacy of the therapies they offer, but these treatments are still available, as the government is working through the details of these regulations. Afterwards, the Ministry of Health will need to evaluate each available therapy according to the Ministry's new criteria, so it will be some time before we know what impact these new regulations have on the stem cell landscape in China. Whether China succeeds in overcoming the controversy around its stem cell clinics will largely depend on its ability to regulate them. The government's development of new clinical regulations show its commitment to changing the status quo of how these therapies are offered, but strict implementation of the new regulations will be required to quell international criticisms.

Potential

The Chinese government has rapidly built up its scientific capacity in regenerative medicine, including stem cells, tissue engineering, and gene therapy. China's success in this field is increasingly hard to deny: China is now the 5th largest publisher of peer-reviewed papers on stem cell research in the international scientific literature, shooting from 37 publications in 2000 up to 1,116 in 2008. Although still short of the United States' 6,008 stem cell publications in 2008, China's publication levels nearly match those of the United Kingdom, Japan, and Germany.

China has adopted a four way approach to build its stem cell industry since 2007, including permissive policies on stem cells, recruiting back Chinese expatriates into local research, and providing annual funding of about $320 million. A more stringent regulatory system will allow Chinese institutions to sell products overseas.

How has China built its regenerative medicine field so quickly? The Chinese government has employed a highly successful four-pronged approach to building up regenerative medicine, combining a powerful recruitment strategy for researchers, ample funding, permissive regulations, and a focus on rapidly deriving applications.

Regenerative medicine therapies are an attractive solution to an increasing burden of chronic disease faced by China's large and aging population. Research in the field aspires to produce solutions to a number of chronic conditions, including cardiovascular disease, diabetes, and degenerative conditions associated with age. As a result, the Chinese government has identified it as a health research priority.

China has also strongly focused its research objectives towards generating therapeutic applications. Moreover, universities and hospitals have the tight relationships needed to understand patient needs and translate research from lab to clinic, making China a front-runner in the race to develop therapies.

Investment Case

It is time to start taking China seriously. China's progress in regenerative medicine has gone largely unnoticed because of the Western media's focus on stem cell tourism and other controversial facts around its stem cell clinics.

China has had setbacks, but if it keeps building on its strengths and overcoming its regulatory challenges, the country may stand at the forefront of the race to develop internationally recognized regenerative medicine treatments and therapies that patients desperately need everywhere around the globe.

This year will be important in how China's regulations affect the stem cell industry. In my opinion, the outcome will be positive and will lead the way for renewed focus and investments in the stem cell industry.

Big pharmaceuticals are urgently looking to buy up smaller firms to fill in their revenue gaps. In fact, for the past two years, M&A activity in the biotech, pharma, and generics industries have hit record numbers. This has pushed premiums way up for smaller drug and biotech companies. Let's hope NeoStem can also profit from this trend.

In the quarterly report of Cowen and Company Asia, you see the deal flow in China regarding Healthcare. Johnson & Johnson (NYSE:JNJ) made a big move in China earlier this month with the purchase of its first medical device company in that country. The company picked up Guangzhou Bioseal Biotech, which develops a porcine plasma-derived biologic product for controlling bleeding during surgery, for an undisclosed sum. J&J has a growing portfolio of hemostasis products in China. The company could use NeoStem's distribution network in China.

Furthermore, the close relationship between NeoStem and Baxter (NYSE:BAX) looks like a catalyst that could bring M&A activity in the future. NeoStem's existing shareholders, such as RimAsia Capital Partners and Enhance Biomedical Holding Corp., could take the company private or cooperate with a Chinese merger opportunity.

The depressed stock price has potential to fly, so let China, and the Chinese, decide.

Disclosure: I am long NBS.

Source: Neostem A Chinese Takeover Candidate?