View
1.605
Download
1
Embed Size (px)
Citation preview
2. Brinson Patrick Neostem, Inc. - March 7, 2013 Investment Summary and Key Points V NeoStem Inc. (NYSE: NBS) is developing autologous bone marrow stem cell-derived therapies for the treatment of diseases with blockbuster opportuntieis. In our view, the companys cell products focused subsidiaries each with dominant intellectual property portfolios in several categories positions NeoStem as one of the leading companies advancing adult stem cells as treatments for multiple diseases that are high cost burdens to the healthcare system. We employed valuation methods that show significant potential upside in its share price, and derived an average value of $6.45 per share. We initiate coverage on NeoStem with a Market Outperform rating and 12-month price target of $6. Key Points We believe NeoStem is positioned at the forefront of a paradigm shift in cell-based therapy. NeoStem is developing an active portfolio of product candidate assets based on the companys diverse array of technology platforms. The companys subsidiaries are developing leading adult stem cell products that target blockbuster market opportunities. Discovered by NeoStem subsidiary, Amorcyte, + AMR-001 is a proprietary preparation of autologous bone marrow-derived CD34 cells that employ a novel ischemia-targeting strategy that produced positive Phase I results in acute myocardial infarction. NeoStems Athelos subsidiary is developing T-cell based therapeutics to target autoimmune conditions. The companys exclusive worldwide license to VSEL technology utilizes the unique regenerative properties of human very small embryonic-like stem cells to explore their potential use as treatments for tissue regeneration. Lastly, Progenitor Cell Therapy, NeoStems premier contract manufacturer of cell- based products generates revenues that significantly lower risk in the companys internal cell therapy product development programs. As a result, we believe NeoStem has developed an organization with broad capabilities to be positioned at the forefront of leading advancements in the stem cell industry. NeoStem captures the economic benefits of stem cell industry growth with Progenitor Cell Therapy. NeoStem acquired Progenitor Cell Therapy (PCT), a contract development and manufacturing organization (CDMO), in an effort to bring additional cell therapy expertise in-house and to establish a one-stop-shop global network of cell therapy product development organization. PCT brings NeoStem closer to its goal of becoming a leader in the fast-growing cell therapy industry. By generating revenues ($9.5mn in 2011 and a projected $14mn in 2012) and leveraging its cGMP manufacturing flexibility for scale-up production, PCT helps offset the cost of developing its own proprietary cell products. PCTs strong leadership position is built on a foundation of services that cater to the cell therapy industry as a whole, including being the only contract manufacturing organization to have worked with a clients product development through all phases of clinical trials and FDA approval. This position reduces NeoStems reliance on any one of its varied technology platforms to achieve commercial success, as PCT gives the company an ongoing opportunity to capture revenues from cell therapy industry growth. NeoStem has fully transitioned to a cell products development company. In June 2012, NeoStem signed a definitive agreement to divest the companys 51% ownership interest in Suzhou Erye Pharmaceutical Co. Limited. The $12mn sale of its ownership interest bolstered NeoStems balance sheet and increase its cash position. The company is now focused fully on its cell therapy business and its transition to a cell products development company with AMR-001 as its lead candidate. Sale of its stake removes the recognition of >$50mn in annual revenues from Suzhou Erye, however, the divestiture also removes the burden of >$25mn in operating expenses, which was primarily driven by the costs of selling products in China, which failed to live up to expectations, but also removes >$30mn in debt. With improved capital reserves and a simplified business structure, NeoStem can now fully transition to focusing on cell product development. 2 3. Brinson Patrick Neostem, Inc. - March 7, 2013 Certain types of stem cell therapy have been around for decades and are now routine. Although stem cell therapy sounds innovative and cutting edge, this type of therapy has been around for decades. An infusion or injection of bone marrow stem cell (BMC) transplant, for example, may sometimes be performed if a patients bone marrow stops working and doesnt produce enough healthy stem cells. A stem cell transplant may also be performed if high-dose chemotherapy or radiation therapy is given in the treatment of blood disorders to reduce the risk of life-threatening infections, anemia and bleeding, such as occurs in leukemia, lymphoma or multiple myeloma. As a result, harvesting stem cells from adult patient bone marrow and then re-injecting them into the same patient is now routine therapy in US medicine, and roughly 1mn patients have been treated with their own bone marrow stems cells since the mid-1980s. Stem cell therapy has potential to fill the gap in demonstrating clinically meaningful cardiac repair. By the sum of all interventions currently used to improve cardiac function and prevent ventricular remodeling after acute myocardial infarction, the primary goal of repairing compromised myocardium is not achieved, leaving the door open for a therapeutic approach that activates the hearts repair mechanism. A decade of experience with intracoronary infusion of BMCs after myocardial infarction has demonstrated this approach could be the key to cardiac repair and durable benefit in altering the cycle of progressive cardiac dysfunction. We believe stem cell therapy represents an emerging approach that can fill the gap in demonstrating clinically meaningful repair of compromised myocardium, prevention of ventricular remodeling, and improvement in cardiac function, especially for patients refractory to standard pharmacologic or revascularization treatment. AMR-001 refines BMC-based cell therapy in heart disease. Myocardial infarction (MI) is associated with increased levels of inflammatory and hematopoietic cytokines which, in turn, are associated with+ increased progenitor cells and other subpopulations such as CD34 cells in bone marrow. Prior to their involvement in cardiac repair and regeneration after MI, however, BMCs must first mobilize into peripheral blood and be guided to the heart. Stem cell homing signals that are upregulated within hours of acute myocardial infarction, such as the chemokine, stromal cell derived factor-1, therefore, play an important role in stem cell mobilization from the bone marrow to the ischemic cardiac environment. Stromal cell + derived factor-1 stimulates the natural healing process by recruiting CD34 cells to the site of injury and inducing neovascularization and angiogenesis. A body of research supports temporal alignment between stromal cell derived factor-1 myocardial expression and upgregulation of its receptor, CXCR4, which is + observed for weeks. The mobilization of CD34 stem cells into peripheral blood early in ST-elevation MI (STEMI) is also positively correlated with left ventricular ejection fraction. As a result, a number of studies+ have explored the usefulness of CD34 cells in the treatment of ischemic conditions in Phase I and Phase+ II clinical trials. Aligning the myocardial signal of stromal cell derived factor-1 and delivery of CD34 cells that co-express CXCR4 to the heart is the strategy being advanced by NeoStem with AMR-001, the++ companys proprietary preparation of autologous bone marrow-derived CD34 cells selected for CXCR4 co-expression.++ NeoStems strategy with transfusion of CD34 CXCR4 showed promising results in Phase I. Meta- analyses showed left ventricular ejection fraction (LVEF), a measure of cardiac function, significantly + improved with increasing numbers of certain cells mobilized, such as CD34 , within 12 hours after myocardial infarction. Peak cell numbers were significantly lower in patients with LVEF $2bn with AMR-001 in acute myocardial ischemia alone. Broad intellectual property portfolio carves out significant protection of NeoStems clinical product assets. NeoStem has built a dominant IP portfolio to protect its cutting edge technologies within the field of cell therapy. Notably, this patent estate includes composition of matter patents for Athelos (2023) and AMR-001 (2028). The patent estate overall includes over 30 issued patents, over 90 pending patent applications, composition of matter and method claims, and geographic breadth of filings that cover North America, Europe, Asia, Australia, Israel and South Africa. The companys IP focuses on 4 5. Brinson PatrickNeostem, Inc. - March 7, 2013 immunology, cardiology, orthopedic, wound healing, age related tissue restoration, stem cell isolation, collection, and storage, and VSEL discovery and applications. Stem cell valuations starting to catch up with stem cell industry growth. A study conducted by the New York Stem Cell Summit group estimated that, while purchases of stem cell-based products or equipment increased from $78mn in 2009 to $139mn in 2010 and purchase growth continues to nearly double annually, the average market capitalization of public stem cell companies declined 25% from 2010 to 2011, but rebounded up 16% in 2012. We believe with increasing interest and knowledge about stem cell products coming to market and positive results from ongoing clinical trials with stem cells in novel therapeutic indications emerging, investors could see further market capitalization appreciation in 2013 and beyond. Valuation review and price target reveal tremendous upside potential in NBS shares. We used a variety of approaches to arrive at 12-month price target for NBS shares. Using a traditional, DCF-based analysis, we derived a per share valuation of $5.20. We also derived a $13.23 per share valuation using our relative CAGR valuation model for currently unprofitable companies. Using comparable company analysis, we derived a value of $0.92 per share or minimum upside potential of 74%. Synthesizing the various valuation approaches, we derived an average value of $6.45 per share. We therefore recommend investors buy NBS shares and set a Market Outperform rating with a 12-month price target of $6. We anticipate NeoStem emerges in 2013 as the leader in the paradigm shift underway in the stem cell industry. The commercial viability of cell-based therapies is still relatively early, however, we believe advancements in the field are leading companies to promising clinical trial results. We believe innovative approaches have led companies like NeoStem to demonstrate the viability of cell-based product manufacturing technologies to realize untapped potential for profitability. We anticipate NeoStem will further explore AMR-001s potential in other ischemia-related therapeutic indication and be first to bring the first stem cell based therapy to blockbuster product status. We look for the outlook in the group, as well as investor returns, to further improve in 2013. Anticipated Key Milestones VProjected EventTimingComplete enrollment in PreSERVE-AMI Phase II clinical trial evaluating AMR-001 in patients with post-STEMI2Q13Publication of, "The Healing Cell: How the Greatest Revolution in Medical History is Changing Your Life"2Q13Announce additional agreements for PCT cell products development services 1H13Announce selection of first T-cell based therapeutic candidate for human clinical trial evaluation3Q13Announce topline 6-month outcome data from AMR-001 PreSERVE-AMI Phase II in patients with post-STEMI4Q13Conduct FDA End-of-Phase II meeting for further AMR-001 evaluation in patients with post-STEMI4Q13Initiate Phase III clinical trial evaluating AMR-001 in patients with post-STEMI2014Initiate first human clinical trial for VSELs for periodontitis 2014Announce topline 12- and 18-month outcome data from AMR-001 PreSERVE-AMI Phase II 2014BLA submission for approval of AMR-001 in patients with post-STEMI2017FDA approval for licensing the use of AMR-001 as a treatment for patients with post-STEMI 2018 Source: Company reports and Brinson Patrick Securities research.5 6. Brinson Patrick Neostem, Inc. - March 7, 2013 Business OverviewV NeoStem is developing an active portfolio of product candidate assets based on the companys diverse array of technology platforms. The companys wholly-owned Amorcyte subsidiary is developing leading autologous bone marrow derived adult stem cell products to target blockbuster market opportunities in cardiovascular disease. NeoStems 80%-owned subsidiary, Athelos, is developing T-cell based therapeutics to target autoimmune conditions. The companys exclusive worldwide license to VSEL technology utilizes the unique regenerative properties of human very small embryonic-like stem cells (VSELs) to explore their potential use as treatments for a wide range of conditions from macular degeneration to liver regeneration to osteoporosis. The final component, albeit perhaps most critical and least risky of NeoStems businesses is Progenitor Cell Therapy, which is a premier contract manufacturer cell-based products. Exhibit 1: Clinical Product Assets Source: Company reports and Brinson Patrick Securities research. Amorcyte Amorcyte was spun off from Progenitor Cell Therapy in 2006 and, in October 2011 was acquired by NeoStem as a wholly-owned company, effectively reuniting it with Progenitor Cell Therapy and providing capital to fund the next steps for its clinical development programs. Amorcytes lead product, AMR-001, is an autologous bone marrow derived stem cell treatment designed to prevent major adverse cardiac events following acute myocardial infarction. AMR-001 in Acute Myocardial Infarction AMR-001 is comprised of a homogeneous and highly purified + + population of cells enriched for CD34 CXCR4 . As its lead indication, NeoStem is developing AMR-001 as a regenerative cell-based therapeutic for high risk patients with acute myocardial infarction, which X. Final Phase I results published in 2011 showed AMR-001 IRA infusion was safe, and as measured by+ change from baseline, demonstrated dose- and CD34 cell-dependent effects on improvement in 2 2 perfusion (r = 0.45, p = 0.011) and improvement in tissue preserved (r = 0.49, p = 0.015), respectively. + In subjects receiving a high dose of CD34 cells, there was an absolute 1.2% increase in LVEF at three months and a 4.5% increase at six months. Moreover, while 30% of control patients and 40% of low- 6 7. Brinson Patrick Neostem, Inc. - March 7, 2013 dose subjects showed absolute reductions in LVEF compared with baseline, none of the patients+ receiving the high dose of CD34 cells had an absolute reduction in LVEF compared with baseline, + supporting the evaluation of dosing with a high dose of CD34 cells for further study. Based on the success of the Phase I trial, the PreSERVE-AMI Phase II trial began enrolling patients in January 2012. The company expects clinical trial site participation from leading US research hospitals. We anticipate the Phase II trial will complete enrolment of 160 patients (80 treatment and 80 control) in more than 40 sites in 2013. The patients will be followed initially for 6 months to determine the key study endpoint outcomes, and will continue to be tracked for 3 years post-treatment. PreSERVE AMI was designed to evaluate the potential of AMR-001 to improve perfusion, preserve cardiac function and improve clinical outcomes. A composite of cardiac measures, including clinically meaningful endpoints, will support the primary endpoint of perfusion. AMR-001 in Other Target Indications Neurohormonal responses activated by ischemia serve as signals+ for homing CD34 cells to damaged tissue. As AMR-001 has potential to change the history of progression of ischemia-related diseases, a disease related to is dilated cardiomyopathy (DC), which like myocardial infarction is characterized by ventricular enlargement and contractile dysfunction albeit with normal left ventricular wall thickness, ultimately leading to progressive heart muscle deterioration. As a + result, as the degree to which homing CD34 cells occurs drives improvement in ventricular function, DC would be a natural as the next target indication for AMR-001 development. With its potential for use as an ischemia-targeting therapy, we therefore believe AMR-001 also has potential application in other indications such as congestive heart failure, critical limb ischemia, and ischemic brain injury. Athelos Athelos is a T-cell based therapeutic development business concern, 80% NeoStem owned through PCT and 20% owned by Becton Dickinson. Immune mediated diseases, such as graft versus host disease (GvHD), autoimmune diseases and allergic diseases, are a result of an imbalance between T effector cells and T regulatory cells. T-reg therapy represents a novel approach for restoring immune balance by enhancing T-regulatory cell number and function. Phase I work is ongoing globally under several independent physician INDs, results of which will guide NeoStems near-term future clinical direction with this therapeutic approach. VSEL Technology VSELs offer the potential to go beyond the paracrine effect, yielding cells that actually differentiate into target tissue and induce cellular regeneration. NeoStems animal model studies to date, for example, suggest that human VSELs have the potential to differentiate into cells of each of the three germ lineages. Recently, NeoStem and its partners at the University of Michigan demonstrated that VSELs can regenerate bone in a mouse model. NeoStem is seeing progress in animal models of wound healing and intends to begin the first human clinical trial for VSELs for periodontitis in late 2013 or early 2014. Wound Healing In April 2009, NeoStem entered into a License Agreement with Vincent Falanga, MD, and acquired a worldwide, exclusive license to stem cell technology and applications for wound healing. In conjunction with that license NeoSTem entered into a multi-year sponsored research agreement, funded by the US Department of Defense, with Roger Williams Medical Center and Dr. Falangas laboratory to study the use of VSELs and mesenchymal cells for the treatment of chronic wounds. NeoStem was subsequently awarded a $700,000 contract from the US Army Medical Research and Material Command, Telemedicine and Advanced Technology Research Center (USAMRMC-TATRC) for the purpose of evaluating the use of topically applied bone marrow-derived adult mesenchymal stem cells for rapid wound healing. In September 2009, NeoStem was notified of an award of a Grand Opportunities 7 8. Brinson PatrickNeostem, Inc. - March 7, 2013 grant in the amount of $108,746 from the National Institutes of Health (NIH), which is being applied to research in the field of bone defect repair. Commercial Operations Contract Manufacturing and Stem Cell Banking Progenitor Cell Therapy NeoStem acquired Progenitor Cell Therapy (PCT), a contract development and manufacturing organization (CDMO), in an effort to bring additional cell therapy expertise in-house and to develop a one-stop-shop global network of cell therapy. PCT brings NeoStem closer to its goal of becoming a leader in the fast-growing cell therapy industry. By generating revenues ($9.5mn in 2011 and a projected $14mn in 2012) and leveraging its cGMP manufacturing flexibility for scale-up production, as well as continue signing external cell product development and licensing opportunities both in the US and abroad, PCT helps NeoStem de-risk development of its own proprietary cell products. PCT has provided services to over 100 clients in its 14-year history, and through its agreement for Provenge development with Dendreon (DNDN, Not Rated) is the only contract manufacturing organization to have worked with a clients product development through all of phases of clinical trials and FDA approval. PCT offers its clients and NeoStem cell processing and development capabilities on both the East and West Coasts of the US. PCTs strong leadership position is built on a foundation of services that cater to the cell therapy industry as a whole. This position reduces NeoStems reliance on any one of its varied technology platforms to achieve commercial success, as PCT gives the company an ongoing opportunity to capture revenues from cell therapy industry growth. PCTs manufacturing revenues, for example, would increase significantly should a client advance its product through Phase I, II, and III trials, as well as into commercialization, where larger numbers of cells for commercial product will likely be needed. Stem Cell Banking Should a patient be diagnosed with a stem cell treatable cancer, or require an immune system boosting stem cell transplantation, NeoStem provides stem cell collection and banking services at approved collection facilities in NeoStems network of collection centers. One problem with autologous use of adult stem cells is that the quantity of cells is only as good as the patients supply. NeoStems process helps to increase the number of stem cells in a patients peripheral blood through a painless and safe procedure. With the capacity for ready expansion of its manufacturing facilities, PCT provides its clients and NeoStem with a significant opportunity to take advantage of economies of scale and realize significant cost of revenues savings and gross margin improvement. We believe NeoStem could achieve its first year of positive cash flow in 2018 from PCTs projected contract cell product manufacturing revenues alone.8 9. Brinson PatrickNeostem, Inc. - March 7, 2013 Intellectual Property NeoStem has built a dominant IP portfolio within the field of cell therapy to protect its cutting edge technologies. Notably, this patent estate includes composition of matter patents for Athelos (2023) and AMR-001 (2028). The patent estate overall includes over 30 issued patents, over 90 pending patent applications, composition of matter and method claims, and geographic breadth of filings that cover North America, Europe, Asia, Australia, Israel and South Africa. The companys IP focuses on immunology, cardiology, orthopedic, wound healing, age related tissue restoration, stem cell isolation, collection, and storage, and VSEL discovery and applications. NeoStems Athelos subsidiary holds composition of matter patents and method patents, mostly relating to the isolation and expansion of Regulatory T cells. In-licensed from the University of Pennsylvania, the University of Minnesota and the University of Southern California, the exclusive world-wide rights to a broad patent estate is comprised of approximately 30 issued patents and approximately 50 pending patent applications. The companys Amorcyte subsidiary was granted US patent numbers 7,794,705 and 8,008,370 titled "Compositions and Methods of Vascular Injury Repair." The patents contain both composition of matter and method claims surrounding a therapeutic chemotactic hematopoietic stem cell product used in treating or repairing vascular injury following an acute myocardial infarction or any other vascular injury caused by vascular insufficiency. The patented pharmaceutical composition is comprised of autologous+ + non-expanded CD34 cells with an enriched subpopulation of CXCR4 cells. Pending patent application filings include, Infarct Area Perfusion-Improving Compositions and Methods of vascular Injury Repair, and Compositions and Methods for Treating Progressive Myocardial Injury Due to a Vascular Insufficiency." NeoStem has patent applications for certain internally developed technologies regarding the apheresed collection, isolation, and storage of adult autologous stem cells. The world-wide patent rights and know- how regarding very small embryonic-like (VSEL) stem cells, their isolation, purification and therapeutic use was in-licensed from the University of Louisville. Joint inventorship for a provisional patent using VSELs for the repair and regeneration of bone tissue is established with the University of Michigan. In- licensed rights to therapeutic stem cell treatments for wound healing, cartilage repair and restoration of age-related tissue loss in the face. Recently, NeoStem further expanded its intellectual property coverage around AMR-001 with the grant of US patent number 8,343,485 entitled "Compositions and methods of Vascular Injury Repair." This is the third US granted patent for AMR-001, protecting further+ expansion of its CD34 chemotactic stem cell product composition claim, as well as method of sourcing and administration of cells claims, and significantly protects the companys most mature clinical asset.9 10. Brinson Patrick Neostem, Inc. - March 7, 2013 Brief Overview of Stem Cells V Stem cells are unspecialized cells found throughout the body that give rise to specialized cells. They are defined by their ability to self-renew and differentiate into multiple different cell types while remaining unspecialized until a signal from the body tells them to develop into specific cells such as blood, liver, muscle, nerve, skin, and cells of other organs. Their function is to begin the cascade of healing when the body is injured. When the body is injured, for example, stem cells become active, move through the body to the site of injury, express proteins to down regulate inflammation, express other proteins to stimulate new cellular growth, recruite growth factor proteins, and themselves may begin to change into the very cells that were damaged. As a result, they serve as part of the bodys repair and renewal system. Because of this ability, it is hoped that stem cells can be used for a variety of applications, ranging from developing novel therapies to drug discovery and toxicity, as well as understanding basic biology. The easiest way to categorize stem cells, no matter their source, is by dividing them into two types: mature and early. Mature stem cells, often called adult stem cells are found in mature body tissues such as bone marrow, blood stream, cornea and retina of the eye, the dental pulp of the tooth, liver, skin, gastrointestinal tract, and pancreas, as well as umbilical cord and placenta afterbirth. Early stem cells, often called embryonic stem cells, are found in the inner cell mass of a blastocyst and develop after approximately five days of embryo development. Both types of stem cells have distinct advantages and disadvantages associated with them. Each offer important insight into how cells rejuvenate the body and cause disease. The list below provides select details on their characteristics: Mature Stem CellsEarly Stem Cells Adult, somatic Embryonic, blastocystic Obtained from mature body tissues (i.e., bone Obtained from the inner cell mass of a marrow, fat, skin), umbilical cord, and placentablastocyst afterbirth Primarily multipotent give rise to multiple but Pluripotent give rise to all cell types limited cell typesexcept the cells of the placenta Become cells with specific functions Although the procedure to replenish a patients supply of healthy blood-forming cells is generally called a stem cell transplant, depending on the source of the adult stem cells, the procedure may be referred to as a bone marrow transplant, peripheral blood stem cell transplant or an umbilical cord blood transplant. In addition, stem cell transplants can use cells from your own body (autologous stem cell transplant), from a donor (allogeneic stem cell transplant) or from an identical twin (syngeneic transplant). The following provides brief details on sources of stem cells and their properties: Embryonic stem cells and induced pluripotent stem cells Being pluripotent, these stem cells are undifferentiated, inducible, and have the potential for unlimited expansion, retention of normal karyotype, and the ability to generate cells of all three germ layers. As a result, high interest arises for studies with these cells because of their potential to form the basis of cellular therapies for diseases affecting organ systems with limited regenerative capacity, to provide enhanced systems for drug screening and toxicity testing, as well as to gain insight into early human development, and with induced pluripotent stem cells (iPSCs), obviate the need for human embryos. There are currently two major methods for generating cells with pluripotent properties. The first is controversial and involves isolating the inner cell mass from an early human blastocyst and culturing the resulting cells in appropriate culture conditions to generate human embryonic stem cells (ESCs). The second involves artificially expressing a defined number of factors in somatic cell types, which, with the appropriate10 11. Brinson PatrickNeostem, Inc. - March 7, 2013culture conditions, causes the cells to be reprogrammed into iPSCs and exhibit the characteristics ofESCs. Hematopoietic stem and progenitor cells Although hematopoietic stem cells are rare, residing inadult bone marrow where hematopoiesis is continuously taking place, they can also be found in cordblood, fetal liver, adult spleen, and peripheral blood. Being multipotent, they can differentiate into anumber of cell types, exhibit remarkable self-renewal capacity, and are responsible for the life-longmaintenance of the hematopoietic system, which is made up of progenitor cells and all mature bloodcell types, including erythrocytes, megakaryocytes (platelet precursors), and cells of the myeloid andlymphoid lineages. Mammary epithelial cells The epithelium of the mammary gland exists in a highly dynamic state, isbipotent (i.e., give rise to mammary cells and their progenitors), and undergoes dramaticmorphogenetic changes during purberty, pregnancy, lactation, and regression. Mammary epitheliumis composed of a hierarchy of cells that spans from the most primitive mammary stem cells todifferentiated myoepithelial and luminal subtypes. Mesenchymal stem cells These stem cells (MSCs) are multipotent stromal cells that occur at lowfrequency in tissues such as bone, cartilage, fat and umbilical cord, with the latter being the youngestand most primitive MSC source. These cells also have a great capacity for self-renewal and arereadily expanded in vitro to obtain sufficient numbers for research and therapeutic applications. Neural stem cells These stem cells are functionally characterized as cells with the capacity toproliferate, self-renew, and produce a large number of progeny that can differentiate into neurons,astrocytes and oligodendrocytes. They have been identified in nearly all regions of the embryonicmouse, rat and human central nervous system (CNS). In the mature CNS, neural stem cells andneural progenitor cells have been shown to contribute towards ongoing neurogenesis only within twospecialized niches: The subgranular layer of the dentate gyrus, and the subventricular zone of thelateral ventricle. Recently, malignant multipotent neural stem-like cells have also been isolated fromvarious types of brain cancers, including gliomas, medulloblastomas, astrocytomas andependymomas. Prostate epithelial cells The prostate consists of glandular epithelium embedded in a fibro-muscularstroma. This epithelium is composed of two histologically distinct layers. The secretory luminal layeris made up of tall columnar cells that are responsible for the production of prostate-specific antigen(PSA), prostatic acid phosphatase (PAP), and human kallikrein-2, which are secreted as part of theseminal fluid into the glandular lumina. This layer of cells is underpinned by a basal layer of cuboidalepithelial cells. The basal layer also contains a stem-like cell population that is responsible for thedevelopment of all epithelial cell types in the prostate. When the stem-like cell undergoes mitosis itgives rise to two cells, another stem cell and a daughter progenitor (transit amplifying) cell which, inturn, differentiates into a terminal end-stage secretory luminal cell. Skin stem cells These stem cells occur in the basal layer of the epidermis and at the base of hairfollicles. They are able to self-renew but are only progenitors of skin cells (unipotent). Epidermalstem cells give rise to keratinocytes, which migrate to the surface of the skin and form a protectivelayer. Follicular stem cells can give rise to both the hair follicle and to the epidermis. Bone Marrow Stem Cell Preparation Although stem cell therapy sounds innovative and cutting edge, this type of therapy has been around for quite some time. An infusion or injection of bone marrow stem cell transplant, for example, may sometimes be performed if a patients bone marrow stops working and doesnt produce enough healthy stem cells. A stem cell transplant may also be performed if high-dose chemotherapy or radiation therapy is given in the treatment of blood disorders to reduce the risk of life-threatening infections, anemia and bleeding, such as occurs in leukemia, lymphoma or multiple myeloma. As a result, harvesting stem cells from adult patient bone marrow and then re-injecting them into the same patient is now routine therapy in 11 12. Brinson Patrick Neostem, Inc. - March 7, 2013 US medicine, and roughly 1mn patients have been treated with their own bone marrow stems cells since the mid-1980s. Exhibit 2: Bone Marrow Aspiration from Pelvic Arch Source: Company reports and Brinson Patrick Securities research. Stem cells are often collected by aspirating bone marrow from the back of the patients pelvis through a small needle, usually with minimal discomfort (see Exhibit 2). Most procedures require about 60cc of bone marrow aspirate and usually contain mesenchymal stem cells, platelets, and other types of stem cells useful for therapy. Mature stem cells associated with those that form blood in bone marrow are the most common type of stem cell used to treat human disease, however, stem cells previously were very difficult and expensive to obtain. With newer techniques and equipment, stem cells from bone marrow are now easily be obtained and concentrated by a simple office procedure. The bone marrow aspirate is centrifuged at very high speed to separate stem cells and platelets from the rest of the blood products to form bone marrow aspiration concentrate (BMAC). Using common medical procedures, BMAC can then be reintroduced into the patient to treat the injured area. Intracoronary and intramyocardial stem cell therapy, for example, can be performed with standard cardiac catheterization techniques in the conscious patient, as well as during cardiosurgical interventions. Competitive Landscape A study conducted by the New York Stem Cell Summit group estimated that, while purchases of stem cell-based products or equipment increased from $78mn in 2009 to $139mn in 2010 and purchase growth continues to nearly double annually, the average market capitalization of public stem cell companies declined 25% from 2010 to 2011, but rebounded u 16% in 2012. We believe with increasing interest and knowledge about stem cell products coming to market and positive results from ongoing clinical trials with stem cells in novel therapeutic indications emerging, investors could see further market capitalization appreciation in 2013 and beyond. Weve previously provided a brief overview of the stem cell competitive landscape and select details on a group of companies that, similar to NeoStem have proprietary stem cell technologies, are developing or marketing stem cell products, and have significant licensing agreements. [Please see our report on Pluristem Therapeutics (PSTI, Market Outperform), Flexibility to Explore the Broad Potential of PLX Cells, published on November 19, 2012.]12 13. Brinson PatrickNeostem, Inc. - March 7, 2013 Brief Overview of Myocardial Infarction V Commonly known as a heart attack, a myocardial infarction (MI) is a type of acute coronary syndrome (ACS) that arises from the irreversible necrosis of heart muscle secondary to prolonged cardiac ischemia. Ischemia results from an abrupt imbalance in oxygen supply and demand, and in the heart is most often caused by plaque rupture with thrombus formation in a coronary blood vessel (thrombosis). This results in an acute reduction of blood supply to a portion of the myocardium. MI is further differentiated according to the appearance of waves on the electrocardiogram (see Exhibit 3) as follows: STEMI, non- ST-elevation myocardial infarction (NSTEMI), and unstable angina (UA), which is not associated with heart muscle damage. (For the purpose of brevity, we limit our discussion to STEMI as these are the higher risk patients.) Exhibit 3: Waves of the Electrocardiogram (ECG) and ST-Elevation Source: Company reports and Brinson Patrick Securities research. ST elevations seen on the ECG reflect active and ongoing transmural myocardial injury. When an ECG shows a STEMI, it predicts with reasonable certainty that there is thrombosis of a fairly large coronary vessel. ST-segment elevation and its evolution during a STEMI is depicted in Exhibit 4. Exhibit 4: ECG Evolution during STEMI Source: Company reports and Brinson Patrick Securities research. Without immediate reperfusion therapy, most people with STEMI develop persistent abnormal Q waves, which reflect a functioning heart with a zone of myocardium that has undergone irreversible damage and cell death. Patients without ST elevations may be diagnosed with either UA or NSTEMI, which are differentiated by the presence of cardiac enzymes and may or may not have changes on the surface ECG, including ST-segment depression or T-wave morphological changes. 13 14. Brinson Patrick Neostem, Inc. - March 7, 2013 The factors that determine prognosis after acute MI are considered the following: Size of ischemic area at risk Percent of myocardium that has already undergone irreversible necrosis Severity of ischemia Presence of previous MI or fibrosis Presence of distal ischemia The immediate prognosis in acute MI patients is inversely related to the amount of myocardium reserves (i.e., total myocardial mass less the ischemic area at risk), however, among patients with low myocardical reserves due to previous MI or diffuse fibrosis, even a relatively small infarction may induce ischemia in remote segments of myocardium and be detrimental, putting the patient in a post-MI cycle of risk. The Post-MI Cycle of Risk The significant morbidity and mortality associated with heart failure has been attributed to structural changes associated with the post-MI cycle of risk. A succession of infarction, peri-infarct zone ischemia and apoptosis, infarct expansion, and recurrent MI is frequently observed 5-6 weeks after acute MI, resulting in post-MI cycles that can advance to ventricular remodeling, long-term cardiac dysfunction, and ultimately, chronic heart failure (see more below). The decision whether to treat a STEMI patient with thrombolysis or primary percutaneous coronary invervention (PCI) must be made quickly. However, ischemic heart muscle function may not be restored or restored only to a minor degree by revascularization (i.e., PCI or coronary artery bypass graft surgery). Left ventricular (LV) enlargement, a marker of long-term cardiac dysfunction, has been associated with an increased risk of major adverse cardiac events (MACE), and an improvement in survival after MI has been associated with attenuation of LV enlargement (e.g., by early treatment with ACE inhibitors and ARBs). Post-MI cardiac remodeling, therefore, the pattern of LV morphological change, in particular, are prognostic for the severity of cardiac injury and its correlation to clinical outcomes. Exhibit 5: Cardiomyocyte Loss within the Peri-Infarct Zone Leads to Infarct Expansion Source: Company reports and Brinson Patrick Securities research.14 15. Brinson PatrickNeostem, Inc. - March 7, 2013 Remodeling and Infarct Expansion Cardiac remodeling occurs in approximately 60% of patients after acute MI, and is associated with progressive dilation, where the size of the heart cavity becomes enlarged and stretched, thinning out the myocardium. The extent of remodeling is initially linked to infarct size and control of myocardial loading conditions, as the patient transitions from compensation (i.e., increased stroke volume, heart rate or both) to adapting to cardiac dysfunction. In high-risk MI patients (e.g., STEMI), a significant region of myocardium with inadequate blood supply surrounding the infarct (i.e., peri-infarct zone) is working hard to compensate for the dead, non- functioning myocardium (see Exhibit 5). Hypoxic conditions result in the release of hypoxia inducible factor-1 (HIF-1), which signals the need for perfusion, and in response to injury, triggers a cascade of cytokine and chemokine expression. If there is an inadequate response in the repair or renewal of damaged tissue within the weeks following acute MI, tissue in the peri-infarct zone undergoes the process of apoptosis and fibrosis, resulting in structural and functional changes throughout the ventricle. Ventricle dilation and shape change subsequently occur through cardiomyocyte loss and hypertrophy within the peri-infarcted zone, resulting in increased fibrosis and further apoptosis, infarct zone expansion, and as a result, recurrent MI. Patients with a greater degree of cardiac remodeling therefore remain in a cycle of risk and recurrent MI, and manifest the worst outcomes, with increased mortality and progression to end- stage heart failure. Exhibit 6: VALIANT Showed the Relation of Left Ventricular Dysfunction to Risk of Events Source: Company reports and Brinson Patrick Securities research. VALIANT showed chronic long-term pharmacotherapy has positive effects on late remodeling in patients at high risk for cardiovascular events after MI. Results from the Echo substudy in VALIANT, which showed that clinical risk post-MI is related to progressive LV dysfunction, as well as older studies such as SAVE and CAPRI, also showed drugs that modestly increase ejection fraction lead to compelling clinical impact (see Exhibit 6). However, by the sum of all interventions currently used to improve cardiac function and prevent ventricular remodeling, the primary goal of repairing compromised myocardium is not achieved, leaving the door open for a therapeutic approach that activates the hearts repair mechanism. A decade of experience with intracoronary infusion of BMCs post-MI has demonstrated this approach could be the key to cardiac repair and durable benefit in altering the cycle of risk. 15 16. Brinson Patrick Neostem, Inc. - March 7, 2013 Post-MI Stem Cell Therapy V We believe stem cell therapy represents an emerging approach that can fill the gap in demonstrating clinically meaningful repair of compromised myocardium, prevention of ventricular remodeling, and improvement in cardiac function, especially for patients refractory to standard pharmacologic or revascularization treatment. Since the first-in-human use of bone marrow stem cells (BMCs) in 2001, a number of clinical studies have demonstrated the clinical benefit of BMC therapy after acute MI, with 6 7 numerous studies showing positive results. As cell quantity ranged from 12.5 x 10 to 246 x 10 cells and type of cells varied, later studies focused on specific cell populations, optimal number for infusion, and evaluating refinements to BMC route of delivery. Mobilization of BMCs After Acute MI ACS such as MI are associated with increased levels of inflammatory and hematopoietic cytokines which,+ in turn, are associated with increased progenitor cells and other subpopulations such as CD34 cells in bone marrow. Prior to their involvement in cardiac repair and regeneration after MI, however, BMCs must first mobilize into peripheral blood and be guided to the heart. Stem cell homing signals, therefore, play an important role in stem cell mobilization from the bone marrow to the ischemic cardiac environment. SDF-1 and CXCR4 The treatment of cancer patients with granulocyte-colony stimulating factor (G-CSF) is considered the standard for mobilizing hematopoietic progenitor cells, however, the most prominent stem cell homing signal for bone marrow-derived cells is the chemokine, stromal cell derived factor-1 (SDF-1). SDF-1, also referred to as the chemokine ligand, CXCL12, stimulates the natural healing process by recruiting endothelial progenitor cells to the site of injury and inducing neovascularization and angiogenesis. Exhibit 7: Upregulation of SDF-1 in Myocardium and Stem Cell CXCR4 Expression Post-MI Source: Brinson Patrick Securities research. Upregulation of SDF-1 is observed within hours of acute MI, and is followed by increased expression of its receptor, the progenitor cell surface protein, CXCR4, which remains upregulated for several weeks. Studies such as the Reinfusion of Enriched Progenitor Cells and Infarct Remodeling in Acute Myocardial Infarction trial (REPAIR-AMI) show there is homing of progenitor cells to the heart, and a body of research supports post-MI temporal alignment between SDF-1 myocardial expression and stem cell CXCR4 expression, as presented in the construct above (see Exhibit 7). As cardiac myocytes in the16 17. Brinson PatrickNeostem, Inc. - March 7, 2013 infarct border zone have been shown CXCR4 upregulation after MI, a number of studies have explored manipulating SDF-1 and CXCR4 as targets for central regulation of the stem cell mobilization process. Targeted expression of SDF-1 after MI, for example, showed increased BMC engraftment into infarcted myocardium, and was accompanied by beneficial effects on cardiomyocyte survival, neovascularization and cardiac function. By attracting circulating stem cells to remain, survive and possibly differentiate in the infarct area, activating the relation between CXCR4 and SDF-1 represents a promising novel therapeutic approach. Other research shows, however, instead of the mere existence of temporal alignment between CXCR4 and SDF-1 expression in the myocardium, SDF-1 upregulation is observed for a much longer period than days (i.e., weeks), which is more important for homing and supports the strategy of aligning the myocardial signal of SDF-1 and delivery of BMCs to the heart being advanced by NeoStem (see more below).++ CD34 Cells Bone marrow-derived CD34 cells are a well-characterized population of stem cells that are+ used to reconstitute a cancer patients hematopoietic system after radiation or chemotherapy. CD34 cells have also been shown to induce angiogenesis in animal models of myocardial, peripheral, and+ cerebral ischemia. The mobilization of CD34 stem cells into peripheral blood early in STEMI is also+ positively correlated with LVEF. As a result, a number of studies have explored the usefulness of CD34 cells in the treatment of ischemic conditions in Phase I and Phase II clinical trials.++ Exhibit 8: Increasing Levels of SDF-1 are a Strong Homing Signal for CD34 CXCR4 Cells Source: Company reports and Brinson Patrick Securities research.+ The mechanism by which CD34 cells promote angiogenesis is not completely understood, however, evidence supports both direct incorporation of the cells into the expanding vasculature and paracrine secretion of angiogenic growth factors from exosomes. Further evidence is found in the direct interaction+ + of CD34 cells with SDF-1. CXCR4 is found on approximately 20-25% of CD34 cells, and within hours++ after acute MI, CD34 CXCR4 cells show more than a two-fold increase in number in peripheral blood. The pioneering study, Transplantation of Progenitor Cells and Regeneration Enhancement in Acute+ Myocardial Infarction (TOPCARE-AMI), showed that the migratory capacity of infused CXCR4 progenitors induced by SDF-1 was the strongest independent predictor of the reduction of infarct size as assessed by contrast MRI. A gradient of SDF-1 upregulation in hypoxic regions of myocardium, therefore, is a strong homing signal and drives these cells to move toward the region of ischemia, release their exosomes, and trigger capillary formation within hours after acute MI (see Exhibit 8). 17 18. Brinson Patrick Neostem, Inc. - March 7, 2013 Early studies such as TOPCARE-AMI were conducted specifically to evaluate infarct remodeling and improving post-MI outcomes after either bone marrow or peripheral blood-derived progenitor cell therapy. TOPCARE-AMI demonstrated that infusion of progenitor cells leads to LVEF improvement. Systematic reviews of subsequent controlled clinical trials appraising the impact of intracoronary cell therapy provide further evidence that a significant increase in LVEF is observed with cell therapy compared with control (see Exhibit 9). Exhibit 9: Meta-Analysis Provides Evidence of Benefit from Intracoronary BMCs on LVEF in AMI Source: Company reports and Brinson Patrick Securities research. Meta-analyses showed autologous bone marrow mononuclear cell ICA infusion resulted in modest improvement in LVEF, but significantly improved with increasing numbers of certain cells mobilized, such ++ ++ as CD34 , CXCR4 , CD117 , and c-met cells, within 12 hours after MI. Peak cell numbers were + significantly lower in patients with LVEF $300K. With potential for economies of scale from its PCT subsidiary, we anticipate sales of AMR-001 could realize product manufacturing margins in the 45%-65% range, which is comparable to some cost of revenues observed with the manufacture of certain complex biologics such as monoclonal antibodies. We project a BLA for AMR-001 in acute MI in 2017, followed by FDA approval and launch in 2018, driving NeoStem to its first full-year of protability in 2019. We note, however, that driven by projected contract cell product manufacturing revenues potentially realized by PCT alone, NeoStem could achieve its first year of positive cash flow in 2018. Our preliminary projections conclude that NeoStem could realize earnings per share cumulative average growth (CAGR) of 42.9% between 2019-2022 and realize peak sales >$2bn with AMR-001 in acute MI alone (see Exhibit 16). 22 23. Brinson Patrick Neostem, Inc. - March 7, 2013Exhibit 16: Revenue Model of AMR-001 in Acute STEMIAMR-001 in Post-Acute STEMI Revenue Build, US2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EAcute Myocardial Infarction (MI) Prevalence, US935,180 935,270 935,360 935,450 935,540 935,630 935,721 935,811 935,901 935,991 936,081Percent Diagnosed with Acute STEMI 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%Number of Patients with Acute STEMI187,018 187,018 187,018 187,018 187,018 187,018 187,018 187,018 187,018 187,018 187,018Percent Treated with Intracoronary Stent Implantation80.0% 80.0% 80.0% 80.0% 80% 80% 80% 80% 80% 80% 80%Number of Patients Treated with Intracoronary Stenting 149,614 149,614 149,614 149,614 149,614 149,614 149,614 149,614 149,614 149,614 149,614Percent with LVEF 50% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4%Number of STEMI with LVEF 50% Implanted with a Stent100,840 100,840 100,840 100,840 100,840 100,840 100,840 100,840 100,840 100,840 100,840AMR-001 Penetration of Stented STEMI Patients 0.0%0.0%0.0%0.0%0.0%3.1% 12.7% 22.8% 25.7% 28.8% 29.7%Number of Patients Treated with AMR-001, US - - - - -3,12612,80722,99225,91629,04229,950Annual Cost of therapy$30,000 $30,900 $31,827 $32,782 $33,765 $34,778Change in Price 3%3%3%3%3%3%Total AMR-001 Sales, US ($mn) - - - - - $94$396$732$850$981$1,042% Growth322.0% 84.9% 16.1% 15.4%6.2%AMR-001 in Post-Acute STEMI Revenue Build, ROW 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EAcute Myocardial Infarction (MI) Prevalence, ROW2,805,411 2,805,616 2,805,822 2,806,027 2,806,232 2,806,438 2,806,643 2,806,849 2,807,054 2,807,260 2,807,465Percent Diagnosed with Acute STEMI 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%Number of Patients with Acute STEMI561,082 561,123 561,164 561,205 561,246 561,288 561,329 561,370 561,411 561,452 561,493Percent Treated with Intracoronary Stent Implantation50.0% 50.0% 50.0% 50.0% 50% 50% 50% 50% 50% 50% 50%Number of Patients Treated with Intracoronary Stenting280,541 280,562 280,582 280,603 280,623 280,644 280,664 280,685 280,705 280,726 280,747Percent with LVEF 50% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4% 67.4%Number of STEMI with LVEF 50% Implanted with a Stent 189,085 189,099 189,112 189,126 189,140 189,154 189,168 189,182 189,195 189,209 189,223AMR-001 Penetration of Stented STEMI Patients 0.0%0.0%0.0%0.0%0.0%0.2%2.7%7.0% 13.0% 17.0% 21.0%Number of Patients Treated with AMR-001, ROW- - - - -3785,10813,24324,59532,16639,737Annual Cost of therapy$25,000 $25,500 $26,010 $26,530 $27,061 $27,602Change in Price 2%2%2%2%2%Total AMR-001 Sales, ROW ($mn)- - - - -$9$130$344$653$870$1,097% Growth164.5% 89.4% 33.4% 26.0%Total AMR-001 Sales, WW ($mn) - - - - -$103$526$1,076$1,502$1,851$2,138Source: Company reports and Brinson Patrick Securities research.23 24. Brinson Patrick Neostem, Inc. - March 7, 2013 Valuation Analysis V We used a variety of approaches to arrive at 12-month price target of $6 for NBS shares (see Exhibits 17- 22). Using a traditional, DCF-based analysis, we derived a per share valuation of $5.20. We also derived a $13.23 per share valuation using our relative CAGR valuation model for currently unprofitable companies. Using comparable company analysis, we derived a value of $1.03 per share. Exhibit 17: Discount Rate Calculation. Blended Discount Rate CalculationProductRisk level Discount 2020 RevSecond full year of profitabilityServices In-Market10% 195Cell ProductsPhase 230% 1,502Royalties -Total 1,697Blended Discount Rate =27.7%Assumptions CommentsBlended Discount Rate 27.7% Through 2019Stage 2 Discount Rate 16.5% 2021 through 2029Terminal Discount Rate11.0% After 2029Terminal Growth3% After 2029Long Term Debt0Shares Outstanding172.6 Projected YE13 Source: Brinson Patrick Securities research. Exhibit 18: Discounted Cash Flows.DCF Valuation Terminal 2013 - - - 2017 2018 20192020 2021202220232024Value Contract / Manufacturing Services 19.755.0 75.0100.0 125.0 156.3195.3 236.3 283.6 340.3 Cell Therapy Products-- -103.2 526.01,076.21,502.1 1,851.0 2,221.2 2,665.5 Royalties-- -- --- - - - Total Revenues19.755.0 75.0203.2 651.01,232.41,697.4 2,087.4 2,504.8 3,005.8 Cost of Sales 16.341.8 54.2125.1 393.7 745.6 1,028.7 1,262.7 1,515.4 1,818.5 COGS as % of total revenue83.0%76.1% 72.2% 61.6% 60.5% 60.5%60.6% 60.5% 60.5% 60.5% R&D Expense 11.219.4 24.2 27.332.048.0 75.394.2 117.7 147.1 R&D as % of product revenue 56.9%32.3% 28.4% 10.8%4.0%3.2% 3.6%3.6%3.6%3.6% SG&A Expense17.821.8 25.7 32.941.850.6 59.766.373.681.7 SG&A as % of total revenues 90.4%36.3% 30.2% 13.1%5.2%3.4% 2.9%2.6%2.5%2.5% Interest and other income0.00.4 0.81.6 2.63.43.8 4.2 4.6 5.0 EBIT (25.6) (27.6) (28.3) 19.4 186.1 391.7537.4 668.4 802.7 963.5 Provision for Income Taxes -1.6 3.15.744.3 104.7159.0 198.5 206.5 214.7 Effective Tax Rate 0.0%11.0% 13.0% 15.0% 18.0% 21.0%23.0% 23.0% 23.0% 23.0% Free Cash Flow (FCF) (25.6) (29.2) (31.4) 13.7 141.8 287.0378.4 469.8 596.2 748.85,269.7 Discount Factor1.02.0 2.53.2 4.15.26.1 7.1 8.2 9.624.0 Present Value of FCF (25.6) (14.9) (12.6)4.334.855.2 62.466.572.578.1 Terminal Value 219.9 NPV of the company$ 896.77 Est. YE13 Shares Outstanding 172.6 Price per share $ 5.20 Source: Brinson Patrick Securities research. Discounted Cash Flows Analysis We derived a blended discount rate of 27.7% using weighted average discount rates based on each drugs contribution to revenues in 2020, our projection for NeoStems second full-year of profitability. We next projected revenues through 2023, discounted back using a discount rate of 16.5% derived above for the profitability stage, modeled in a terminal growth rate through 2029 of 3% (driven by AMR-001s composition of matter patent life) and discounted back using an estimated NBS cost-of-capital of 12.5%, and derived a share fair value price of $5.20 (see Exhibit 18). We believe this target price reflects a probability-adjusted premium in AMR-001s market potential in MI.24 25. Brinson Patrick Neostem, Inc. - March 7, 2013 Exhibit 19: Relative CAGR.CAGR Valuation ComparablesBiotech Group P/E (2013)17.30Biotech Group Forward CAGR (2013-2015) 14.9% Valued CompanyYear used for discounting 2020Price Target Year 20133-year EPS CAGR (2020-2022)42.9%Second Profitable Year EPS (2020)$1.47Blended Discounting Rate 27.7%# Years for Discounting 7 Target Price $13.23 Source: Brinson Patrick Securities research. Relative CAGR Model We also derived a $13.23 per share valuation using our relative CAGR valuation method for currently unprofitable companies by multiplying the FY13 mean forward P/E ratio of profitable biotech companies of 17.3 by a ratio of NeoStems FY20-FY22 projected 3-year CAGR of 42.9% to the groups FY13-FY15 CAGR of 14.9%, then by our FY20 EPS estimate of $1.47, discounted back at our blended rate of 27.7% (see Exhibit 19). By conducting a sensitivity analysis of blended discount rate versus CAGR (see Exhibit 20), we believe significant upside may be realized as AMR-001 development risk would decrease with the announcement of top-line Phase II data later this year, as commercialization risk decreases from gaining insight into whether AMR-001 has potential to demonstrate a long-term mortality benefit, and NeoStem potentially signs an ex-US AMR-001 commercialization partner. We do not model a partnership, however, with its blockbuster ex-US market opportunity, we believe an agreement for ex-US rights to AMR-001 is highly probable. We believe this target price best reflects NeoStems unrecognized value relative to its peer group, which we believe is supported by NeoStems potential to achieve its first year of positive cash flow profitability in only three years. Exhibit 20: Discount Rate vs. CAGR Sensitivity Analysis.Sensitivity Analysis Discount RateCAGR 17.7% 22.7%27.7%32.7%37.7%12.9%$7.03 $5.25$3.97$3.04$2.3422.9%$12.49$9.33 $7.06 $5.39$4.1632.9%$17.95 $13.42$10.14 $7.75$5.98 42.9% $23.41 $17.50$13.23 $10.11 $7.8052.9%$28.88 $21.58$16.31 $12.47 $9.6262.9%$34.34 $25.66$19.40 $14.83 $11.4472.9%$39.80 $29.74$22.49 $17.18 $13.26Note: Used FY20 estimated EPS of $1.47. Source: Brinson Patrick Securities research. Comparable Company Analysis We believe current share prices of stem cell companies reflects overly negative investor sentiment regarding the early-stage of clinical trials and the wait-and-see view of big pharmaceutical companies. In sympathy of this view, NeoStems enterprise value is currently trading at a 30% discount to the mean enterprise value of a peer group of stem cell companies ($72mn versus $104mn, respectively), resulting in a share valuation of $0.76 using this methodology (see Exhibit 21). We note, however, that NeoStem is undervalued when compared with a more select group companies (highlighted in light green below) that have proprietary stem cell technologies, are developing or25 26. Brinson PatrickNeostem, Inc. - March 7, 2013 marketing stem cell products, and have significant licensing agreements. These include Advance Cell Technology (ACTC, Not Rated), Cytori Therapeutics (CYTX, Not Rated), Pluristem Therapeutics, and Osiris Therapeutics (OSIR, Not Rated). By adjusting for this select groups mean enterprise value of $158mn, we derive an enterprise value for NeoStem of $126mn or $0.92 per share, representing 74% upside to current prices near-term. Exhibit 21: Comparable Company Valuation Analysis.Price SOS1Mkt. Cap.Cash 2Debt3Enterprise Value CompanyTicker3/6/13($ MM) Total /ShareTotal /ShareTotal /Share AASTROM BIOSCIENCES, INC. ASTM $1.29 44 5621 $0.480 $0.00350.81 ADVANCED CELL TECHNOLOGY, INC.ACTC $0.07 2,192 1588$0.002 $0.00151 0.07 ATHERSYS, INC.ATHX $1.56 53 838$0.150 $0.00751.41 CYTORI THERAPEUTICS, INC. CYTX $2.86 5916818 $0.30 25 $0.42176 2.98 GERON CORP.GERN$1.44131188 100 $0.770 $0.00880.67 NEURALSTEM, INC.CUR$1.17 68 8010 $0.150 $0.00701.02 PLURISTEM THERAPEUTICS, INC. PSTI$3.2658 190 65$1.110 $0.00126$2.15 OPEXA THERAPEUTICS, INC.OPXA $1.666 106$1.080 $0.05 40.63 OSIRIS THERAPEUTICS, INC. OSIR $9.36 3330837 $1.130 $0.01271 8.23 STEMCELLS, INC. STEM $1.79 37 6722 $0.580 $0.01461.22 Median 120 19$0.530 $0.0081 $1.12 Mean 131 29$0.583 $0.05104$1.92 NEOSTEM, INC.NBS $0.53159 8412 $0.080 $0.00720.45 All numbers are in $ millions except per share data. EV = enterprise value1Shares outstanding (SOS) as of most recent reported quarter adjusted for effects of recent financing activities.2, 3 As of most recent reported quarter. NBS Discount to Mean Market Cap -35% NBS Discount to Mean EV -30% Comparable EV Multiple (Mean/NBS)1.4 Target Price (comparable EV div ided by NBS shares out) $0.76Adjusted Comparable EV Multiple (Select Group Mean/NBS)1.7 Adjusted NBS EV (YE13) $126 Adjusted Target Price (comparable EV divided by NBS shares out) $0.92 Source: Brinson Patrick Securities research. Review of Valuation Approaches and Price Target Determination Synthesizing the various valuation approaches, we derived minimum upside potential to $0.92 and an average value of $6.45 per share (see Exhibit 22). We therefore recommend investors buy NBS shares and set a 12-month price target of $6. Exhibit 22: Summary of Valuation Results. Review of Valuation CalculationTechniqueTargetDCF $5.20CAGR $13.23Comparables $0.92Valuation Average $6.45 Source: Brinson Patrick Securities research. 26 27. Brinson Patrick Neostem, Inc. - March 7, 2013 NeoStem Inc. (NBS) Quarterly Income Statement VIncome Statement ($ MM)2011A1Q12A2Q12A3Q12A4Q12E2012E1Q13E2Q13E3Q13E4Q13E2013ECell Therapy Contract and Manufacturing Services 9.5 3.83.44.4 2.714.3 3.53.64.04.2 15.2 % Yr/Yr Growth160%53% 104%-26%50.7%-8.4% 7.6% -10.8%53.8% 6.4% % of Revenues 100.0% 100.0% 100.0%Cell Therapy Product Sales - ---- - --- -- % Yr/Yr GrowthTotal Revenues, Net9.53.83.44.42.7 14.33.53.64.04.2 15.2% Yr/Yr Growth160.3%52.5% 103.7% -25.7%50.7%-8.4% 7.6% -10.8%53.8% 6.4%Cost of Revenues 8.83.02.73.72.2 11.62.93.03.33.4 12.6 % Total Revenues 92.7%78.3%81.1%84.5%81.3%81.3%83.0%83.0%83.0%83.0%83%Gross Profit 0.70.80.60.70.52.60.60.60.70.72.6 Gross Margin7.3%21.7%18.9%15.5%18.7%18.5%17.0%17.0%17.0%17.0%17.0%Research and Development 7.71.9 2.72.82.5 10.0 2.52.72.93.011.2 % Yr/Yr Growth -23% 71% 7%20% 29.2%30.1% 1.3% 7.0%21.4%12.2%General and Administrative27.56.44.7 5.9 5.7 22.84.44.44.5 4.5 17.8 % Yr/Yr Growth-1% -47%7% -8% 5.0% -31.6%-6.4% -24.8%-20.7%5.0%Total Operating Expenses35.2 8.47.48.88.232.8 6.97.27.4 7.6 29.0Operating Income (Loss)(34.5)(7.5)(6.8)(8.1)(7.7) (30.1)(6.3)(6.6)(6.7)(6.8) (26.4) MarginNA NA NA NA NA NA NA NA NA NA NAOther Income (Expense)(1.5)(1.3)(0.4)(0.5)(0.1)(2.3)0.00.00.0 0.00.0Pretax lncome(36.0)(8.8)(7.2)(8.5)(7.8) (32.4)(6.3)(6.6)(6.7)(6.8) (26.4)Provision for Income Tax(0.4)---- - --- --Effective Tax Rate 0.0% 0.0% 0.0%Amounts Attributable to NBS Common ShareholdersFrom Continuing Operations (35.6)(7.9)(7.2)(8.5)(7.8) (31.3)(6.3)(6.6)(6.7)(6.8) (26.4)From Discontinued Operations - net of taxes (2.6)(1.5) (13.4)0.10.1 (14.6)--- --Warrant Inducements- --(1.0)(0.3)(1.4)(0.3)(0.3)(0.3)(0.3)(1.2)Preferred Dividends (0.6)0.1(0.1)(0.1)-(0.1)--- --Net lncome (Loss)(38.5)(9.5) (20.6)(9.5)(8.0) (47.5)(6.6)(6.9)(7.0)(7.1) (27.6)Margin NA NA NA NA NA NA NA NA NA NA NAEPS from Continuing Operations (0.50) (0.07) (0.05)(0.06)(0.05) (0.23) (0.04) (0.04) (0.04) (0.04) (0.15)EPS from Discontinued Operations (0.04) (0.01) (0.10) 0.00 0.00 (0.11) 0.00 0.00 0.000.00 0.00EPS Attributable to NBS Common Shareholders(0.54) (0.08) (0.15)(0.06)(0.05) (0.35) (0.04) (0.04) (0.04) (0.04) (0.16)Weighted Shares Outstanding, basic71.8111.8134.4148.2159.4138.5161.1168.7170.4176.4169.2Weighted Shares Outstanding, diluted71.8111.8134.4148.2162.6139.3164.4172.1173.8180.0172.6 Source: Company reports and Brinson Patrick Securities research.27 28. Brinson Patrick Neostem, Inc. - March 7, 2013 NeoStem Inc. (NBS) Annual Income Statement (2011A-2022E) VIncome Statement ($ MM)2011A2012E2013E2014E2015E2016E2017E2018E2019E2020E2021E2022ECell Therapy Contract and Manufacturing Services 9.515.119.7 27.0 38.0 55.0 75.0100.0125.0156.3195.3236.3 % Yr/Yr Growth59.2%30.6%37.1%40.7%44.7%36.4%33.3%25.0%25.0%25.0%21.0% % of Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%89.1%40.0%15.9%10.7% 9.7% 9.6%Cell Therapy Product Sales ------- 103.2526.0 1,076.21,502.11,851.0 % Yr/Yr Growth NA 409.5% 104.6%39.6%23.2% % of Revenues 41.3%67.0%73.7%74.9%74.9%Total Revenues, Net9.5 15.1 19.7 27.0 40.0 60.0 85.2252.1802.21,503.22,088.32,580.4% Yr/Yr Growth 59.2%30.6%37.1%48.1%50.0%41.9% 196.0% 218.2%87.4%38.9%23.6%Cost of Revenues 8.8 12.3 16.3 22.431.5 45.7 61.5155.2485.2909.3 1,265.61,560.9 % Total Revenues 92.7%81.3%83%83.0%78.9%76.1%72.2%61.6%60.5%60.5%60.6%60.5%Gross Profit 0.72.83.34.68.514.4 23.7 96.9317.0593.8822.7 1,019.4 Gross Margin7.3%18.5%17.0%17.0%21.2%23.9%27.8%38.4%39.5%39.5%39.4%39.5%Research and Development 7.710.0 11.2 13.4 16.1 19.4 24.2 27.3 32.0 48.0 75.3 94.2 % Yr/Yr Growth29.2%12.2%20.0%20.0%20.0%25.0%13.0%17.0%50.0%57.0%25.0%General and Administrative27.5 22.817.8 18.7 19.6 21.8 25.7 32.9 41.8 50.6 59.7 66.3 % Yr/Yr Growth 5.0% 5.0% 5.0% 5.0%11.0%18.0%28.0%27.0%21.0%18.0%11.0%Total Operating Expenses35.2 32.8 29.0 32.1 35.8 41.2 49.9 60.3 73.8 98.6135.0160.4Operating Income (Loss)(34.5) (30.0) (25.7) (27.6) (27.3) (26.8) (26.3) 36.7243.2495.3687.7859.0 MarginNA NA NA NA NA NA NA 15%30%33%33%33%Other Income (Expense)(1.5)(2.3) 0.00.10.20.40.8 1.62.63.43.84.2Pretax lncome(36.0) (32.3) (25.6) (27.4) (27.1) (26.4) (25.5) 38.2245.9498.7691.5863.1Provision for Income Tax(0.4) ---0.71.63.15.744.3104.7159.0198.5Effective Tax Rate 0.0% 0.0% 0.0% 0.0% 8.0%11.0%13.0%15.0%18.0%21.0%23.0%23.0%Amounts Attributable to NBS Common ShareholdersFrom Continuing Operations (35.6) (31.1) (25.6) (27.4) (27.8) (28.0) (28.6) 32.5201.6394.0532.4664.6From Discontinued Operations - net of taxes (2.6) (14.6) ----- -----Warrant Inducements- (1.4)(1.2)(1.8)(2.7)(4.1)(6.1)(9.1) (13.7) (20.5) (30.8) (46.1)Preferred Dividends (0.6)(0.1) ----- -----Net lncome (Loss)(38.5) (47.4) (26.8) (29.2) (30.5) (32.0) (34.7) 23.4187.9373.5501.7618.5Margin NA NA NA NA NA NA NA 13%25%26%25%26%EPS from Continuing Operations (0.50) (0.23) (0.15) (0.14) (0.14) (0.13) (0.13) 0.14 0.83 1.55 2.01 2.41EPS from Discontinued Operations (0.04) (0.11)0.00 0.00 0.00 0.00 0.000.00 0.00 0.00 0.00 0.00EPS Attributable to NBS Common Shareholders(0.54) (0.35) (0.16) (0.15) (0.15) (0.15) (0.16) 0.10 0.77 1.47 1.90 2.25Weighted Shares Outstanding, basic71.8138.5169.2188.7195.8203.0214.2224.4234.6244.8255.0265.2Weighted Shares Outstanding, diluted71.8139.3172.6195.8203.3210.7222.3232.9243.5254.1264.7275.2 Source: Company reports and Brinson Patrick Securities research. 28 29. Brinson Patrick Neostem, Inc. - March 7, 2013 Valuation Methodology We used a variety of approaches to arrive at 12-month price target for NBS shares. Using a traditional, DCF- based analysis, we derived a per share valuation of $5.20. We also derived a $13.23 per share valuation using our relative CAGR valuation model for currently unprofitable companies. Using comparable company analysis, we derived a value of $.92 per share or minimum upside potential of 72%. Synthesizing the various valuation approaches, we derived an average value of $6.45 per share. We therefore recommend investors buy NBS shares and set a Market Outperform rating with a 12-month price target of $6. Company Risks Development risk, as the latest data from evaluating AMR-001 cells in acute MI are early, and therefore, there is no guarantee future and ongoing clinical trials will be successful. Regulatory risk as, although there are other cell based therapies further along in development that may establish a path for approval, there has been no stem cell based therapy approved to date. Commercialization risk given the rigid and well-established treatment paradigms in cardiovascular disease. Financial risk as based on our analysis of the historical costs of conducting clinical trials, we anticipate NeoStem periodically will need to conduct successful financing activities through 2018.RELATED COMPANIESCompany Ticker Rating PricePrice TargetOpexa Therapeutics, Inc. OPXA$1.66 Pluristem Therapeutics, Inc.PSTI Market Outperform$3.26 $5.00 IMPORTANT DISCLOSURES Analyst Certification Vernon Bernardino hereby certifies that the recommendations and opinions expressed in the research report accurately reflect the research analysts personal views about any and all of the subject securities or issues discussed herein. Furthermore, no part of the research analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this research report. Brinson Patrick and/or its affiliates expect to receive or intend to seek compensation for investment banking services from Neostem, Inc., Opexa Therapeutics, Inc. and Pluristem Therapeutics, Inc. in the next three months. In the past 12 months, Brinson Patrick or its affiliates have received compensation for investment banking services from Opexa Therapeutics, Inc. .Ratings Distribution & Investment Banking DisclosureRatingCount Ratings DistributionCount *Investment BankingMarket Outperform9100.00% 111.11%Market Perform 00.00% 0 0.00%Market Underperform00.00% 0 0.00%* Percent of companies under research coverage from which Brinson Patrick received compensation for investment banking services provided in the previous12 months. Ratings Definitions Market Outperform: Over the next six to twelve months, the common stock of the company is expected to outperform a passive index comprised of all the common stock of companies within the same sector, as defined by various market indices and ETFs. Market Perform: Over the next six to twelve months, the common stock of the company is expected to reflect the performance of a passive index comprised of all the common stock of companies within the same sector, as defined by various market indices and ETFs. 29 30. Brinson Patrick Neostem, Inc. - March 7, 2013 Market Underperform: Over the next six to twelve months, the common stock of the company is expected to underperform a passive index comprised of all the common stock of companies within the same sector, as defined by various market indices and ETFs. UNDER REVIEW: The current rating and financial estimates of the common stock of the company are suspended while being reviewed. NOT RATED: Brinson Patrick does not maintain research coverage on the common stock of the company. Risk Profiles Definitions SPECULATIVE: The common stock risk level is materially higher than its benchmarks based on various market indices and ETFs. The price of this common stock has been, or likely will be, exceptionally more volatile than its benchmarks. AGGRESSIVE: The common stock risk level is higher than its benchmarks based on various market indices and ETFs. The price of this common stock has been, or likely will be, more volatile than its benchmarks. MODERATE: The common stock risk level is in-line with its benchmarks based on various market indices and ETFs. The price of this common stock has been, or likely will be, just as volatile as its benchmarks. Visit us at http://www.brinsonpatrick.com The analyst(s) responsible for preparing this research received compensation that is based on various factors, including Brinson Patricks total revenues, a portion of which is generated by Brinson Patricks investment banking activities. Investors should assume that Brinson Patrick is seeking, or will seek, investment banking or other services from the covered companies. Employees of Brinson Patrick not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may buy, sell, or trade them in ways different from, or in a manner inconsistent with, those discussed in this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The methods used by Brinson Patrick to determine the price target for this security, along with the risks, are detailed within this report. Additional information available upon request. For additional information and disclosures, please contact Matthew Muszala, Director of Research, at [email protected] Copyright 2013 Brinson Patrick Securities Corp. The study herein is not a complete analysis of every material fact respecting any company, industry, or security. The opinions expressed here reflect the judgment of the author at this date and are subject to change. Facts have been obtained from sources considered to be reliable, but are not guaranteed. Brinson Patrick, its officers, directors, and/or employees may have an interest in the securities of the issue(s) described herein and may purchase, sell, trade or act as market maker while this report is in circulation.30
