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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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One of the most promising but controversial areas within medicine is the use of stem cells to treat life-threatening conditions. Thus far, stem cell use has proved difficult because of legal and regulatory concerns. However, that appears to be changing as companies continue to receive private funding in an effort to further explore and develop stem cell-based technology platforms. NeoStem Inc (NYSEMKT:NBS) appears to be close to breaking through and giving hope to both the medical community and investors.

What Are Stem Cells?

Stem cells are biological cells found in multicellular organisms that can divide and differentiate into diverse specialized cell types and can self-renew to produce more stem cells. In mammals, there are two broad types of stem cells:
  • Embryonic: Isolated from the inner cell mass of blastocysts
  • Adult stem cells: Found in various tissues
In adult organisms, stem cells and progenitor cells act as a repair system for the body, replenishing adult tissues. In a developing embryo, stem cells can differentiate into all the specialized cells but also maintain the normal turnover of regenerative organs, such as blood, skin, or intestinal tissues.

Medical researchers believe that stem cell therapy has the potential to dramatically change the treatment of human disease. A number of adult stem cell therapies already exist, such as bone marrow transplants that are used to treat leukemia. In the future, medical researchers anticipate being able to use technologies derived from stem cell research to treat a wider variety of diseases including cancer, Parkinson's disease, spinal cord injuries, and multiple sclerosis. NeoStem, a company heavily involved in stem cell-based technology platforms, is hoping to be one of the first to capitalize on this niche market.

Company Profile

NeoStem is involved with the discovery, development, and commercialization of novel proprietary cellular therapy products. The company also operates a contract development and manufacturing organization that provides services for the regenerative medical industry. An advantage that NeoStem has over its competitors is that it is able to combine a therapeutic development business with a revenue-generating service provider business. Because of this, NeoStem is able to internally develop new products and therapies while at the same time generating substantial cash flows that can be used to fund new studies.

Deep Pipeline

The company is currently developing an extremely deep pipeline of potential therapies and technology-based platforms. The pipeline includes Amorcyte, Athelos, VSEL Technology, and Wound Technology. The most exciting product for the company is Amorcyte AMR-001, which is used in the prevention of major adverse cardiac events that can develop after acute myocardial infarction. NeoStem has been enrolling patients in the PreSERVE AMI Phase II trial since January 2012. Thus far, the trial has shown effective results. In early March, NeoStem announced that it had received approval to continue the Phase II trial. The goal is to enroll 160 patients by the end of 2013. Once that milestone is achieved, investors can expect to see the full set of data by the end of the summer of 2014.

AMR-001 Market Potential

In the United States alone, there are more than 160,000 patients per year who suffer a STEMI, the most dangerous type of heart attack, resulting from a sudden blockage of one of the arteries that supplies nutrient-rich blood to the heart muscle. Treatment of these patients post-heart attack represents a significant financial burden for many managed care programs. This burden is expected to increase as the baby boomer population ages and the annual number of STEMI likely increases. AMR-001, if approved, could provide a significant economic benefit by preventing downstream cardiac adverse events. The patients who would need access to AMR-001 represent an annual market of $1.2 billion. With NeoStem's market capitalization sitting at just over $100 million, the potential impact on the share price could be monumental.

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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