After selling its 51% interest in Suzhou Erye generic pharmacy, NeoStem (NBS) can finally focus on its segments of greatest potential growth. I first began following the company in late April, and then purchased shares one month later. The reason I purchased shares is because I thought the company's diversified business presented opportunity, the company was under-valued following a public offering, and I thought the sale of its generic pharmacy could open new doors, allowing the company to become more aggressive in its cell therapy approach. Some have doubted whether or not the sale would occur. Now that it's complete, the company can focus all of its resources into manufacturing and clinical development, without being tied down with the restraints of a pharmacy business that did not live up to expectations.
NeoStem's 51% interest in Suzhou Erye could be worth up to $50 million, plus the return of 1.3% of the company's fully diluted issued and outstanding shares. The company will receive $12.28 million in cash along with eliminating significant debt, over $37 million as of March 31, 2012.
The generic pharmacy business in China has failed to live up to high expectations. When the company first entered the space, investors believed it would provide a profitable segment while the company's other segments were being developed. Yet, because of regulatory hurdles and increased competition, the company's 51% stake never generated the revenue the company hoped it would. Some investors doubted that this sale would occur, and probably would have never guessed that it would be worth so much. The increase in competition made it difficult for NBS to sell the business, therefore making the sale very impressive (pending shareholder approval). While the money obtained from the acquisition is in itself impressive and will significantly benefit the company, it also further validates the company's leadership and the negotiating abilities of CEO Dr. Robin Smith.
Now that the restraints of the generic pharmacy business are lifted, the company can exit what was once considered a great opportunity in China. Dr. Smith said about the sale, "This divesture will enable the company to bolster NeoStem's cash position in the United States, reduce its legal and financial reporting expenditures, simplify its financials, and become a pure play in the rapidly growing cell therapy industry." In other words, it will cut the costs. NeoStem is now simplified, no longer being a "complex" business structure, changing to a straight forward cell therapy business.
The company has yet to disclose the effect of the sale in terms of quarterly performance. Obviously it will take most of NBS' revenue, but also eliminate much of its quarterly loss. I imagine it is hard for a small company to be a Chinese and North American based company, especially with so many assets in both regions of the world. It costs a lot to manage such a large diversified business. When those businesses don't meet expectations, it can be a disastrous situation for a small company-- a disaster that could have ended in bankruptcy, a risk that is now averted, as it can comfortably focus on the segments with the most potential.
In the press release, the company made no secret that it plans to use the proceeds for the development of its Phase 2 lead candidate, AMR-001, a candidate that one analyst projects is worth over $700 million in sales. Investors have been very excited about the potential for AMR-001 as a therapy with proven results. It almost mirrors Baxter's (NYSE:BAX) Phase 3 CD34+ cell therapy. Although the two are slightly different in approach, the theory of the treatment is the same, and that is that the use of CD34 + cells is beneficial in the restoration and repair of cells of the heart. I have often stated that I am "worry-free" about AMR-001. The company's PCT segment has manufactured many cell types, knows what works, and what doesn't work. Therefore I find it very encouraging that it has chosen to develop a CD34+ cell therapy, and I am sure that the company wouldn't develop this candidate if it wasn't certain that using the cells was effective, as it should know from experience as a manufacturing entity in the sector.
In addition to its clinical development segment the company can also focus its energy on the PCT cell manufacturing business, a business that just so happens to manufacture the cells of Baxter's Phase 3 candidate. NeoStem is a leader in this fast-growing momentum-building industry, and is positioned to capitalize on long-term contracts from the approval of cell therapy treatments and vaccines.
The bottom line is that NeoStem was a small company that was too diverse and can now focus on its segments with the most potential, without facing any immediate financial dangers. It had too many segments and was losing money faster than it could accumulate cash, obviously an unhealthy business model. With this sale, the company's costs will be cut. It will be able to focus all of its energy on the two segments with the most potential. The $50 million benefit to selling the pharmacy business is huge, allowing NeoStem to develop an identity through its sale. The company is now smaller, but still well diversified, and is now better positioned as a biotechnology company to capitalize on a fast-growing industry as a potential leader for many years to come.
Disclosure: I am long NBS.
Additional disclosure: The information in this article is for educational purposes only and should not be used to make any investment decisions without first consulting a financial advisor.