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Despite appreciating in value by over 80% in the last four months, NeoStem Inc. (NBS) is still highly undervalued. The company is largely misunderstood and potentially a great play on the future of cell therapy and the innovation of cancer treatments. Its overall loss over the last 14 months was a combination of several events: the market trading lower during the final six months of 2011, the acquisition of Amorcyte, and a round of financing in which the company raised $6.8 million. Obviously, anytime a company does a public offering it affects share value. However, its recent strategic decisions that led to the stock trading lower have made NBS a company of great opportunity and a far better investment than it was in 2010 and 2011 when it traded consistently over $1.50.

For anyone who has followed the company, both its Phase 2 trial of AMR-001 and the sale of its generic pharmacy are known and have been major catalysts for its recent increase in value. However, the majority of its gains have been a correction, as its loss back in 2H 2011 was more due to the performance of the market, and not fundamental changes. Yet as NBS continues its trend, and resumes on path to trade higher, there is one segment of its business that remains ignored, and it happens to be the segment with the most immediate promise-- the PCT segment.

Now that Osiris Therapeutics (OSIR) has been awarded the first approval for a cell therapy candidate, investors should be much more optimistic that NBS could see an approval for its Phase 2 cell therapy following its clinical studies. In addition, Baxter International (BAX), a large healthcare company that is making progress in its cell therapy trial, is reaching endpoints that have never been reached. Due to the similarities between it and NBS' cell therapy, some have speculated that AMR-001 could also see an approval. However, this breakthrough is still several years away, as both candidates must complete studies, and then file for approval in various regions around the globe. As a result, the more immediate upside, which could provide very significant revenue, lies in the partnerships between NeoStem and other promising companies in its manufacturing segment, which is a facet of the company that is often overlooked.

For a little background information, NeoStem's manufacturing segment, which is also known as PCT, is engaged in a broad range of services that include cell transportation, manufacturing, storage, clinical trial design, and distribution. In this particular space, NeoStem is the leader, returning between $8 and $10 million per year and having manufactured more than 30,000 cell therapy products, delivered to over 6,000 patients, for over 100 clients worldwide over the course of a decade. Thanks to the recent advancements in cell therapy, immunotherapy, and other cancer or degenerative diseases, the need for advanced cell therapy manufacturing is now a requirement. Promising companies in the sector must either build their own facilities or seek the services of a company such as NeoStem as it is very expensive to build the facilities and hire a team that knows how to manufacture the complex cells.

NeoStem's PCT segment has manufactured virtually every type of cell therapy with its over 65,000 square feet of development and manufacturing facilities. It is well positioned to return larger gains over the next 24 months with several late stage candidates under development. For example, companies will use NeoStem's PCT services while in clinical trials while NeoStem charges a flat rate. Once approved, the company has the option to enter into a contract with NeoStem, in which NeoStem could earn royalties on the sales of the product. In my opinion, the late stage products in development all represent great chances of being awarded approvals. With the high expenses to build the facilities and the difficulties in trying to find a staff to manufacture the cells, it makes sense to work with NeoStem.

Some bears point to the fact that companies have the option to walk away after using NeoStem in clinical studies and that most could build their own facilities. To counter this, NeoStem and investors could point to the problems of Dendreon (DNDN) as proof that companies would be wise to stay with NeoStem, seeing as how they could save money and avert risk. NeoStem manufactured Provenge throughout clinical studies; but once approved, Dendreon decided to build its own manufacturing facilities. Fast forward and you'll see that Dendreon has been unable to return a profit, and just recently announced that it was closing its New Jersey facility and cutting 40% of its workforce to limit costs. If it would have stayed with NeoStem, then it may not have had to close the facility and waste $100s of millions in building the facility, logistics, and staff. Dendreon had no way of knowing the actual demand for Provenge and made the mistake of not utilizing the already operational facilities of NeoStem. Also, as another writer pointed out, it is very expensive to build these elaborate facilities for just one drug.

NeoStem can definitely point to the failures and struggles of Dendreon as to why its PCT segment is important. With a questionable economy, I think it seems logical to expect companies to try to save by using NeoStem for manufacturing purposes. Looking back, I am certain that Dendreon wishes that it had made a different choice; though back when the company decided to build the New Jersey facility, its market cap was in the billions and the market was expecting billions in sales of Provenge. Now, with a manufacturing gap in the northeastern side of the U.S., some have speculated that Dendreon could use the PCT services after its New Jersey facility is shut down. It could also possibly complete the switch and close its California facilities and use both of NeoStem's facilities so that it can cut costs while maintaining production. As an investor and a follower of the space, this seems like a logical move, especially since manufacturing and speedy transportation of Provenge in the northern U.S. would be near impossible after closing the New Jersey facility.

Dendreon rehiring PCT for manufacturing is a speculative call, but one that could very well occur in the next six months. Regardless of the decisions made, NeoStem still has a very large list of late-stage promising products that have very significant revenue potential-- one being Baxter's Phase 3 cell therapy product which is the first to meet both endpoints of reducing angina and improving exercise tolerance in patients with chronic myocardial ischemia . The market potential for this particular cell therapy is large, and with it showing such significant results for treating this particular cardiovascular disorder, most believe it will be approved. This CD34+ cell therapy is very similar to NeoStem's cell therapy product; and if Baxter does earn an approval, it should provide a clear path to an FDA approval for NeoStem, along with returning very significant revenue from the manufacturing side of NeoStem's business.

In addition to manufacturing Baxter's cell therapy and the speculative deal to again manufacture Provenge, NeoStem has other billion-dollar candidates that it is manufacturing which are also late-stage promising candidates. The company recently announced a deal with the private company SOTIO, for its Phase 3 autologous dendritic cell vaccine also called SOTIO, which is expected to launch in 2013 pending an FDA approval. The company is European based and is developing its immunotherapy candidate to treat prostate cancer at various stages of the disease. Interestingly enough, it already has a top-of-the-line manufacturing facility located in Europe. However, it needs manufacturing capabilities in the U.S. in order to keep the therapy nearby for quick distribution. To me, it also seems reasonable that SOTIO could also utilize NeoStem to control costs. SOTIO expects its therapy to become a global product. In the U.S., with the very large market for prostate cancer, this candidate could be commercially successful for both SOTIO and NeoStem.

The final promising product is a candidate that has received a particularly large amount of interest due to the excitement surrounding its clinical studies, ImmunoCellular Therapeutics' (IMUC) glioblastoma multiforme candidate, ICT-107. IMUC's Phase 2 product seems like one of the more advanced cancer treatments in biotechnology; and because of its multiple antigen targeting technique, some believe it could prove to effectively treat several cancers. However, it's still early in the study process. With early results that are unmatched in cancer treatments and a very impressive enrollment rate for its Phase 2 study, many suggest that ICT-107 could be approved as early as next year if interim results show a clear advantage over other approved therapies. Only time will tell. If approved, this vaccine could return north of $1 billion in sales, which would be a significant potential gain for NBS.

In terms of risk, the growth of PCT is speculative, and chances are that not all of the above mentioned developments (FDA approvals) will fall in place. Perhaps Baxter doesn't gain an approval, or SOTIO decides to build its own facilities, or Dendreon makes yet another mistake and tries to operate with only two facilities. Unfortunately, like all biotech companies of this size, there is risk and the future is speculative. It is possible that none of these candidates will earn approvals, or that all of these companies could elect to manufacture its own products. The clinical segment may also be viewed as a concern, at this time we don't have an approved product with a cell therapy as the main component in the U.S. And although Osiris' Prochymal was approved in Canada and Baxter's cell therapy (which is very similar to NeoStem's therapy) is meeting endpoints never before reached, there is still a possibility that U.S. regulators will choose to not approve a cell therapy, which combined would create downside in shares of NeoStem. In any case, some of the pieces will likely fall in place. It would be nice for investors if Dendreon utilized NeoStem's PCT segment-- and if SOTIO, Baxter, and IMUC, all earned approvals (among the many others). Unfortunately, we most likely won't see all pieces fall in place, however that's what makes NeoStem so interesting, because it doesn't need every piece to fall in place.

Part of the investment potential for NeoStem is that it has several different avenues of growth, which is atypical for most biotechnology companies. Typically, with biotechnology companies of this size, all pieces must fall in place in order for the company to grow and earn approvals. NBS not only has its clinical segment, but also manufacturing, which presents immediate upside. In terms of risk, the growth of PCT is speculative, and chances are that not all of the above-mentioned developments (FDA approvals) will fall in place. Perhaps Baxter doesn't gain an approval, or SOTIO decides to build its own facilities, or Dendreon makes yet another mistake and tries to operate with only two facilities. In any case, some of the pieces will likely fall in place. It would be nice for investors if Dendreon utilized NeoStem's PCT segment - and if SOTIO, Baxter, and IMUC, all earned approvals (among the many others). Combined, they could garner in excess of $3 billion in total sales, and although we don't know the exact revenue amount, in which NeoStem will earn from total sales, we can assume solid growth with each approval. If you also factor in the potential of its Phase 2 candidate Amorcyte, then it's easy to see why some investors are excited about the future of this company, and how its fundamental growth could explode in the not too distant future.

Source: Developments Over The Next Year That Could Change NeoStem