Possible Reverse Split Should Be the Catalyst Needed to Take NeoStem Shares Higher
In the last three weeks, cell therapy company NeoStem (NBS) has announced two key publications including data for both of its clinical products, AMR-001 and its VSEL technology. Last Wednesday NeoStem announced yet another development that further strengthens the company's balance sheet, indicating that a period of financing is unlikely, a development that may provide additional support for the stock. All of these announcements have come in the month of October, as the month is proving to be very exciting in terms of developments for the company. Looking ahead to the next catalyst, it is very possible that a reverse split could occur in the coming weeks, and may be exactly what investors want to hear.
A couple of weeks ago I was scrolling through stocktwits.com and came across a message that stated, "NBS, I thought this would fly with that news" and added, "Shoulda' pulled a CUR" (alluding to the September 13th news which drove Neuralstem's (CUR) share price up 42%). I firmly believe that once the investing public fully digests the magnitude of the recent news that the share price of NeoStem will also see a significant increase. The message was referring to NeoStem's announcement that data from its collaboration with the University of Michigan's School of Dentistry found that VSELs demonstrated bone regeneration capabilities.
The study, published in Stem Cells and Development, shows that human VSEL stem cells formed human bone when implanted into the burr holes in cranial bones of SCID mice. This breakthrough, innovative news helps to prove that the experimental technology could treat conditions where bone degeneration is present by transplanting the cells into bone tissue. This apparent validation includes, but is not limited to, all of the six indications that are currently being tested with the company's VSELs. If VSELs can, in fact, create bone from cells in humans then this becomes a technology with significant upside potential. When you combine the news of the recent Nobel Prize, the discovery of mature cells reprogrammed to become pluripotent, we have a technology that is quickly becoming validated.
Following the data announcement regarding VSELs, NeoStem provided additional news by announcing positive data for its lead product, AMR-001, in a phase 2 clinical. AMR-001 has an addressable market of over $1.2 billion annually. The company provided further evidence that AMR-001 is capable of preserving heart muscle function following a large myocardial infarction. The company announced that, of those patients who received a therapeutic dose of more than 10 million cells, none experienced deterioration in heart muscle function. However, 30-40% of patients who did not receive a therapeutic dose did experience deterioration.
In the past, bulls, including myself, were optimistic regarding the future of AMR-001 on the fact that it was safe, well-tolerated, and that it was very similar to Baxter's (BAX) cell therapy - a cell therapy that has achieved endpoints never before reached. However, we now know that the therapy not only works, but works effectively and much earlier than previously considered. When you think about it, the 30-40% of patients experiencing measurable deterioration is significant when it compares to zero percent in the test group. There are probably few trials that can make similar claims, depending on enrollment size.
Obviously, NeoStem has been a busy company over the last couple of weeks, and has announced company-changing data. However, we have yet to see significant movement in the shares of the company. This lack of movement may change in the coming weeks. The company just announced news regarding the redemption of the outstanding 7% Series E Preferred Stock, which may help in explaining the struggles to cross $0.75. The news was big for the company, and apparently went unnoticed.
With its Series E Preferred Stock, the company had chosen to pay investors in equity, or shares, rather than cash. As a result, this has created selling pressure in shares of NeoStem while these payments were occurring. Therefore, by using the $2.5 million in escrow, it will eliminate the selling pressure that has taken place on a monthly basis over the last two years, and also improve the company's balance sheet. As a result, with this coming to an end, it should be easier for the stock to trend higher and possibly break this level of resistance. So when combining the aforementioned October news with the redemption of Series E Preferred Stock, what will be the catalyst to now push shares higher?
NeoStem is a $110 million company that is priced at $0.70, and there are many investors who have been requesting a reverse split to increase share price for the majority of 2012. Due to the current price of the stock it does not attract the same level of coverage from analysts nor is it included in as many funds because of limitations and the restrictions of these funds/firms. Thus, there was a significant amount of optimism a few weeks ago when the company disclosed that it had been authorized for a reverse split. This reverse split means that, after an affirming vote, the company can consolidate its shares and meet these requirements by increasing the price of its stock.
So why is a reverse split significant? Well, it's a perception changer. Some investors avoid stocks that trade below $2.00 regardless of the company's potential upside or its valuation. With a 1:5 reverse-split NeoStem would be priced at $3.60, and would most likely trade significantly higher subsequently. There are several recent examples of a reverse split having a positive effect on the price performance of a stock, such as with Beazer Homes (BZH).
Last week Beazer Homes completed a 1:5 reverse split, taking its price from $3.48 to $17.40. The stock has since rallied over the last few days, to reach a price of $18.30. However, BZH had met the requirements of most funds prior to its split, so there may be better examples. Flagstar Bancorp (FBC) was priced at $1.10 prior to its 1:10 reverse split last week. The stock opened at $11.90, reached $12.75 in the first day after the split, and has since created new 52-week highs at nearly $14.00. Cyclacel Pharmaceuticals (CYCC) was priced at just $0.51 prior to its 1:7 reverse split, hence making its post-split price $3.50. The stock quickly reached $5.50 after its split and has since traded even higher to its current price of $6.20.
The bottom line is that reverse-splits for a stock priced near $1.00 usually, and recently, have had a great effect on the immediate and short-term trend of the stock. NeoStem will now vote to determine whether or not the split will occur; and due to the benefits, I couldn't imagine that they would not announce the split soon. Shortly thereafter, I expect that the stock will trade to reflect its latest developments and also its true worth.