Over the years I have had the pleasure of interviewing a number of very interesting people such as Ford (F) CEO Alan Mulally, who has been instrumental in the recovery of the auto industry, to one of the true pioneers in the treatment of breast cancer, Dr. George Peoples. It has been exciting to learn from some of the more brilliant minds in business, medicine, and innovation, as I've made an attempt to bring news straight from the source so that investors can make an informed decision.
My favorite interviews are always those with an edge, people in industries of intrigue, and people who are trying to accomplish goals that will not only return large gains to investors, but will also help everyday people. Therefore, I was very excited to have the opportunity to interview a leader in the exciting cell therapy arena, Dr. Robin Smith, the CEO at NeoStem (NBS).
The company itself is very complex, with a presence in clinical development and manufacturing. There are a lot of questions regarding the company's direction and its short-term impact on the stock. This interview is focused on the company's recent developments, both clinically and financially, to provide answers to investors' most important questions.
Brian Nichols (BN)
Hello Dr. Smith, thank you for taking time to discuss the outlook for NeoStem. As a CEO you joined the company about 6 years ago when it was only a small $4 million market cap company. Can you talk a little about your past 6 years, at the helm, and your long term vision for the company over the next 5 years?
Dr. Robin Smith (RS)
Over the past 6 years NeoStem has built the company through acquisitions. In place of building from scratch, NeoStem was able to buy companies with key assets and personnel to develop cell therapies which enabled the company to have the advanced capabilities faster and cheaper. It is our goal to be a leader in the cell therapy industry and capture a portion of the $ 50 billion being spent annually on regenerative medicine. We plan to continue to be opportunistic and look for assets, and add shareholder value by building our pipeline of cell therapy products and growing our Contract Development and Manufacturing business as well as fostering strategic business development partnerships.
NeoStem has an exciting pipeline of cell therapy products in development that we believe can treat many chronic diseases such as congestive heart failure, an acute heart attack, AMD, Type 1 diabetes, steroid resistant asthma, organ rejection, non-healing wounds, and boney defects. We believe this presents tremendous opportunity, for both the company and its investors.
There has been a renewed interest in stem cell companies such as NeoStem, StemCells (STEM), Neuralstem (CUR), Osiris Therapeutics (OSIR), and Pluristem Therapeutics (PSTI) during the last year. What do you think has been the most significant reason that investors, and the general public, have been so receptive to cell therapy in 2012, after somewhat skeptical opinions in the past?
First, I believe that adult stem cell technology is becoming more widely understood for its potential benefit. People are starting to understand the true potential of adult stem cells and the potential for finding cures to long-standing illnesses through cell therapy. This is augmented by the further understanding that medicines that are derived from you for you (autologous therapies) are safer and may be more effective for many diseases.
Second, the cell therapy industry is maturing. Pre-clinical science is now rapidly advancing through advanced clinical trials. There is an industry momentum that is building and it is expected that there will be numerous US FDA and EU approvals over the next decade, and as we see more positive data and get closer to licensing and commercialization, the value of the entire sector should rise dramatically.
There have been a lot of rumors about a reverse-split. In a company filing it was disclosed that it had been authorized for a reverse split. Can you comment on this?
As part of the ordinary course of business, NeoStem sought shareholder approval to execute a reverse split if such a transaction was in the best interest of the Company and its shareholders. Seeking authorization for a transaction is not predictive that such a transaction will take place. In fact, we have sought this approval in previous years, however we have not executed on this transaction.
Unlike companies on the NASDAQ that are required to maintain a price over a dollar for continued listing, NYSE: MKT doesn't pose any such requirements. The main goal of this approval is adding flexibility to the capital structure and not necessarily to do a reverse split.
Our goal is to build shareholder value through substantive efforts such as bringing AMR-001 to market, building our PCT business, and investigating new technologies and potential acquisitions and strategic partnerships. At this time, we have no plans to reverse the stock.
A few weeks ago an article was published in Circulation Research showing beneficial 5-year outcomes of patients treated with CD34 cells. What are the implications of this on your lead product AMR-001?
The Company's phase 2 clinical trial for AMR-001 takes stem cells from a person's own body and injects them one time into the heart through the infarct-related artery in order to lay down new blood vessels, with the intent of preserving heart function.
As observed in our AMR-001 AMI phase 1 trial, the beneficial effects correlated with CD34+ cell mobility measured by cardiac homing to viable, non-functioning myocardium. [see here]. The recent publication in Circulation Research publication by Vrtovek and colleagues [see here] illustrates the basis for this new paradigm for myocyte focused therapy.
In brief, infusion of purified CD34+ cells into the coronary arteries of patients with NYHA Class III heart failure and severe LV dysfunction led to a meaningful and statistically significant improvement in heart muscle function. The authors report that 5-year survival was 2.3 times higher in patients treated with autologous CD34+ cells (p = 0.015).
The mechanism for CD34+ cells to home is via CXRC4 SDF-1 receptor-ligand coupling and the amount of homing is the key driver of outcome. When following these patients over 5 years, it was found that the physiologic impact that aligns with the reduced risk of clinical events, all tied to reduction of ischemia, restoration of myocardial function, and reversing the natural history of chronic heart failure. Treated patients showed reverse remodeling, which supports the underlying thesis our AMR-001 therapy is based upon.
Management remains focused on the key objective of completing enrollment of the PreSERVE AMR-001 phase 2 clinical trial for preserving heart function after a heart attack in order to have data by the end of 2013. One in five AMI patients will die within a year, and of those individuals that do live, many will have worsening heart function over time. We believe AMR-001, after an acute heart attack, will preserve deterioration of the heart muscle function and become the most effective cellular therapy for the treatment of AMI.
Can you give us an update on PCT, its growing clientele, and where you see the division going in the coming months?
As we have previously discussed, the cellular therapy industry is rapidly advancing. Numerous companies are advancing their products through the clinical process to market; early pre-clinical research is moving into later stage clinical trials. In a capital-challenged market, many companies are seeing the value of using CDMO's as the most efficient way to produce exceptional results at reduced costs. It is an undeniable fact that there are economies of scale in engaging a CDMO.
PCT's long history of excellence put it at the top of the list of preferred partners. To meet the needs of its customers, PCT is evolving with the industry. First, we are expanding our geographical presence. We have announced our intent and are in the process of expanding into Europe.
Second, we are planning to invest in automation technologies that will facilitate scalable commercial manufacturing processes and improved gross margins.
Finally, we intend to meet the future needs of the industry through adaptable, multi-client commercial manufacturing facilities. Our goal is to be able to transition our clients from clinical manufacturing to commercial manufacturing in a cost effective, profitable, quality environment.
One of your previous investments was in Suzhou Erye Pharmaceuticals, (in 2009) but earlier this year the company divested the generic pharmacy. With the divestiture of the generic pharmacy, NeoStem loses some of its annual revenue. However, last quarter the company increased sales for its manufacturing segment by more than 50%. It does appear that with the addition of SOTIO, and late-stage promising candidates from Baxter (BAX) and ImmunoCellular Therapeutics (IMUC), among many others, that the upside is bright. What is the potential in annual sales for this particular segment? Is there a 5-year outlook?
NeoStem's decision to invest in Suzhou Erye Pharmaceuticals in 2009 was heralded as a unique opportunity and a true exercise in entrepreneurism. In fact, our investment in Erye and the subsequent appreciation in the company's market cap enabled us to acquire both PCT and Amorcyte in 2011.
As you are aware, changes in the Chinese regulatory system regarding generic pharmaceutical manufacturing usurped the value of our majority ownership stake in Eyre, but our decision to divest our holdings in Erye will now benefit our investment in PCT and Amorcyte through the focusing of our attention and the cash proceeds we are receiving from the sale.
We believe the growth opportunity for PCT exceeds that of our divested Eyre ownership. The cell therapy market is coming of age, but we have learned from early entrants into the market place, such as Provenge, Carticel, Epicel, and ChondroSelect, that adoption by physicians may take longer and sales may increase slower than predicted.
As such, internal manufacturing with a single product may increase COGS significantly and cut into profits. Simply put, in constrained capital markets, investment in single purpose manufacturing operations is risky, and this risk can be mitigated by outsourcing manufacturing to a CMO, which can lower costs. One scenario to look at is if $50 billion is spent annually in the regenerative therapy market, and if contract manufacturing accounts for 10% of that, you would have a market of annual service revenues equivalent to $5 billion dollars.
Back in June when the sale of Suzhou Erye was announced, it appeared promising because of the cash received, the returned shares, and the elimination of debt. Is the sale complete? Can you give us an update with regard to cash, and shares returned, as a result of the transaction?
The closure of the Suzhou Erye divestiture is imminent. The divestiture will add $12.3 million in cash to our balance sheets, eliminate approximately $33 million dollars in short and long-term debt from our balance sheet and return 1,040,000 Common Stock shares along with the cancellation of 1,170,000 Common Stock options and 640,000 Common Stock warrants.
The recent news of NeoStem's redemption of Series E Preferred Stock flew under the radar. I don't think investors really understood its meaning. Will you explain the benefits of this news and how it both helps the company's financial position and creates support for the stock?
Again, like our original investment in Suzhou Erye, our decision to raise capital through the sale of Series Preferred Stock in 2011 was a prudent decision that bolstered our balance sheet at an important time in our history. While we greatly appreciated our preferred investors' investment in our Company, the basic nature of an outstanding preferred stock (a dividend preference) for a publicly traded company creates an overhang that can be perceived as a disincentive for existing and new investors.
Additionally, the monthly redemption payments and anticipated programmed selling of the Company's Common Stock has caused selling pressure in the stock and thus elimination of this financing instrument with achievement of near term milestone should result in stock price appreciation. With the sale of Erye bringing in $12.3 million of non-dilutive funding onto the balance sheet, we felt it was the perfect time to release the money in escrow and pay off the balance of the series W preferred.
An investment in NeoStem is an investment in cell therapy, which is a developmental segment. NeoStem presents the same risks as any developmental biotechnology company, such as the possibility of never being awarded an approval. The good news with NeoStem, and what separates it from other cell therapy companies, is its manufacturing business. Of course, there is a slight risk that none of its PCT clients will earn an FDA approval, at that point NeoStem's PCT business may not grow at the expected rate. Overall, the company has a large pipeline, diversified manufacturing presence, and has the financial leverage to continue its operations without financing (due to the developments that we discussed in this interview).
As of now, I am planning a second interview, later this week, to go more in depth regarding the operations and outlook for the industry and the company itself, but would appreciate your questions in the comment section below. Dr. Smith was very open and provided detailed answers to all of my questions, therefore I have concluded with my five key takeaways from our conversation, or what I consider to be the important points.
- The reverse-split is not part of the company's current plan.
- The data from the Circulation Research publication provides further proof of the company's lead product, AMR-001, effectiveness, potential, and gives the company a standard for use. AMI is a large unmet medical need and NeoStem's candidate is a serious contender to create a new standard of care, or hope for patients with the disease.
- The fast-growing manufacturing segment is further expanding into Europe, which should present new opportunities.
- The interview alludes to the enormous market potential that PCT is positioned to capture, much larger than most investors expected.
- The redemption of Series E Preferred Stock should eliminate short-term selling pressure and create upside. It also improves the company's balance sheet and decreases the chances for financing.
Disclosure: I am long NBS.