The small cap biotech sector is poised for a long-term breakout and will ultimately benefit long-term holders of the top tier companies in this sector. Although small cap biotech companies are frequently the topic of discussion for buyout candidates they should be purchased on the strength of their management and their prospective business opportunity, rather than the potential of a near term acquisition target.
Neostem Inc. (NBS) is rapidly becoming a leader in the field of stem cell therapy. This should not be surprising when you couple a compelling business opportunity with a CEO that has the talent level of Dr. Robin L. Smith. Dr. Smith's superior ability to promulgate the NBS story to new shareholders and institutions is already a matter of public record. Thus, requirement number one of the thesis behind buying small cap equity has been satisfied.
NBS clearly meets the second criterion of becoming a dominant player in its sector as it has already produced results from its collaborative studies with the University Of Michigan School of Dentistry. The findings from this study were a breakthrough for NBS as it showed its VSEL Technology successfully created bone when implanted in the bone tissue of SCID mice. In addition, the results from AMR-001 which is Neostem's lead product have shown considerable success for preserving heart muscle and it's headed to phase ll of clinical trials.
The core focus and thesis of this article is the fact is that NBS has rapidly been improving its balance sheet. NBS announced on June 18th that it had entered into a definitive agreement to sell its 51% interest in Suzhou Erye Pharmaceutical, Co. Ltd. The net result to the company will be an additional $ 12.8 million in cash to its balance sheet and the elimination of $ 37 million of debt. That transaction should close in the fourth quarter of this year.
NBS filed in a recent 8K that in a shareholder meeting held on October 5th, the shareholders approved a 1:2 to 1:10 reverse stock split. This should bode well for long term holders of NBS, as should a reverse split occur, it would be executed in conjunction with an improving balance sheet, which often accompanies a corporate milestone.
On October 25th NBS announced that it had completed the redemption of all 2,351,558 outstanding shares of its Series E 7% Senior Convertible Preferred Stock. This further emphasizes management's long-term outlook and its concern for its shareholders.
From a technical standpoint, NBS closed Monday at $ .63, putting the current market cap at the $100 million dollar level. The near term support for NBS looks to be in at $.60. These are near term variables however and are not indicative of the future performance of NBS. NBS looks to have an industry-leading product in AMR-001. This alone creates value.
With an improving balance sheet, a diminutive market capitalization given its position in the sector, and multiple collaborations already announced, NBS looks to have major upside from here.
While this is our opinion that there is potential upside for the aforementioned reasons expressed in this article, it is important to note that there are inherent risk factors when purchasing any stock underneath $1.00. There are also risks associated with investing in the stem cell space as it is new technology. Lastly, there is execution risk should the management team at NBS fail to execute on their business model.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.