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Amorcyte acquisition strengthens position of NeoStem in stem cell therapeutics space

NeoStem Inc. announced July 14th an agreement to acquire the stem cell therapeutics company Amorcyte. The major asset involved is Amorcyte’s lead product, AMR-001, a stem cell treatment being evaluated for the treatment of acute myocardial infarction (more commonly known as a heart attack). It has completed Phase I studies where amazingly reported a p-value (0.01) on the primary endpoint. The company will begin a blinded, randomized Phase II trial in the first quarter of 2012.

The deal calls for issuance of issuance of 6,821,283 shares of NeoStem common stock and warrants to purchase an aggregate of 1,881,008 shares of common stock. An additional 4,092,768 shares of stock will vest upon achievement of specified milestones. Amorcyte shareholders will receive additional consideration in the form of an earn-out upon commercialization.  Given the fall in NeoStem share price the price the company is acquiring Amorcyte for, becomes very accretive to the long term outlook and the fundamentals of the company.

Amorcyte is a logical fit for the company as it focuses increasingly on cell therapies. NeoStem already has an established adult stem cell collection and storage business and stem cell research capabilities, bolstered by its January acquisition of Progenitor Cell Therapies. NeoStem’s own adult stem cell technology, VSELs, which may have the potential to treat diseases ranging from cardiac disease to age-related macular degeneration. A product based on this technology could enter the clinic by the end of this year. Through its 80% ownership in Athelos, NeoStem has T-cell therapeutic ready for Phase I testing in autoimmune disorders, Graft versus Host Disease and the prevention of rejection in solid organ transplants. Interest in the T-cell space is rising and NeoStem appears to have solved the T-effector cell expansion issues that have held the field back.  Proof of concept in any of these indications has the potential to transform the field of auto-immune disease and immunology.

Bringing Amorcyte into the fold reunites it with Progenitor Cell Therapies, from which it was originally spun out. Amorcyte as a virtual acquisition seamlessly integrates back into he company with the only impact being the $8 million the company is projecting in costs over the 18 months to complete the P2 clinical trial.

In placing its resources on cell therapeutics, NeoStem is considering strategic options on its 51% interest in China based Suzhou Erye Pharmaceutical Co. Suzhou Erye is a profitable, vertically integrated company, selling generic anti-infectives, finished drug products, as well as active pharmaceutical ingredients. It has helped provide NeoStem entrance into the Chinese market while also generating the vast majority of revenue. 

A sale of its Suzhou Erye stake could generate significant funds to further the company’s cell therapy research. Typically these companies are sold for 1-2x revenues for NeoStem this would mean $37 to 65 million in capital. NeoStem has hired a financial advisor to find protect their interest while entertaining offers.  Suzhou Erye ofcourse is a possible buyer with the China part acquiring back the half of the company they don’t presently own. 

Amorcyte’s AMR-001 catapults NeoStem into being a clinical stage biotechnology company.  The treatment is an autologous, bone marrow derived, pharmaceutical grade cell-based product that uses a cell population enriched for CD34+CXCR4+ cells. A completed Phase I study of patients with ST segment elevation myocardial infarction (STEMI), a very severe heart attack, patients receiving 10 to 15 million cells demonstrated a significant improvement in resting perfusion rates at six months as compared to patients receiving five million cells and control patients, as measured by the SPECT total severity score. Patients receiving 10 or more million cells showed a trend toward improvement in ejection fraction, end systolic volume, and infarct size/tissue death due to loss of adequate blood supply. Treatment involves directly infusing active cells into a patients heart six to eleven days after the heart attack.

Study results suggest AMR-001 therapy improves microvascular density (perfusion) and rescues at-risk cardiomyocytes (cardiac muscle cells) from hibernation and apoptosis (cell death). Future studies will explore the potential of AMR-001 to preserve heart muscle function and consequently improve both quality-of-life and longevity by reducing the incidence and severity of major adverse cardiac events (MACE).

The Phase II trial in acute myocardial infarction is expected to enroll 150 patients at 25 centers beginning by Q1 2012. Enrollment should complete within 12 months with data read-out coming six-months after the last patient has been treated. A Phase I trial in congestive heart failure will also begin in 2012.

There is a large unmet market for the treatment of AMI and its adverse consequences. The five year survival rate of a major heart attack is only 20%, worse than many cancers.  Of the 800,000 Americans who suffer acute myocardial infarctions each year, the company estimates 20%, or 160,000 patients remain at risk of to subsequently experience progressive deterioration in heart muscle function and as a consequence, an increase in major adverse cardiac events (MACE) and death.  AMR-001 clearly has  enormous potential as a one time therapy to dramatically alter the landscape of AMI , CHF Modest and cardiology as we know it today.

The costs of the Phase II trial are expected to be modest with a modest sample size, and rapid enrollment at $8 million over 18 mos (start to finish and data read-out). NeoStem completed a public offering July 22, netting $16.5 million, adding to current cash of what we estimate is around $5 million, which will allow the company to fund its development efforts and operate for the next year. Amorcyte is funded. 

We spoke with Jason Kolbert, head of Buisness Development at the company.

Jason: "Remember Amorcyte’s asset in Phase 1 showed a p value of 0.01 on the primary endpoint, RTSS - a measure of heart damage.  That means that there is a 1% chance that the P1 trial was a fluke. Baxter’s decision to move ahead with a CD34+ cell in a P3 trial for cardiac ischemia is validating for us. FCB Pharmicell’s (Korean company) recent positive results with a similar CD34+ AMI trial in Korea also validates Amorcyte’s approach and the mechanism of action.

The signs are all around us that this works and is a low risk approach using the natural repair mechanism of the body to heal itself. Amorcyte is unique in that the company has developed a homogeneous, enriched and purified cell therapy (that’s what regulators want to see). What attracted me to NeoStem is the company’s philosophy around their approach to developing cell therapy. That is, that manufacturing and basic science comes first.

In the case of Amorcyte we understand the biological mechanism of action and have absolutely validated it in pre-clinical and clinical work. We have investigated and identified the effective  biological dose  and even accounted for the biologic variability that exists from patient to patient. In all my years of working with cell therapy companies, this is the first time I've seen this level of detail in a P1 trial.  This work effectively connects the dots between the biological MOA and the clinical result. 

I believe the P2 trial is a low risk proposition. As such it will set us up for a major pharma partnership to move forward into pivotal development in two years. Phase 2 companies typically see the greatest value inflection as investors go from non-believers to believers based on trial results with larger patient numbers.

If Dendreon’s Provenge, at almost $100k, extends life by 4 months propelled that stock to its 1.7 bln market cap today (even with the recent fall in the stock price), what is NeoStem worth with a $30k per treatment (one time) therapy that reduces 5 year mortality from 80% to a survivable outcome?

NeoStem raised money before the market imploded recognizing the value of capital on the balance sheet.  While there is dilution, you could also argue the price the company acquires Amorcyte for comes down sharply too.  (The share numbers are locked, and as the stock gets cheaper, so does the dilution associated with Amorcyte's acquisition.)

Fully diluted, NeoStem is now valued at under $65 million, with a China asset worth $30-50 million  in cash today and PCT generating $10 mln in revenues and rising, and one of the best thought-out assets in the space (biological, clinical moa defined) in the Amorcyte AMR-001 cell therapy for AMI.  This translates into a negative enterprise value and makes NeoStem one of the most compelling values in the cell therapy space today,

Bottom Line: NeoStem is one of the best-positioned cell therapy companies, one of the best-capitalized and, has a great, pragmatic and logical asset now in development. We see this as a natural result of the PCT manufacturing-first philosophy and believe that NeoStem gets it. Shareholders should too!”