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NeoStem Inc: A Stem Cell Company With an Attractive Valuation

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NeoStem is able to combine a therapeutic development business with a revenue-generating service provider business.

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Valuation

NeoStem represents a substantially differentiated participant in the stem cell sector because of its four different technology platforms and lead product candidate, AMR-001. To date, AMR-001 is the only stem cell-based therapeutic that has demonstrated a dose-dependent clinical response in cardiovascular disease. Aegis Capital recently put out a report that gave NeoStem a buy rating and a 15-month price target of $2.50. The advisory firm used a sum-of-the-parts analysis to compute NeoStem's valuation potential. The firm ascribed a $250 million risk-adjusted Net Present Value to AMR-001, and a total of $200 million to Athelos and VSEL Technology. Finally, Progenitor Cell Therapy (PCT), a wholly owned subsidiary of NeoStem, was given a value of $200 million as well. In sum, this gives NeoStem a $650 million enterprise value. Aegis Capital also projects NeoStem to have an approximate cash balance of $150 million by the summer of 2014, which together with the $650 million business value yields a total value of $800 million. The expected amount of outstanding shares is 350 million, which yields the expected share price of $2.50.

Risks

Clearly NeoStem looks like a company on the rise. However, it is important to look at the risks facing the business. First, the company is likely to require additional funding in the future. As of March 31, NeoStem had a cash position of $9.3 million. The company also raised an additional $10 million in early May. Unless the revenues of PCT grow substantially, they may require another financing round in 2014. Second, the competitive landscape is incredibly fierce. Two companies competing against NeoStem are Athersys, Inc. (NASDAQ:ATHX) and Osiris Therapeutics, Inc. (NASDAQ:OSIR).

Athersys is an emerging biopharmaceutical company developing MultiStem, a patented and proprietary stem cell product for the treatment of multiple distinct disease indications including myocardial infarction, oncology treatment support, and a range of conditions involving immune system function. Athersys plans to deploy MultiStem for treatment of various diseases, including cardiovascular diseases. So it is clearly a competitor to NeoStem. However, MultiStem is a very different product compared to NeoStem's proprietary AMR-001 product candidate; it is intended to address the pathology of cardiovascular disease using a slight different method than AMR-001 uses. Therefore, while investors should keep a close watch on the progress of MultiStem, there is room in the stem cell market for both companies.

Another competitor, Osiris Therapeutics, should also be closely watched by investors. The company has been one of the premier developers of mesenchymally-derived stem cell-based solutions for several years. The company's flagship product, Prochymal, was approved by the FDA for use in treatment of graft vs. host disease in May 2012. Osiris represents a potential competitive threat to NeoStem's VSEL technology platform. However, it is also possible that both platforms could be used in combination. It is still too early to see how each system will turn out, but as is the case with Athersys, investors in NeoStem should be keeping a close eye on Osiris.

Conclusion

Despite the risks and fierce competition in the stem cell field, NeoStem is a substantially differentiated participant in the stem cell sector because of its four different technology platforms and lead product candidate, AMR-001. To date, AMR-001 is the only stem cell-based therapeutic that has demonstrated a dose-dependent clinical response in cardiovascular disease. Investors can look forward to several future catalysts. NeoStem will announce AMR-001 Phase II data by the end of the summer in 2014. There is also a strong possibility of signing a significant partnership deal if that data turns out positive. All signs seem to be pointing up for NeoStem and though the company still has work to do, the future certainly appears bright.

Editor's note: TM Meyer is a former equity derivatives market maker based out of Chicago. He currently manages his own personal portfolio using a combination of fundamental analysis, technical analysis, and event driven catalysts.
No positions in stocks mentioned.
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