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NeoStem: Timing Is Everything
Sep. 19, 2014 1:14 PM ET | 4 comments | About: NeoStem, Inc (NBS), Includes: BAX
Disclosure: The author is long NBS.


Undervalued and unrecognized biotech companies offer perhaps the greatest upside in the market.
NeoStem's Ph II PreSERVE AMI study's results are imminent, and could produce a substantial upswing.
NeoStem's pipeline, validated technology, widely used wholly owned subsidiary and currently depressed share price make for an attractive long position.
At a current market cap of just $188mm, NeoStem appears to be a highly attractive, undervalued buy at these prices.

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In 2013 and for the second year in a row, NeoStem was named the number one fastest growing company and number eleven nationally on Deloitte's Technology Fast 500, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America.

NeoStem (NASDAQ:NBS) has grown through a series of acquisitions, and as such has become one of the fastest growing companies in its sector. NeoStem has completed five M&A transactions, one divestiture, and raised over 180 million dollars, enabling it to bring in key assets.

Dr. Robin Smith, CEO of NeoStem, in an interview on "The Traders Network" Business Talk Radio, stated:

I think having the manufacturing is a real edge for us because we can generate revenues from the industry, we can lower the cost of goods, we can focus on things that the industry needs as a whole, and not only does it benefit our clients, but it benefits our internal development. We've created a very unique model that seems to be exciting to Wall Street and investors.

NeoStem's wholly owned subsidiary, Progenitor Cell Therapy (PCT), has provided pre-clinical and clinical cGMP development and manufacturing services to more than 100 clients, advancing regenerative medicine product candidates from the development stage all the way through to human testing. As further demand for these novel, fast up-and-coming cell therapies increases, so will company expansion to meet these demands.

Of course, it is also highly convenient for the bottom line to be able to manufacture your own therapies for all of your clinical trials. This in-house manufacturing gives NBS not only a steady stream of income, but also a discount for running their own clinical trials--and their ambitions here are vast.

The trial of central interest for NBS at the moment is their PreSERVE AMI (Acute Myocardial Infarction, or "heart attack") Ph II randomized placebo controlled 160 patient study, testing the safety and efficacy of AMR-001. According to the Company,

After a heart attack part of the heart muscle dies and the surrounding heart cells (the peri-infarct zone) are stressed. These cells express proteins that signal they need help to restore blood supply. NeoStem is working to enhance this response by connecting beneficial bone marrow stem cells with the heart muscle cells that need help. AMR-001 is first stem cell product to demonstrate a dose-related improvement in cardiac perfusion in a clinical trial.

Phase 1 Results:

In a study of 31 patients, AMR-001 showed a dose-related significant improvement in perfusion. Presented at the 2009 American College of Cardiology Annual Scientific Session, the Phase 1 study results demonstrated that patients receiving 10 to 15 million cells (n=9) showed significant improvement in resting perfusion rates at six months as compared to patients receiving five million cells (n=6) and control (n=15), as measured by the SPECT total severity score (-256 versus +13, p=0.01). The data also showed that patients receiving 10 million cells or more trended towards improvement in ejection fraction (+4% versus +1%); end systolic volume (-5.7mL versus -0.1mL); and infarct size (-10% versus -3%) at six month follow-up. No study-related significant adverse events were reported.

There are no other approved therapies on the market to treat this indication (the aftermath of STEMI, the most severe form myocardial infarction, inflicting over 150,000 people in the US annually). Eventually, this condition often leads to congestive heart failure and pre-mature death, due to the fact that cardiac tissue lacks regenerative capacity.

Why is a successful Ph II so important? Because the vast majority of successful (meaning showing clinical benefit against control) Ph II trials evolve into Ph III trials, and it was recently found that around half of Ph III trials earn eventual FDA approval (though this percentage increases with strength of Ph II data).

Strong Ph II results, which are imminent, would be a likely indicator of eventual approval--especially for an indication for which there are no available effective therapies, and few rising competitors.

Ph II Results May Lead to Buyout Offers and/or Partnerships

Big pharma Baxter International, Inc. (NYSE:BAX) is the only other company with a like product in late stage clinical development. Their Ph III trial testing intramyocardial delivery (heart muscle injection) of autologous CD34+ stem cells is set to conclude by mid 2016 (which incidentally is being manufactured by NBS's wholly owned sub, PCT).

The difference between this technology (whose Ph II readout was positive) and NBS's lies in the latter's proprietary addition of the CXCR4+ chemokine, which reacts with CD34+ stem cells to enhance proliferation and mobility. CXCR4 will also enhance blood flow and reduce inflammation, further assisting in cardiac tissue repair, and even aid in the formation of new blood vessels to the heart. Thus their AMR-001 should prove superior to BAX's ACT34-CMI.

This may lead in two obvious directions, the most likely of which being partnership or direct buyout of AMR-001 by BAX. The other less likely result being a buyout offer for all of NBS/PCT. Given their extensive pipeline of developmental therapies, especially one set to recruit patients into a Ph III orphan drug status trial (more on this below), the price could be quite high.

One year price targets for NBS are currently around $20/share, and analysts across the board maintain a buy or outperform rating. This is based on NeoStem's acquisitions, the increasing profitability and projected profitability of PCT, their extensive developmental drug programs, and the expectation of positive Ph II results from their randomized AMR-001 trial.

Exclusive rights to AMR-001 and all applicable patents would be worth close to $1B by my conservative estimations, should their Ph II results outshine BAX's Ph II readout; I base this on the potential profitability of AMR-001, as others have also enumerated.

Aegis maintains a significant outperform rating on this stock. 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) was given a value of $200 million as well. In sum, this gives NeoStem a $650 million enterprise value. This does not include the since purchased NB20 technology, which comes with a Ph III trial clearance from FDA with special protocol assessment, orphan drug status and fast track designation (more on this below), with an enterprise value of $250mm, which together with the $650 million business value yields a total value of $900 million. This would equate to a $25 share price.

And results of their randomized Ph II AMR-001 tiral are imminent. Multiple statements from the Company of "Q3 2014," and sometime before the AMA's Scientific Sessions being held mid Nov (and for which their abstract for AMR-001 was accepted) have been promulgated. It could be tomorrow, it could be next week, or it could be a month from now--but it is clear that it's imminent.

The results will likely be positive, considering their Ph I data and BAX's Ph II placebo controlled data using a very similar, though less enhanced technology--as well as the Zeiher study, as others have noted, and extensive other anecdotal references.

FDA Validation and Ph III Trial with SPA

As exciting a prospect as the above is, it is not even NBS's lead product candidate. That space is reserved for NBS20, NeoStem's autologous DC vaccine for the treatment of advanced metastatic melanoma.

Based on earlier data from the Ph II study, which showed NBS20 outperformed placebo by a very wide margin (72% 2-year survival vs. 31% for control, p=0.007--and which outshines BMY's Yervoy), FDA granted the therapy Fast Track designation and orphan drug status, and also has applied a Special Protocol Assessment by which FDA agreed to accept the primary endpoint of OS based on a total time frame of enrollment plus follow up, rather than require a certain number of events. This could substantially shorten a trial of this magnitude.

Fast track will enable "rolling review" which will speed up the process of submitting a BLA and having it reviewed by FDA. Orphan drug status, among other things, allows a company to receive marketing exclusivity for that type of treatment for 7 years in the US.

The likelihood of eventual approval based on highly compelling, Ph II randomized data on NBS20 appears high.

An overview of NeoStem's other promising product candidates may be found here.

The Right Time to Buy

It is uncommon to find a significant degree of telegraphing of effectiveness of therapy from a blinded study, but this may be it. AMR-001 may prove to be a very near term game changer for NBS and another step forward in stem cell research and MI therapy.

The risks inherent in such an investment should be obvious. On the chance that Ph II results flop, NBS stock may experience a sharp decline. Although some of that seems to already be priced in to the gradual sell off that has occurred over the past six months. There is no other explanation for the volatility in share price over this time besides the fact that much hinges on Ph II data. Many investors would rather abide by the tried and true "wait and see" approach. However, in certain situations a large degree of anecdotal evidence can support an investment, reducing its risk. NeoStem's AMR-001 has just such evidence.

With a very near term, massive share price catalyst in their likely positive Ph II data readout of AMR-001 (for which the $250mm risk adjusted valuation would sharply increase), the initiation of a highly promising Ph III trial BLA candidate, a fast growing wholly owned stem cell manufacturing facility, and a clean balance sheet makes this $188mm market cap company look grossly undervalued



http://seekingalpha.com/article/2507765-neostem-timing-is-everything