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A couple weeks ago I wrote an article that was somewhat controversial when I voiced my beliefs that NeoStem (NBS) would reverse its stock. Since then many people have expressed their opinions regarding the reverse, and their belief that it would be a bad idea. After further consideration, and after reading a recent interview with the CEO of the company, Dr. Smith, it is evident that there will be no reverse split, that I was wrong, and the reason is related to the strategy, the goals, and the direction of this company.

The entire discussion of a possible reverse split was a result of a company filing in which an authorization for a reverse split was disclosed. However, in a recent interview the CEO made it very clear that no reverse split would occur at this time.

"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."

"In fact, we have sought this approval in previous years, however we have not executed on this transaction."

"The main goal of this approval is adding flexibility to the capital structure and not necessarily to do a reverse split."

"We have no plans to reverse the stock."

NeoStem has become a biotechnology company that is very focused on the health of its balance sheet. The company has more upside than at any period in its history due to several late stage candidates in its manufacturing business and two recent announcements of data for both VSELs and its lead product AMR-001. The statements above validate this notion along with the fact that NeoStem will not reverse its stock at any point in the near future.

The fact of the matter is that a reverse-split does not mean anything in terms of valuation to the company. It has no impact whatsoever. It simply decreases the number of shares and raises the price of the stock. My original argument was that it would benefit NeoStem due to institutional interest. However, with 152.54 million shares outstanding, the company is undeniably trading with the correct number of shares if it's to become a billion dollar company.

Investors, such as myself, will typically look through filings to find certain hints at upcoming developments, however Dr. Smith clearly points to the fact that this "approval" is nothing new, they had sought this approval in recent years, and have never executed. It simply gives the company the flexibility, as mentioned above. NeoStem does not have the same requirements as a stock listed on the NASDAQ because it trades on the NYSE: MKT, the need to reverse the stock is unnecessary, and could create uncertainty on behalf of investors.

After assessing all of the available information I now believe it makes more sense that the company does not reverse its stock. The data from AMR-001 has all been positive, according to a recent publication, and the company believes there is a market potential for the drug of more than $1 billion, analysts say more than $700 million annually. In the same interview, where Dr. Smith says there is no plan for a reverse split. With three late-stage candidates that all have $1 billion of market potential, the company could earn substantial revenue from the PCT segment. As a result, its current share count makes sense for the long-term direction of this company, a company that could easily create revenue in excess of $1 billion, within the next five years, as the company becomes a clear leader in cell therapy.

NeoStem is in a unique position to become the dominant company in cell therapy. It is much more advanced compared to other cell therapy companies such as Neuralstem (CUR) and StemCells (STEM). Both Neuralstem and StemCells have rallied in 2012 with the announcement of animal studies. However, NeoStem has announced its own encouraging animal study, also has a late stage product, and a manufacturing segment, which means its upside far exceeds the speculation of StemCells or Neuralstem. Osiris Therarpeutics (OSIR) is the only company in the space with an approved product that has a cell therapy as the main component. However, it trades with three and a half times the valuation of NeoStem and its approved product Prochymal has very little market upside with its one indication. In fact, the market potential for Prochymal is equal to or less than NeoStem's current manufacturing business. As a result, I believe NeoStem is the best choice as an investment in this space, both for its upside and the plan that management is executing.

Too often CEOs and executives of clinical phase biotechnology companies care too much about the performance of a stock. However, I think NeoStem has an executive staff in place that cares deeply about the long-term prospects of the company, and the decision of not executing a reverse-split is further proof. With the company selling its generic pharmacy, improving its balance sheet (cash position), and redeeming its Series E Preferred stock, I think it's almost evident that NeoStem is planning for its future and is preparing to grow by a large margin over the next several years.

Source: NeoStem to Create Value with Billion Dollar Potential