If you measure NeoStem's (NBS) success over a period of two months, then it is evident that the stock has been on the rebound with a 37% gain. This comes after the stock lost 50% of its value in the first four months of the year. Needless to say, it has been quite a year for NBS, and should now become a better year now that the company has sold its stake of its generic pharmacy, a sale that provides cash, cuts costs, and makes NBS a straight forward cell therapy play. Yet the stock remains volatile, and has traded lower when it should be trading higher. Therefore, it is important that investors understand the company and why it has traded lower and higher at various points over the last year, and with such volatility.
Let's start with why NBS traded lower during the first four months of 2012; simply put, it was because of financing. The company raised $6 million back in March through a public offering that was priced at just $0.40 per share. It was the news of the public offering that caused such strong selling pressure following its announcement in March. Because up until that point NBS had actually performed well in 2012, outperforming the market and reaching a price of $0.75 (until the public offering was announced).
If you want to trace back the price action of this stock you would notice that it has lost 60% of its value over the last year. At first glance this looks bad. In fact, anytime a stock loses this level of value it's bad, but what drove the stock lower was the massive selloff during July and August of 2011. On June 24th, the stock was priced at $1.75, but then by August 12th, the stock was $0.63, losing more than 50% of its value. Then when you incorporate its financing deal into the equation, the company's stock never recovered, and traded even lower due to upset investors. This was a very dramatic change for a stock that had traded with consistency over a period of 26 months before the selloff in 2011.
At the time, loss was complimented with a public offering where the company raised $16.5 million and acquired Amorcyte and its lead candidate AMR-001. Today, this is a critical factor behind the price movement of the stock, though in July 2011, this was viewed as desperation, and sparked additional fear as the market was trading with such excessive loss.
On April 10th, NBS reached a low of $0.30 and then it reversed and has traded higher, until announcing the sale of its generic pharmacy This is a company that was hit with both the market sell-off in 2011, and then even more following a round of financing back in March. It created the perfect storm, pushing the stock much lower than its worth, therefore creating value.
The stock has regained much of its losses during the last two months, but is still down 60% over the last year, and arguably has more positive developments than at any point in the last several years. The company is much more diversified than most realize: Its cell manufacturing business is the best-in-class in an industry where cell therapies are becoming more and more popular. It has produced 30,000 cell products and supplies cells for the likes of Baxter (BAX), and manufactured Dendreon's (DNDN) Provenge. As these clients of NeoStem approach FDA approval, NeoStem will continue to produce consistent revenue. If therapies are approved, then NeoStem can lock its clients into long-term contracts to manufacture cells that are very complex and expensive for a new company to begin developing.
The company's newest acquisition, Amorcyte, includes a Phase II drug, AMR-001, for the treatment of myocardial infarction, which is strikingly similar to Baxter's Phase III product, which NeoStem is manufacturing. The drug will aid in cell regeneration, following a heart attack, to preserve heart function. The potential market for this drug is huge, with one analyst projecting sales of more than $700 million. The fact that AMR-001's technology is very similar to Baxter's already successful Phase III candidate should speak volumes to the likelihood of the candidate being effective. Not to mention, NBS is the best in terms of manufacturing cells, and it knows which cells work, which ones don't, and the most effective way to utilize those cells.
As far as concerns, which are a primary point of any discussion, the company has raised a lot of cash over the last year to embark on new ventures. To investors, this is always discouraging, and if the company were to ask investors for more money, then it could cause massive selling pressure. As of now, the company has $21 million in cash, and with the sale of its stake in the Chinese pharmacy, there should be no reason for the company to raise more money. If it does, then it could be damaging to the stock.
The sale of the generic pharmacy was a major development for the future of this company. Back when NBS acquired the generic pharmacy it was believed that the business would grow and produce profits in a growing Chinese economy. Unfortunately it did not work, as increased competition and issues with cheaper drugs kept the business from appreciating. Therefore, when the company announced the sale of the generic pharmacy conventional wisdom suggested that the stock would trade higher, however it has since traded lower.
For the last two weeks NBS appears to have lost much of its positive momentum. Up until June 12 the stock was on a roll with seemingly no resistance in the immediate future. Yet the recent loss has been unexplainable, leaving me to search for why the stock is trading lower. And I believe the reason for its loss, has nothing to do with retail investors losing faith, or that the market wasn't impressed with the company's sale of its generic pharmacy. But rather the fact that it was deleted from the Russell index funds, a duo of indexes with more than $100 billion that track it. Therefore, NBS has been sold over the last two weeks, creating selling pressure of its stock.
I will finish by saying that NBS is worth much more today than it was last year, especially if you factor the advancements of cell therapy, the initiation of its Phase II trial, and the proceeds from the sale of the generic pharmacy. The Russell indexes has now finished rebalancing, and all shares have been sold, therefore the stock can now proceed with its bullish trend and recover from its losses, to reflect the good news of the pharmacy sale, and trade with a valuation that reflects the future that this company has in store.
Disclosure: I am long NBS.