Inside Wall Street: Tiny NeoStem Offers a Chinese Health Care Play

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Not many investors know much about tiny NeoStem (NBS), which collects and stores adult stem cells for future medical use. Its stock hit a 52-week high of $2.72 last year but has since tumbled to $1.64. But it may soon attract attention that could propel it back to its old high, if not higher. That's because NeoStem has become an unlikely China health care play.The company last year acquired 51% of Suzhou Erye Pharmaceuticals in China, which produces a series of penicillin drugs and cephlasporins, which are antibiotics. NeoStem has yet to make a penny, losing $5 million in 2009. But this year, it stands to become profitable, largely because of its majority interest in Suzhou Erye. In 2009. Suzhou Erye reported revenues of more than $60 million and earnings of $11 million. This year, it's projected to post revenues of $84 million and earnings of $14 million.

When investors get wind of NeoStem's new financial profile, the stock is likely to heat up. "As NeoStem reports consolidated sales and earnings, including the revenue and profits of Suzhou Erye, in the first quarter, we believe the stock will dramatically appreciate," says Allen Silberstein, founder and CEO of AGS Capital Group.

Fast-Growing Antibiotic Producer

Sources close to Suzhou Erye and NeoStem figure that when NeoStem consolidates its first-quarter earnings, it'll likely post revenues of $18 million and net income of $1.7 million. For all of 2010, they estimate NeoStem's revenues will total $90 million and earnings of $10 million. The company declined to comment on the sales and earnings projections.

Suzhou Erye is one of the fastest-growing antibiotic producers in China and should be one of the prime beneficiaries of Beijing's health reform program, which aims to spend $124 billion over the next three years to help provide 90% of China's population with basic medical insurance, according to NeoStem CEO Dr. Robin Smith.

NeoStem is developing stem-cell therapies, she says, and pursues anti-aging initiatives. It operates a network of adult stem-cell collection centers in the U.S., which enable people to store their own stem cells for their personal use in times of future medical need.

From Cardiac Repair to Face-Lifts

NeoStem's foothold in China, says Dr. Smith, allows it to take its patented autologous adult stem-cell extraction and storage business, as well as its numerous therapeutic adult stem-cell applications, to that nation's vast market starting this year. NeoStem will establish a laboratory and distribution system in China, she adds, to market its multiple stem-cell therapies.

In addition, NeoStem has acquired worldwide rights to the use of VSEL, or very small embryonic-like stem cells, Dr. Smith says. The VSELs are adult stem cells that are the same as embryonic stems cells but are found in an adult's own body. NeoStem will market the harvesting, storage and use of these cells to enhance wound healing, cardiac repair, orthopedic rejuvenation and cosmetic uses, including face lifts, says Dr. Robin.

Otis Bradley, analyst at ICM Capital Markets, expects NeoStem will earn more than $12 million in 201l, largely because of the revenues and earnings impact from Suzhou Erye. "The VSELs could revolutionize regenerative medicine and place NeoStem as the leading company in the stem-cell industry," says Bradley.

If all goes as planned with NeoStem's adult stem-cell therapies and its bold venture in China, this $1.64 stock could well turn out to be the kind of undiscovered -- and undervalued -- winner that investors hunger for.
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