NeoStem (AMEX: NBS): Pending Merger Key to China Growth Strategy Print E-mail
Wednesday, 16 September 2009 08:57

NeoStem (AMEX: NBS) is an innovator and leader in the pre-disease collection, processing and long-term storage of adult stem cells for the general population to use in future medical applications. The Company's business model includes generating revenue through ongoing fees associated with a minimally invasive, proprietary stem cell collection process, in addition to fees charged to the centers for marketing and long-term storage.


NeoStem targets its marketing efforts toward health conscious consumers to encourage them to donate and store their stem cells as a form of bio-insurance for possible use in later years or to address an emerging medical need.


Click here to join NeoStem on Facebook and the following are links to eight YouTube videos related to NeoStem and promising medical applications of adult stem cells, including (1) an interview with NeoStem's CEO, Robin Smith (conducted in May 2009); (2) peripheral vascular disease; (3) multiple sclerosis (MS); (4) orthopedic surgery; (5) diabetes; (6) heart attack; (7) heart valve development; and (8) lupus. In addition, NeoStem also has a page at its website with more recent videos.


NeoStem's initial collection center network includes single physician practices in California, Pennsylvania, and Nevada. The revenues generated by these early efforts have not been significant and the Company does not expect this core business to become significant on an income statement basis. However, the importance of developing the stem cell collection centers is twofold, including (1) the ability to leverage the collection network for research (VSELs), anti-aging, cosmetic, and regenerative medicine applications and (2) potential to grow the network through multi-physician practices that target major metro areas.


NeoStem has also expanded into stem cell research as part of an exclusive licensing agreement with the University of Louisville for the identification and isolation of rare stem cells found in adult bone marrow called VSEL for short (very small embryonic-like). As the name suggests, VSELs share traits with embryonic stem cells (ESCs), including the ability to differentiate into a wide variety of cells found throughout the body for many potential medical applications.


The Company is working on a method to expand VSELs collected from individual patients while preserving their ability to differentiate in an embryonic-like manner for a wide variety of regenerative medicine applications. The use of VSELs would avoid the ethical controversies associated with ESCs, in addition to eliminating the risk of immune system reactions since VSELs originate from the patient (autologous) and would not be rejected as foreign by the body.


In mid-April, NeoStem announced an $11 million private placement (led by RimAsia Capital Partners and Enhance Biomedical at $5M each) aimed at expanding its operations in China. In late 2008, NeoStem signed a definitive agreement to acquire control of a China regenerative medical therapy company (Shandong New Medicine Research Institute of Integrated Traditional and Western Medicine LLC) as part of the Company's efforts to expand its medical tourism business. Through this deal, NeoStem can offer regenerative medicine therapies to people in the U.S., Europe, and other developed countries which do not currently offer such alternatives.


In early May, the Company filed a patent application which covers cosmetic stem cell face lift technology while simultaneously announcing an expansion to its stem cell collection network, which is located at the Giampapa Institute for Anti-Aging Medical Therapy in Montclair, NJ. NeoStem also signed a deal for the exclusive worldwide rights to an innovative technology and pending patents that involve using a patient's own stem cells derived from their bone marrow to promote healing of chronic wounds.


Other developments for NeoStem earlier this year include licensing the worldwide rights to Primcel, which is a stem cell product derived from a patient's own bone marrow that has demonstrated promising early-stage results for speeding up the healing of chronic wounds. The CEO of NeoStem, Dr. Robin Smith, announced in a statement that the U.S. Department of Defense appropriated $800,000 last year for NeoStem to evaluate the use of adult stem cells to treat wounds. The net amount of the grant must be distributed to the Company by October 2010 and will be $681,000.


NeoStem also signed an exclusive licensing agreement for Asia with Regenerative Sciences, LLC for a medical procedure known as Regenexx. This process involves extracting stem cells from a patient's own bone marrow, isolating the mesenchymal stem cells (which can develop into bone, tendon, ligament, cartilage, and muscle), culturing the cells in a proprietary solution with elements from the patient's blood, and generating millions of stem cells over a period of 2-3 weeks. The cells are re-injected into the patient's affected joints or bones to promote tissue healing and bone/cartilage restoration as an alternative to surgery.


In mid-May, NeoStem announced an agreement with Ceres Living to promote the sale of an innovative liquid nutritional supplement called AIO Premium Cellular Health that blends a variety of fruit extracts in an all-natural puree (including acai, pomegranate, blueberry, acerola, amla, camu camu, mango and dark cherry with 13,830 mg of whole fruit per one ounce in addition to resveratrol, green tea, and plenty of other vitamins and minerals). NeoStem and the Stem for Life Foundation will receive a portion of the proceeds from each sale in exchange for the Company providing Ceres Living with certain scientific literature and access to its scientific personnel.


In mid-June, the Company announced an exclusive 10-year agreement with Enhance BioMedical Holdings Limited, a Shanghai corporation, to develop a Stem Cell Collection and Treatment Network using NeoStem's proprietary adult stem cell technologies in Shanghai, Taiwan, and several Chinese provinces. Enhance BioMedical Holdings is a subsidiary of Enhance Holding Corporation, a multinational conglomerate whose CEO, Jackson Ling, invested $5M as part of the previously announced $11M private placement funding in mid-April.


Enhance BioMedical has healthcare provider relationships with numerous hospitals and doctors in Taiwan and Shanghai, as well as in the five provinces in China to which the Network Agreement relates. Enhance BioMedical operates the Anti-Aging and Prevention Medical Center in Taipei, Taiwan, with facilities focused on stem cell research and development and anti-aging therapies. It expects to open an additional healthcare center in Shanghai during spring 2010, which will target high net worth individuals.


On 7/1/09, NeoStem announced that it raised additional gross funds exceeding $4 million (M) from both institutional and private investors, adding to the previously announced capital raise in mid-April ($11M) for total proceeds of over $15M. In addition, affiliates of Suzhou Erye Pharmaceuticals Company, Ltd. increased their overall investment in NeoStem at the time to over $1M. Pending shareholder approval, NeoStem expects to close its acquisition of a 51% interest in Suzhou Erye through a merger with its current 51% owner, China Biopharma (OTC: CHBP.OB), as part of the Company’s expansion activities (e.g. medical tourism) in that country.


The proceeds will also be used to fund NeoStem's R&D initiatives in VSEL, expanding the Company’s U.S.-based operations, and adding seasoned individuals to the NeoStem management team who have experience in clinical drug development from the pharmaceutical and biotechnology industry, in addition to the administration of clinical trials conducted outside of the U.S. As evidence of the quality and experience of the NeoStem’s management team, below are two upcoming industry-related conferences in which the Company will participate.


The CEO of NeoStem, Robin Smith, M.D. MBA, has been invited to participate in the 2009 World Stem Cell Summit in Baltimore, Maryland, and will participate on the panel, "Cord Blood and Cell Banking: Answers for Patients, Researchers and Industry," which is scheduled for 9/23/09 from 4-5:15 pm (ET). In addition, the Company's Vice President of Drug Development and Regulatory Affairs, Alan Harris, M.D., Ph.D., is scheduled to speak at a conference on Clinical Applications for Age Management Medicine in Las Vegas and will present on 11/5/09 about "The Apheresis Product: A Rich Source of Pluripotent VSELs, Stem Cells and Progenitor Cells for Autologous Banking and Cellular Therapies."


In addition to the $4M capital raise in early July, NeoStem ended 2Q09 with about $10.5M in cash/equivalents ($10M in working capital), negligible debt, 8.5M shares of common stock outstanding, and a market cap of approximately $16M based on a closing price of $1.85/share on 15-September within a 52-week range of $0.41 – $2.72. The three-month average daily trading volume is approximately 36,000 shares with a slightly higher average 10-day average daily trading volume of 38,000 shares.


NeoStem posted a net loss of approximately $6.8M for the first six months of 2009 and cash used to fund operations during 1H09 was $5.2M. As of mid-2009, NeoStem has approximately 18.3M warrants outstanding (5.2M exercisable) with the majority occurring at an exercise price range of $0.50 – $3.02 per share. In addition, the Company has 2.6M options outstanding (2.1M exercisable) with the majority occurring at an exercise price range of $0.71 – $4.17 per share.


During 2008, NeoStem’s potential merger partner, China Biopharma, generated approximately $50M in revenue, $2.8M in net income, $41.8M in operating expenses, and posted a diluted EPS of $0.05/share. At the end of 2Q09, CHBP.OB had $2.5M in cash/equivalents, $2.4M accounts receivable, zero long-term debt, total assets of $48.8M (including $7.5M classified as intangible assets), current liabilities of $21.8M (including notes payable/short-term debt of $9.7M), and 37.1M shares of common stock outstanding. During 1H09, China Biopharma generated $9.2M in cash from operations.


More recently, China Biopharma has experienced positive growth trends, including revenue of $15.3M for 2Q09, representing an increase of 15% from the year-ago period. The Company attributed the growth to an increase in the production and sales of prescription drugs, which grew by about 25% from the year-ago period. China Biopharma improved its sales mix to include higher margin products in addition to an increase in volume to achieve this growth, which resulted in net income during 2Q09 of $3.9M that increased by 45% from the year-ago period.


NeoStem’s strategy to greatly expand its presence and operations in China pursuant to the merger agreement will allow the Company to expedite its R&D and commercialization objectives for stem cell and regenerative medicine therapies in an environment that is more conducive to such treatments. However, NeoStem has assembled an experienced team of executives and scientific/medical advisors to implement its strategy in China to best capitalize on the opportunity, which includes both a rapidly growing middle class in China with increased spending power and a medical tourism business for those located outside of China.


As of 7/1/09, NeoStem entered into an Amendment No. 1 to the Agreement and Plan of Merger with China Biopharmaceuticals Holdings, Inc. (“CBH”), China Biopharmaceuticals Corp., CBH’s wholly-owned subsidiary (“CBC”) and CBH Acquisition LLC, NeoStem’s wholly-owned subsidiary. Some highlights of the amended terms of the merger agreement outlined in NeoStem’s most recent SEC 10Q filing are outlined below.


1.) The number of shares of NeoStem common stock to be issued to the CBH Common Stockholders was reduced to an aggregate of 7.15 million shares for an exchange ratio of 0.19255 with no additional shares being escrowed – equal to approximately $0.36/share for CHBP.OB (which last traded at $0.21/share) based on NeoStem’s current price of $1.85/share as of mid-September


2.) The number of common stock shares to be issued to RimAsia will be increased to approximately 6.5 million and 8.2 million shares of NeoStem Series C Convertible Preferred Stock, each with a liquidation preference of $1.125 and convertible to shares of NeoStem Common Stock at an initial conversion price of $0.90;


3.) A total of 125,000 shares of NeoStem Common Stock will be issued to Erye Economy and Trading Co. Ltd. (“EET”) (the 49% holder of Suzhou Erye); 51% of which is owned by CBH and which 51% will be acquired by;


4.) The outside date for completion of the Merger is extended to 10/31/09;


5.) As part of the 7/1/09 funding agreement, RimAsia shall supply additional funding to both NeoStem and CBH in an amount up to $1.6M, which includes approximately $1M advanced at the time of the 10Q filing for 2Q09.


NeoStem is rapidly expanding upon its core adult stem cell collection and banking business model into related areas such as research on VSELs along with cell-based anti-aging and regenerative medicine applications in the U.S and China. While NeoStem maintains its platform business of operating a commercial autologous adult stem cell bank network, its core platform business will be enhanced and leveraged upon as the Company expands its regenerative medicine offerings and makes these available to patients through medical tourism initiatives and the local population in China. In addition, the pending merger agreement represents a near-term catalyst with a targeted completion date by the end of October which includes the core, growing business of China Biopharma and allows NeoStem to accelerate its China expansion plans beyond cell banking to include regenerative medicine, anti-aging/cosmetic medicine, and adult stem cell therapies.


Disclosure: No positions. See my full disclaimer at at the bottom of any page.

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