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NeoStem (NBS) is a growing cell therapy company with much short, mid and long-term potential. It has the knowledge and experience of several companies that are all rolled into one and centered around growth in the cell therapy arena. The company's long-term potential lies in its Amorcyte (clinical) and VSEL technology companies, although its immediate upside is the PCT manufacturing segment-- a division that will also aid in growing its other segments. The PCT division received some very encouraging news on Monday: that it would be receiving yet another late-stage client (SOTIO), for which it would manufacture the cells for its Phase 3 trials.

For those not familiar with it, the PCT business is an industry leader in contract development and the manufacturing of cell therapy products. Its services include manufacturing, product & process development, tissue processing & storage, distribution, transport, and various areas of support in clinical trials. The company is currently working with a host of high-profile companies, including the likes of Baxter (BAX). The company has now added SOTIO, similar to Dendreon (DNDN) in terms of its lead candidate, which is an immunotherapy treatment for prostate cancer, like Dendreon's 2010-approved Provenge. To add validity, Dendreon's Provenge was manufactured by PCT during its clinicals.

According to NeoStem's press release, the Phase 3 trial will enroll 250 patients and will be SOTIO's first in the U.S. SOTIO is using an immunotherapy approach to target antigens in treating advanced stages of prostate cancer. The reason it's a big win for NeoStem is because the PCT business not only receives additional revenue while SOTIO is in clinical studies, but could earn even more revenue in royalties if the company chooses to use NeoStem following a potential marketing approval of its immunotherapy candidate. With preliminary results showing a clear benefit in the company's treatment, and with it being a Phase 3 candidate, it could create sizable royalties for NeoStem in a short period of time.

NeoStem is currently returning $8-$10 million per year in its PCT space with the bulk of its clients being preclinical and early phase candidates. SOTIO now joins Baxter as being one of their two clients developing Phase 3 candidates. Both Baxter's CD34+ cell therapy and SOTIO's advanced prostate cancer treating candidate are expected to produce very large sales pending marketing approval. Therefore, it is a big win for NeoStem, in terms of both immediate revenue from a large 250 patient Phase 3 trial, and long-term revenue after the possible approval. Perhaps more importantly, it gives NeoStem even more credentials in a space where it is already the leader.

The expenses involved in creating and staffing a facility such as NeoStem's have been well documented. It would very expensive and difficult for a company to create a company such as NeoStem's PCT business. The company has more than a decade of experience in manufacturing virtually all cells, has over 65,000 square feet of development and manufacturing space, and has served more than 5,000 patients with 30,000 cell therapy procedures. Therefore, NeoStem's PCT is top-of-the-line, and with the addition of another Phase 3 candidate, it should encourage other late-stage companies to seek the services of NeoStem. Because the cell therapy space, including cell-based therapeutic vaccines and regenerative medicine, is growing at a rapid rate, a company such as NeoStem is well-positioned to benefit and could produce 100's of millions in revenue in the coming years.

One of the most significant reasons that I expect large growth from the PCT segment over the next few years is also because of word-of-mouth, and I believe this is effective in two ways. Now that NeoStem has Phase 3 clients it will be attractive to other companies with late stage candidates, and since it successfully led Dendreon throughout the trial process and manufactured its cells with success, it gives the company a selling point for companies in need of manufacturing services.

The other reason I expect the PCT segment to grow is perhaps most significant, and that is perception. Unless we're talking about OncoMed or Verastem (VSTM), most clinical stage companies have limited amounts of cash and must take all proper measures to ensure success, and cannot afford to make costly mistakes. NeoStem had already successfully manufactured the cells for Provenge, which is somewhat similar to SOTIO. Both use the immunotherapy approach, target antigens, and treat prostate cancer. When companies such as SOTIO are seeking a manufacturing company, they want to know that the company has experienced success at manufacturing similar drugs. Since NeoStem's clientele continues to grow, and it has manufactured virtually every cell therapy product, it allows the company to provide assurance to clinical stage companies that can't afford to waste money or lose shareholder confidence because of a B-manufacturing company's inconsistencies. Instead, a company will want an industry leader such as PCT.

There is one final point to consider regarding the manufacturing segment: The PCT business is vital to the success of NeoStem's other segments. NeoStem has a solid pipeline of clinical candidates that require services of an advanced cell production team. And because of the PCT space, NeoStem has built a foundation for manufacturing and regulatory expertise. Its research capabilities are unmatched and continue to grow with every new client; because of its large clientele it has direct relationships to allow for the possibility of future collaborations with large companies. It also puts NeoStem in a rare situation, where it gets to see first-hand the success of other therapies, and learn from the success and failures of therapies from a clinical point-of-view. Therefore, its clinical segment becomes more reliable as it knows what works and what does not work, and it has the expertise to know which cells are most efficient at treating various diseases. This knowledge continues to grow with each and every client, and although the potential revenue and prominence that is created from a new Phase 3 company such as SOTIO is great, it is only one small piece in a much larger picture that NeoStem is creating with its complex, yet promising business model.

Source: A Big Win For Neostem