Analyzing the
Business and Technology
of Stem Cells

Can NeoStem Still Make It Across the Finish Line?

May 7, 2013

Two events over the past several days suggest the value of taking a fresh look at the prospects of NeoStem Inc., one of fourteen U.S.-incorporated, publicly traded stem cell-focused companies we track in our Stem Cell Stock Index (SCSI). SCSI component companies are regenerative medicine plays engaged in developing stem cell therapeutics, employing a wide variety of stem cell types and targeting an even wider array of degenerative diseases. Through its Amorcyte division, NeoStem aims to use a patient’s own bone marrow-derived stem cells to treat the crippling and sometimes life-threatening damage caused by myocardial infarction (heart attack) -- a potentially huge market opportunity for the first company lucky enough to demonstrate the efficacy of its own particular flavor of stem cells and to gain FDA approval.

NeoStem competes in developing bone marrow-derived stem cell therapeutics with fellow SCSI component companies Aastrom Biosciences (ASTM), Athersys (ATHX), BrainStorm Cell Therapeutics (BCLI) and Osiris Therapeutics (OSIR), as well as ex-U.S. companies such as Mesoblast (MBLTY) and Cardio3 BioSciences. It competes in developing stem cell-based cardiac therapeutics with Aastrom, Athersys, Cytomedix (CMXI), Cytori Therapeutics (CYTX), Osiris, Mesoblast, Cardio3, Capricor Inc. and others. The intersection of bone marrow-derived stem cells and cardiac indications probably constitutes the single most congested corner of the stem cell therapeutics universe.

The first of the two events that might cast doubt on NeoStem’s staying power was its pricing, last week, of an offer of up to 23 million common shares (a 14% increase in shares outstanding) at $0.50 per share (a 21% discount from NBS’s last reported sale price at the time of that announcement). Highly dilutive financing is an altogether too common occurrence in the stem cell stock market (the average SCSI component company dilutes by 25% per year of late), although one that investors sometimes seem to shrug off. But the deep discount in the case of this latest offering appeared to trouble investors more than usual, and they promptly drove the share price down by the same 21% figure, from which it has yet to fully recover.

With annual losses currently hovering around $36 million, and just $9 million in cash on hand prior to this offering, its net of about $10 million won’t last NeoStem long. It seems reasonable to expect yet more dilutive and price-depressing share offerings from the company before the year is out.

The second event that may herald hard times for NeoStem happened only yesterday, when, as noted on our clinical trials calendar page, the U.S. National Institutes of Health’s trial tracking web site,, revealed that NeoStem’s Amorcyte division has just added a 57th institution to the list of sites participating in its ongoing Phase 2 PreSERVE-AMI clinical trial.

Normally, the addition of a new site to a clinical trial is at least modestly good news, because the speed with which a clinical trial can be completed (thus moving a company forward toward a potentially big payday) is largely determined by the rate at which new patients can be enrolled in the trial -- and more sites generally equals faster enrollment. But this particular announcement surprised us, and not in a good way, because this trial’s ‘estimated primary completion date’ -- the date by which the last participant is expected to have received the experimental treatment and all of the data assessing the primary outcome have been collected -- is fast approaching: December of 2013, just seven months away. Given that primary outcome data in this trial are collected from each patient six months after he or she receives the stem cell implant, that means that in order for NeoStem to keep its one and only clinical trial on schedule it must recruit its final (160th) patient by June 30th of this year. It is surprising to see new locations still being added to a trial this late in its expected life.

According to NeoStem’s public presentations, the first patient was recruited into its PreSERVE-AMI trial in January of 2012 and by last month the trial had “enrolled over ninety patients.” Over that same interval (according to the trial assembled a total of 56 participating trial locations, or what we estimate to be an accumulated 1,716 ‘location-weeks’ of recruitment effort, working out to about 18 location-weeks per patient enrolled. At that rate, and taking into account the required six month delay between the last treatment and the last primary data collection, we might thus expect the earliest feasible primary completion date to be some time in February of 2014, slightly behind NeoStem’s current expected December 2013 date...if the trial hits no unexpected bumps in the road and the company executes flawlessly.

A clinical trial’s estimated primary completion date is merely aspirational -- there’s no direct penalty for over-running that date. But insofar as an over-run may reflect a hitch in the company’s business planning, it might telegraph trouble ahead. This may be less significant for a mature, viable operating company, but for an unprofitable early-stage company perpetually on the edge, such as NeoStem and many of its fellow SCSI component companies, it can be a red flag.

Throw in perhaps a couple of months for data analysis, and the earliest likely date for an announcement regarding the outcome of the PreSERVE-AMI trial would appear to be the second quarter of 2014. By then the company will probably have burned through another $30+ million or more, necessitating either an unforeseen windfall from one of its current revenue-generating (albeit still unprofitable) side businesses, an asset sell-off, or else yet more dilutive funding rounds like its last -- perhaps another 50% dilution or more that, if recent history is any gauge, could drive the share price down 75 or 80%, fast approaching the single-digit penny stock range where another SCSI component company, Advanced Cell Technology (ACTC) is currently stuck.

And at that point, anything less than a stunningly positive outcome to the PreSERVE-AMI trial might well be the company’s death-knell. Merely good news might not be good enough. For beyond Phase 2, NeoStem still faces an even more expensive and time-consuming Phase 3 trial, which will require it to raise much more capital. To do that without exceeding investors’ patience would likely require either a large and sustained bump in share price -- the kind of step-change that, usually, only solidly good news brings -- or else the appearance of a big-pharma strategic partner. Given pharma’s traditionally extreme wariness regarding stem cells, the latter doesn’t seem plausible unless the Phase 2 data are nothing less than stunning.

The catch here is that Phase 2 trials like PreSERVE-AMI aren’t statistically powered to generate completely unambiguous efficacy results in the case of anything less than a miracle cure, so ‘stunning’ Phase 2 results are never very likely. Could it happen? Sure. But is it likely to? No.

Monday morning quarterbacking is worth every penny it costs (which is to say, nothing), except insofar as it aids us in gauging management’s instincts and discipline. Over the past few years NeoStem has invested aggressively in both organic and inorganic growth, acquiring Amorcyte, contract research and manufacturing firm Progenitor Cell Therapy, and a particularly ill-fated 51% interest in a generic pharmaceutical company in the People’s Republic of China (now divested), as well as launching a new cord blood banking service. The resulting business combination has consistently yielded $10 - $20 million quarterly losses, and it is fair to wonder whether the company’s fortunes might not be less troubled today had it simply restricted itself to the Amorcyte acquisition and its PreSERVE-AMI trial. This seems a particularly appropriate question when a company keeps going back to the well for ever more highly dilutive capital infusions. Despite its multiple sources of revenue from its side businesses, NeoStem ranks in the top quartile among SCSI component companies for dilution over the 2011 through 2012 time frame, with shares outstanding increasing 114% over those two years.

Scientifically-oriented investors who are already persuaded regarding the potential for bone marrow-derived stem cells to mend a broken heart have numerous investment options in this crowded corner of the stem cell market. Many of those opportunities are presented by companies whose financial fortunes look brighter than NeoStem’s right now. It may require something of a miracle at this point to persuade investors to continue backing a player with one foot seemingly on the edge of the cliff.