Over the last six trading days, NeoStem (NBS) traded higher by an incredible 33%, following an upgrade by WBB Securities from Buy to Strong Buy, the firm's second upgrade for the stock in the last six months. In addition to the upgrade, NBS was pushed higher when the company's CEO, Robin Smith, issued a bullish letter to shareholders regarding recent developments and near term catalysts that created immediate optimism. Therefore, I am taking some time to look through the letter and highlight a few "key points" to determine why the stock may have traded higher (all quotes below are from the CEO's letter to shareholders).
"A definitive agreement to divest the Company's 51% ownership interest in Suzhou Erye Pharmaceutical Co. Limited was signed on June 18th. This sale will bolster the Company's balance sheet, increase its cash position by $12,280,000, and allow it to hone its focus on its cell therapy business. Of note, $1,228,000 (ten percent of the total cash purchase price) has already been received by the Company. The transaction is expected to close no later than the 4th quarter, subject to the satisfaction of various closing conditions including China regulatory approvals and NeoStem shareholder approval."
The statement above was in the company's letter to shareholders. It reiterates the most recent development, the company's sale of its generic pharmacy business, and informs shareholders that 10% of the sale has been received, and highlights the fundamental benefits from the sale. This particular sale has been long awaited by investors for the last six months, as it does give the company a significant amount of cash, eliminates debt, returns shares to the company (1.3% of the company's fully diluted issued and outstanding shares), and gives the company the ability to focus on its most promising segments along with eliminating significant expenses. Therefore, it is no surprise that investors are happy to see the sale progressing rapidly, as some believed it would be a drawn out process.
"In January 2012, our acute myocardial infarction (AMI) therapeutic product development team achieved its forecasted goal of enrolling the first patient in the PreSERVE Phase 2 clinical trial. We continue to open new clinical sites and expect to achieve full enrollment over the next nine months or so and present top-line data by the end of 2013."
The company's cell therapy is a major catalyst for its future, as JMP Securities estimates it could be worth $700 million in sales. It is encouraging that the company expects to achieve full enrollment within the next nine months, and data soon after. Investors expect strong results from its AMR-001 cell therapy candidate due to the similarities between it and Baxter's (BAX) cell therapy, which has achieved endpoints that had never before been reached. The technology and theory to the therapy is showing all the signs of being effective.
"Our Progenitor Cell Therapy (PCT) CDMO service business continues to grow and has added new clients in later stage clinical trials setting the stage for expansion into larger and substantially more lucrative commercial manufacturing contracts."
NeoStem is the leader in cell therapy, and has been continuously adding new clients in its services space, which is its revenue producing segment. On Monday, the company announced a deal with the Phase 3 company "SOTIO" for its immunotherapy candidate. When Dr. Smith released the letter to shareholders, I assumed that new client announcements would begin to occur in the near future, however I did not expect one week following the CEO's letter. I do not know a great deal about SOTIO, however it does have a late-stage candidate, and NeoStem will be able to benefit from its 250 patient trial. If the candidate is approved in the next year, it could very well lock the company into a long-term contract.
The manufacturing business produces revenue by manufacturing cells, while candidates are in clinical trials; it can then earn larger revenue with long-term contracts once therapies, vaccines, or other treatments gain approvals. The fact that its newest client is a Phase 3 candidate means that larger revenue could come in the near future in the form of royalties. And I imagine that SOTIO will not be the only new addition to the PCT services segment. Now that NBS has divested its pharmacy business, it can focus a lot more of its energy on other segments such as the PCT business, which has much more upside over the long-term. I believe this is an area of the company's business that investors should watch throughout the rest of this year; more and more companies need complex cells manufactured and NBS is the leader in the space, and poised to benefit from the demand.
"We believe that substantial cost savings also will be achieved with the closing of our Cambridge facility in September 2012 upon lease expiration and the consolidation of the Cambridge group's scientific expertise in stem cell biology, immunology, and hematology with PCT's broad expertise in commercial process and product development for cellular therapies."
Anytime a company can cut costs it's good for shareholder value. NeoStem is a clinical stage company, yet the company is unique because it creates large amounts of revenue, $80 million over the last 12 months. Therefore, any cuts in costs are good for the business, which should be significant moving forward since it already removed large costs with the sale of its generic pharmacy.
"We are actively pursuing additional strategic relationships with major pharmaceutical and biotechnology companies in 2012."
I think now that NBS has sold its generic pharmacy, it's an attractive acquisition target. The cell therapy space in building in momentum, and there are more and more cancer vaccines using the services of NBS for cell manufacturing purposes. It is very expensive to create an effective cell manufacturing business and find experienced staff that has the capabilities and knowledge to manufacture a large array of cells. NeoStem is the leader in this space and has a cell therapy candidate that is showing great promise. Now that it has exited the generic pharmacy, which never lived up to expectations, it could be very attractive to large pharma, because of it being a revenue producing company that could easily grow and be acquired cheap. Of course, all investors are aware that developmental biotechnology companies are always "pursuing strategic relationships", but I think the fact that she said "in 2012" could have some hidden speculative meaning.
"We recently received a two year grant totaling $595,252 for the 'Development of Human, Autologous, Pluripotent Very Small Embryonic Like (VSELs) Stem Cells as a Countermeasure to Radiation Threat' from the National Institute of Allergy and Infectious Diseases (NIAID), a division of NIH."
The VSEL segment is a technology that investors believe presents a great deal of promise; however, it was unknown whether or not the company would develop the technology while in studies for AMR-001. It is encouraging that the VSEL Technology program will be funded by the U.S. Department of Defense and the National Institute of Health grants over a long-term period of time. It allows the company to proceed with a technology that has great potential while in clinical trials for AMR-001.
NBS has increased 120% during the last three months, with over 30% being during the last six trading days. The company now appears to be moving in the right direction, and is taking action to ensure explosive growth in the immediate future. After reading the CEO's letter to shareholders one can see why the stock may have responded. And with analysts giving bullish ratings on the stock, I think it all came together to create large gains in the stock. It has been an incredible rally for NBS, and if the developments and catalysts in this letter become a reality, then NBS could continue its rally.
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 particular investment decisions.