|x||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|o||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of
incorporation or organization)
|420 Lexington Avenue
New York, New York
|(Address of principal executive offices)||(Zip Code)|
Registrants telephone number, including area code: (212) 584-4180
Securities Registered Pursuant to Section 12(b) of the Act:
|Title of Each Class||Name of Each Exchange On Which Registered|
|Common Stock, par value $0.001 per share||NYSE Amex|
|Class A Common Stock Purchase Warrants||NYSE Amex|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
|Large accelerated filer o||Accelerated filer o||Non-accelerated filer o||Smaller reporting company x|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2011 (the last business day of the most recently completed second fiscal quarter) was approximately $73.5 million, computed by reference to the closing sales price of $1.48 for the common stock on the NYSE Amex reported for such date. Shares held by executive officers, directors and persons actually owning directly or indirectly more than 10% of the outstanding common stock have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
On March 12, 2012, 114,348,438 shares of the registrants common stock, par value $0.001 per share, were outstanding.
Documents incorporated by reference: Portions of the registrants definitive Proxy Statement for the 2012 Annual Meeting of Stockholders, to be filed with the Commission not later than 120 days after the close of the registrants fiscal year, have been incorporated by reference, in whole or in part, into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.
All references in this Annual Report on Form 10-K to we, us, the Company and NeoStem mean NeoStem, Inc., including subsidiaries and predecessors, except where it is clear that the term refers only to NeoStem, Inc. This Annual Report on Form 10-K contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Cautionary Note Regarding Forward-Looking Statements and under Risk Factors and elsewhere in this Annual Report on Form 10-K.
|CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS||ii|
EXECUTIVE OFFICERS OF THE REGISTRANT
UNRESOLVED STAFF COMMENTS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as well as historical information. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from anticipated results, performance or achievements expressed or implied by such forward-looking statements. When used in this Annual Report on Form 10-K, statements that are not statements of current or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words plan, intend, may, will, expect, believe, could, anticipate, estimate, or continue or similar expressions or other variations or comparable terminology are intended to identify such forward-looking statements, although some forward-looking statements are expressed differently. Additionally, statements regarding our ability to successfully develop, integrate and grow the business, including with regard to our research and development efforts in cellular therapy, our adult stem cell and umbilical cord blood collection, processing and storage business, contract manufacturing and process development of cellular based medicines, and the pharmaceutical manufacturing operations conducted in China, the future of regenerative medicine and the role of stem cells in that future, the future use of stem cells as a treatment option and the role of VSELTM Technology in that future and the potential revenue growth of such businesses, are forward-looking statements. Our future operating results are dependent upon many factors and our further development is highly dependent on future medical and research developments and market acceptance, which is outside our control.
Forward-looking statements, including with respect to the successful execution of the Companys strategy, may not be realized due to a variety of factors and we cannot guarantee their accuracy or that our expectations about future events will prove to be correct. Such factors include, without limitation, (i) our ability to manage the business despite operating losses and cash outflows; (ii) our ability to obtain sufficient capital or strategic business arrangements to fund our operations and expansion plans, including meeting our financial obligations under various licensing and other strategic arrangements, the funding of our clinical trials for AMR-001, and the commercialization of the relevant technology; (iii) our ability to build the management and human resources and infrastructure necessary to support the growth of the business; (iv) our ability to integrate our acquired businesses successfully and grow such acquired businesses as anticipated; (v) whether a large global market is established for our cellular-based products and services and our ability to capture a share of this market; (vi) competitive factors and developments beyond our control; (vii) scientific and medical developments beyond our control; (viii) our ability to obtain appropriate governmental licenses, accreditations or certifications or comply with healthcare laws and regulations or any other adverse effect or limitations caused by government regulation of the business; (ix) whether any of our current or future patent applications result in issued patents, the scope of those patents and our ability to obtain and maintain other rights to technology required or desirable for the conduct of our business; (x) whether any potential strategic benefits of various licensing transactions will be realized and whether any potential benefits from the acquisition of these licensed technologies will be realized; (xi) the results of our development activities, including the timing, enrollment, outcome and/or results of any clinical trials; (xii) our ability to successfully divest our 51% ownership of our Erye subsidiary and the value that may be realized given recent regulatory developments in China; (xiii) factors regarding our business and initiatives in China and, generally, regarding doing business in China, including through our variable interest entity structure, and our ability to successfully wind down most or all of our regenerative medicine initiatives in China; and (xiv) the other factors discussed in Risk Factors and elsewhere in this Annual Report on Form 10-K and in the Companys other periodic filings with the Securities and Exchange Commission (the SEC) which are available for review at www.sec.gov under Search for Company Filings.
All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by law, the Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
NeoStem, Inc. (we, NeoStem or the Company) continues to develop and build on its core capabilities in cell therapy to capitalize on the paradigm shift that we see occurring in medicine. In particular, we anticipate that cell therapy will have a large role in the fight against chronic disease and in lessening the economic burden that these diseases pose to modern society. Our January 2011 acquisition of Progenitor Cell Therapy, LLC (PCT) provides NeoStem with a foundation in both manufacturing and regulatory affairs expertise. We believe, this expertise, coupled with our existing research capabilities and collaborations will allow us to achieve our mission of becoming a premier cell therapy company. Our PCT subsidiarys manufacturing base is one of the few current Good Manufacturing Practices (cGMP) facilities available for contracting in the burgeoning cell therapy industry. Amorcyte, LLC (Amorcyte), which we acquired in October 2011, is developing a cell therapy for the treatment of cardiovascular disease. Amorcytes lead compound, AMR-001, represents NeoStems most clinically advanced therapeutic and has commenced enrollment for a Phase 2 trial to investigate AMR-001s efficacy in preserving heart function after a heart attack. We also expect to begin a Phase 1 clinical trial by 2013 to investigate AMR-001s utility in arresting the progression of congestive heart failure and the associated comorbidities of that disease. Athelos Corporation (Athelos), which is approximately 80%-owned by our subsidiary, PCT, is engaged in collaboration with Becton-Dickinson that is exploring the earlier stage clinical development of a T-cell therapy for autoimmune conditions. In addition, our pre-clinical assets include our VSELTM Technology platform as well as our MSC (mesenchymal stem cells) product candidate for regenerative medicine. NeoStems origins are in adult stem cell research and the collection and storage of adult stem cells. We believe that as new therapeutics are developed utilizing ones own stored cells (autologous), the market penetration rate for the collection and storage business will rise sharply from its current low single digits percentage level. NeoStem is now ideally positioned to be an integrated leader in the cell therapy industry. We have strong basic research capabilities, manufacturing facilities on both the east and west coast of the United States, the support of regulatory and logistical expertise and the experience of a decade of clinical practice.
In 2011, we operated our business in three reportable segments: (i) Cell Therapy United States; (ii) Regenerative Medicine China; and (iii) Pharmaceutical Manufacturing China. We are pursuing the divestiture of the majority of our China operations and anticipate they will have been exited by the close of 2012.
We acquired our PCT subsidiary in January 2011. PCT is engaged in a broad range of services in the cell therapy market for the treatment of human disease.
Founded by Andrew L. Pecora, M.D. and Robert A. Preti, Ph.D., PCT is an internationally recognized cell therapy services and development company that represents a business for as needed development and manufacturing services for the emerging cell therapy industry from clinical trials through eventual commercialization. With its cell therapy manufacturing facilities and team of professionals, PCT offers a platform that can facilitate the preclinical and clinical development and commercialization of cellular therapies for clients throughout the world. Dr. Preti now serves as PCTs President and Chief Scientific Officer and Dr. Pecora as its part-time Chief Medical Officer. Dr. Pecora also serves as Chief Medical Officer of NeoStem (effective August 17, 2011).
PCT is engaged in a broad range of services in the cell therapy market for the treatment of human disease. PCT offers cGMP compliant cell transportation, manufacturing, storage, and distribution services and supporting clinical trial design, product process development, logistics, regulatory and quality systems development services. Through its network of contacts throughout the cell therapy industry, PCT is able to identify early stage development opportunities in the cell therapy field and opportunistically develop these cell
therapies through proof of concept. From that point, products can be further developed and ultimately commercialized through NeoStems developing commercial structure. PCTs expertise in the cell therapy arena includes cell-based therapeutic vaccines (with applications in oncology), other cell therapeutics, and regenerative medicine. From this platform, we hope to develop cell-based therapeutics. In addition to using PCTs facilities and expertise to develop Amorcytes product candidates, as well as our MSC and VSELTM technologies, we may develop internally, or through partnerships, other allogeneic (cells from a third-party donor) or autologous (cells from oneself) therapeutic technologies.
PCT is accredited by the Foundation for Accreditation of Cell Therapies (FACT).
In the United States, through NeoStem Family Storage, LLC, a wholly-owned subsidiary of PCT, we offer Family Banking of stem cells, which services include collection, processing and storage of cells for newborns as well as adults. This enables healthy individuals to donate and store their stem cells for future personal therapeutic use, as may be needed. We have established a network of adult stem cell collection centers in the U.S. and for our cord blood business distribution channel through hospitals and obstetrician practices with a current focus on the New York and New Jersey metropolitan areas. With our acquisition of PCT, we acquired the expertise associated with cGMP, the highest Food and Drug Administration (FDA) standard, for stem cell banking.
We acquired our Amorcyte subsidiary in October 2011. Amorcyte is a clinical stage therapeutics company pursuing cell-based therapies for cardiovascular diseases. Amorcytes most advanced product candidate is AMR-001, a chemotactic hematopoietic stem cell product comprised of autologous bone marrow (BM) derived CD34+/CXCR4+ cells selected to treat damaged heart muscle following acute myocardial infarction (AMI). AMR-001 is being evaluated to determine its effect on myocardial perfusion (blood flow) and ability to prevent subsequent major adverse cardiac events following a significant AMI by preserving heart muscle tissue. AMR-001 is intended to increase microvascular blood flow in the myocardium (heart muscle) via neoangiogenesis (development and formation of new blood vessels), thereby reversing post-heart attack induced ischemia (restriction of blood supply) and rescuing tissue from hibernation and preventing eventual cell death (apoptosis). AMR-001 is injected 5 to 11 days post-stent placement (the repair phase) into the peri-infarct zone (that is, the living tissue on the periphery of the dead tissue), to restore perfusion surrounding the site of the heart attack.
Prior to its acquisition by NeoStem, Inc., Amorcyte completed a Phase 1 trial of AMR-001 in patients with damaged heart muscle following AMI and in January 2012, we commenced enrollment of a Phase 2 trial to investigate AMR-001s ability to preserve heart function after a heart attack. We believe that Amorcytes Phase 1 study was the first stem cell trial to show dose-related, significant improvement over standard of care following AMI. The lack of myocardial perfusion remains a significant cause of morbidity and mortality in the United States and world-wide. Current interventions or medications have limited ability to prevent progressive myocardial cell apoptosis leading to cardiac deterioration and downstream major adverse cardiac events (MACE). We also believe that there are applications for AMR-001 in congestive heart failure, and we expect to begin a Phase 1 clinical trial of AMR-001 for this indication by 2013.
Just as it did for Amorcytes Phase 1 trial, PCT will offer its expertise in cell therapy and core process development providing a cost advantage for AMR-001 manufacturing for the Phase 2 trial.
In September 2010, the U.S. Patent Office granted Amorcyte U.S. Patent 7,794,705, protecting this therapeutic compound and method of treatment. In January 2012, the U.S. Patent Office granted Amorcyte U.S. Patent 8,088,370, expanding the protection of AMR-001 to include treatment of all vascular injury caused by vascular insufficiency, not just AMI.
We conduct other research and development activities on our own and in combination with academic, government and industry collaborators. These activities have been buttressed by our PCT acquisition with its cell therapeutic development expertise and facilities. For example, through Athelos, an 80% owned subsidiary, we are pursuing a novel regulatory T-cell (T-reg) therapy for restoring normal immune responses by enhancing T cell balance and function. This early clinical work provides potential applications in graft vs. host disease, solid organ rejection and autoimmune diseases such as asthma and diabetes. To date, government grants have provided funding for a portion of this program. In addition, our pre-clinical program is based on VSELTM Technology licensed from the University of Louisville. VSELTM (very small embryonic-like) stem cells have been shown to have characteristics generally found in embryonic stem cells without the potentially dangerous attributes of those cells. Our research efforts with VSELTM stem cells target osteoporosis and bone regeneration, macular degeneration and glaucoma and chronic wound healing. To date, The Department of Defense has provided funding for a significant portion of this program.
In 2009, we began certain adult stem cell initiatives in the Peoples Republic of China (China or PRC) including: (i) constructing a stem cell research and development laboratory and processing and manufacturing facility in Beijing (the Beijing facility), (ii) establishing relationships with hospitals to provide stem cell-based therapies, and (iii) obtaining product licenses covering certain adult stem cell therapeutics focused on regenerative medicine.
In December 2011, Chinas Ministry of Health announced its intention to more tightly regulate stem cell clinical trials and stem cell therapeutic treatments in the PRC. Additionally, we operate our regenerative medicine business in China through a wholly foreign owned entity (WFOE) and variable interest entities (VIEs). While often foreign companies use structures similar to the ones pursuant to which we have operated our regenerative medicine business in the PRC, and while such arrangements are not uncommon in connection with business operations of foreign companies in China in industry sectors in which foreign direct investments are limited or prohibited, recently there has been greater scrutiny by the business community of the VIE structure. Accordingly, the Company has determined to take steps to restrict, and expects to ultimately eliminate, its regenerative medicine business in the PRC.
Our Beijing Facility is located at the Life Science Innovation Center, Life Science Park, Zhongguancum, Beijing. It has been designed for comprehensive cell manufacturing, collection, processing and storage that can enable the PCT business model to launch in the PRC should the opportunity be presented. With the upcoming expiration of this lease in May 2012, the Company is considering its options with respect to extending the lease to allow for manufacturing of cell therapies, which will depend in part upon guidance from the PRC Ministry of Health with respect to regulations applicable to stem cell clinical research and applications.
We have a 51% ownership interest in Suzhou Erye Pharmaceutical Company Ltd. (Erye). Erye was founded more than 50 years ago and represents an established, vertically-integrated pharmaceutical business. Historically, Erye has concentrated its efforts on manufacturing and distributing of generic antibiotic products. It has received more than 160 production certificates from the State Food and Drug Administration of China, or SFDA, covering both antibiotic prescription drugs and active pharmaceutical intermediates (APIs). Our current senior executive management team at Erye, Mr. Shi Mingsheng, Chairman, and Madame Zhang Jian, General Manager, joined Erye in 1998 and in conjunction with others, bought it from the PRC government in 2003.
As part of our plan to focus our business on the cell therapy industry, we are pursuing strategic alternatives with respect to Erye. In June 2011 we engaged a financial advisor to lead the effort to pursue the possible divestiture of our 51% interest in Erye. Marketing efforts have led to a few nonbinding letters of intent. However, in addition to the factors set forth herein, it is too early to determine whether these or other proposals will lead to definitive agreements.
According to the MDB Capital Groups January 2011 report entitled The Regenerative Medicine Report: Part II, cell-based therapies utilizing stem cells now represent a market of approximately $50 billion with an expected growth rate of 15% compounded annually, projected to reach an estimated $88 billion by 2014. NeoStem believes that an increasing portion of healthcare spending in the United States will be directed to cell and tissue based therapies in the coming years, driven both by aging baby boomers and the favorable pharmacoeconomic value proposition of a cell therapy treatment paradigm for chronic disease. The cardiovascular space represents one area where the forecasted burden on society is expected to rise substantially. Adverse consequences associated with severe myocardial infarctions (MI) and the progression to congestive heart failure even with current state of the art medical care, represent major unmet medical needs. These adverse consequences associated with MI typically result in an annual cost to society of $50,000 per patient per year on average for five years of life post MI and in those patients who do progress to congestive heart failure the numbers become substantially higher. Cell therapy offers the promise of alleviating much of the burdens of these chronic diseases in a cost-effective way.
With approved products currently being sold, the promise of cell therapy is close to becoming a reality. However, in 2011 the industry has faced several crises of investor confidence as industry pioneer Geron Corporation discontinued its embryonic efforts and Osiris Therapeutics, Inc., a leader in investigating the use of allogeneic cells that had signed a robust early partnership with biotechnology giant, Genzyme Corporation saw product rights returned when Genzyme itself was acquired by large pharmaceutical leader Sanofi Aventis. Both companies experienced difficulties in their ability to navigate the regulatory requirements for product approval. Inadequate trial designs was cited in the executive summary of the 2012 New York Stem Cell Summit Report as contributing to the failures. NeoStem believes that PCTs decade of experience from manufacturing to regulatory affairs, from understanding product profile to basic mechanism of action, effective therapeutic dose, and the critical connection required in clinical design are major distinguishing characteristics of our Company versus the industry overall, and in fact position NeoStem to lead the industry in this way.
The number of companies that are currently in Phase 2 and Phase 3 trials in and around cell therapy has never been greater. As such, we believe the timeline to the next product approval in the cellular therapy industry will be visible within the next five years. While the dream of cell therapy and regenerative medicine has been the creation of biological or bio-hybrid tissues and organs that will replace and or partially regenerate tissues and organs damaged by disease, injury, or congenital anomaly, we believe the reality has never been closer. Regenerative medicine offers the promise to address many of these conditions by augmenting and or repairing malfunctioning tissues. Reports indicate that there are approximately eight million surgical procedures performed annually in the United States to treat these disorders. If approved and effective, cell therapies may have the effect of cutting health care cost as they may facilitate functional restoration of damaged tissues and not just abatement or moderation of symptoms. NeoStems Amorcyte subsidiary hopes to accomplish exactly this goal by strengthening failing hearts and preventing the progression to congestive heart failure which, under current standards of care, ultimately results in heart assist devices or heart transplant.
In fact, one should observe that amongst the failures of early pioneers like Geron and Osiris there are also several success stories with newly approved commercial products that include Shire plc, TiGenix NV and Dendreon Corporation. While the regenerative medicine industry is still in its early stages, the number of companies in late-stage clinical trials (Phase 2 and Phase 3) in the cardiovascular space alone represents, what we believe is a beacon for the industry.
The field of regenerative medicine continues to expand its scope but can be generally characterized into the following:
|||Cell Therapy the use of cells (adult or embryonic, donor or patient, stem or differentiated) for the treatment of many debilitating injuries and diseases. Therapeutic applications may include cancer vaccines, cell based immune-therapy, heart disease, diabetes, Parkinsons and Alzheimers diseases, vision impairments, orthopedic diseases and spinal cord injuries to name a few. This sector also includes the development of growth factors and serums and natural reagents that promote and guide cell development.|
|||Tissue Engineering using a combination of cells with biomaterials (also called scaffolds) to generate partially or fully functional tissues and organs, or using a mixture of technology in a bioprinting process. Some natural materials, like collagen, can be used as biomaterial, but advances in materials science have resulted in a variety of synthetic polymers with attributes that would make them uniquely attractive for certain applications. Therapeutic applications may include heart patch, bone re-growth, wound repair, replacement neo-urinary conduits, saphenous arterial grafts, inter-vertebral disc and spinal cord repair.|
|||Tools, Devices and Diagnostics i.e., creating cell lines that embody genetic defects or disease characteristics that are used for the discovery and development of new drugs. This sector also includes companies developing devices that are designed and optimized for regenerative medicine techniques, such as specialized catheters for the delivery of cells, tools for the extraction of stem cells and cell-based diagnostic tools.|
|||Aesthetic Medicine includes developing cell therapies, tissues and biomaterials for cosmetic applications. This sector includes hair follicle cells for hair regeneration, and collagen-secreting human dermal fibroblasts for facial wrinkles and other skin disorders.|
PCT is currently working with a wide range of clients in areas which range from regenerative medicine to virology and oncology. As such PCT has a unique and fundamental base platform of experience with virtually every cell type in development today. Our manufacturing service and developmental offerings are strategically aligned to participate in all of these aspects of the evolving cell therapy industry, as described above. Our goal is to continue to leverage the experience of PCT as a recognized leader of cell therapy manufacturing and development services in this industry.
All living complex organisms start as a single cell that replicates, differentiates (matures) and perpetuates in an adult through its lifetime. Cell therapy is aimed at tapping into the power of cells to prevent and treat disease, regenerate damaged or aged tissue and provide cosmetic applications. The most common type of cell therapy has been the replacement of mature, functioning cells such as through blood and platelet transfusions. Since the 1970s, bone marrow and then blood and umbilical cord-derived stem cells have been used to restore bone marrow and blood and immune system cells damaged by chemotherapy and radiation used to treat many cancers. These types of cell therapies have been approved for use world-wide and are typically reimbursed by insurance.
Over the past number of years, cell therapies have been in clinical development to attempt to treat an array of human diseases. The use of autologous (self-derived) cells to create vaccines directed against tumor cells in the body has been demonstrated to be effective and safe in clinical trials. Dendreon Corporations Provenge therapy for prostate cancer received FDA approval in early 2010. PCT assisted Dendreon, as its manufacturing partner, in the development of its cellular therapy and supported Dendreons various FDA submissions. Researchers around the globe are evaluating the effectiveness of cell therapy as a form of replacement or regeneration of cells for the treatment of numerous organ diseases or injuries, including those of the brain and spinal cord. We, as well as others, are developing cell therapies for cardiovascular disease. Cell therapies are also being evaluated for safety and effectiveness to treat autoimmune diseases such as diabetes, inflammatory bowel disease and bone diseases. While no assurances can be given regarding future medical developments, management believes that the field of cell therapy is a subset of biotechnology that
holds promise to better the human experience and minimize or ameliorate the pain and suffering from many common diseases and/or from the process of aging.
We are developing our business in cell therapeutics and capitalizing on the increasing importance and promise that adult stem cells have in regenerative medicine. Our most advanced candidate, AMR-001 is now in a US FDA Phase 2 clinical study evaluating the utility of autologous cells to preserve heart function after a ST segment elevated myocardial infarction (STEMI). Our early stage research initiatives include a focus on delivering therapies in retinal disease, orthopedics, wound indications and immunology.
Stem cells are very primitive and undifferentiated cells that have the unique ability to transform into many different cells, such as white blood cells, nerve cells or heart muscle cells. Adult stem cells are found in the bone marrow, in peripheral blood umbilical cord blood and other body organs. For over 40 years, physicians have been using adult stem cells to treat various blood cancers, and only recently has the promise of using adult stem cells to treat a myriad of other diseases begun to be realized.
Within the adult stem cell classification, the use of cells is either autologous (meaning donor and recipient/patient are the same) or allogeneic (donor and recipient are different people). The use of allogeneic stem cells will be appropriate for certain disease conditions while autologous will have its advantages depending on the indication and therapeutic goal. Our Amorcyte program is focused on autologous therapy as we believe the integration to the host and long term benefits of the therapy can best be achieved with an autologous product. In our Athelos subsidiary we are evaluating the use of an autologous and an allogeneic product, tailored to the specific indication, such as solid organ transplant (SOT), Graft Versus Host Disease (GVHD), Asthma and Type 1 Diabetes.
Our January 2011 acquisition of PCT is expected to greatly facilitate the translation of NeoStems research and development capabilities and other proprietary technologies into the manufacturing of stable, reproducible, well characterized cell products tailored for specific therapeutic applications. PCT is an internationally recognized commercial cell therapy company with operations on the east and west coasts of the U.S., serving the cell therapy community with cGMP, state-of-the art cell therapy research, development, and manufacturing facilities, and processing and storage facilities for stem cells collected from both adults and umbilical cord blood. We believe that the combined capabilities of NeoStem, PCT and our prestigious academic collaborators could lead to the effective and validated emergence of AMR-001, VSELTM stem cells and other stem cell therapies in a wide range of regenerative applications.
We believe that PCT is the first company that is focused exclusively on developing a client-based offering for manufacturing and related support services to the emerging regenerative medicine industry, and we believe that based upon its provision of high quality services to that industry, PCT has earned a global reputation of expertise, competence, and quality in this area of therapeutic development. We believe that, with this platform as a foundation, and in connection with our scientific infrastructure, we possess the capacity to successfully develop our own cellular therapeutic pipeline. PCT serves the developing cell therapy industry including biotechnology, pharmaceutical and medical products companies, health care providers, and academic investigators from licensed cell therapy manufacturing facilities in Allendale, New Jersey and Mountain View, California. PCT supports the research of leading academic investigators designed to expedite the broad clinical application of cell therapy. PCTs core strategy is to provide a global network of cell therapy manufacturing and storage facilities and an integrated and regulatory compliant distribution capacity for the evolving cell therapy industry to meet international commercial demands. To this end, PCT is currently looking at opportunities to expand its manufacturing activities into Europe and to the manufacturing facility retrofitted by NeoStem and PCT in Beijing, China.
The management team of PCT has extensive experience in the business and science of cell therapy. Team members are recognized experts in cell therapy product development and characterization, manufacturing, delivery, and clinical development and use. PCTs personnel has experience with the design, validation, and operation of cGMP cell therapy manufacturing facilities, have participated in regulatory filings in the U.S. and Europe, and has contributed over 100 peer reviewed cell therapy publications. The team has extensive experience in biologics development, sales, marketing, medical practice, hospital administration, insurance contracting, and regulatory compliance. Collectively, the management team has experience in all aspects of cell therapy product and clinical development and use (other than with the use of embryonic stem cells), covering cancer, autoimmunity, infectious diseases, cardiovascular diseases, and spinal, brain, corneal, orthopedic, hormonal and skin regenerative therapies.
PCT has accumulated experience in the service and business of cell therapy manufacturing for clinical use. PCT has served over 100 clients and is experienced with more than 20 different cell based therapeutics, including neuronal and skin based cells for brain and spinal cord repair, myoblast, mesenchymal cells and bone marrow derived cells for heart disease, tumor, dendritic cells and monocytes for cancer treatment, cord blood, peripheral blood, bone marrow CD34+ selected cells for transplantation and islet cells for diabetes. PCT has performed over 30,000 cell therapy procedures in its cell therapy manufacturing facilities, processed and stored over 18,000 cell therapy products (including approximately 7,000 umbilical cord blood, 10,000 blood and marrow derived stem cells and 1,000 dendritic cells) and arranged the logistics and transportation for over 14,000 cell therapy products for clinical use by over 5,000 patients nationwide. Importantly, PCT manufactured over 85% of Dendreons approved Provenge® product during its Phase 3 clinical testing, and over 60% of all Dendreon cell therapeutics in clinical testing from 1999 through 2007.
As illustrated below, PCT has experience working at all developmental stages:
Informed by this experience and enabled by the infrastructure and staff required to service the industry, PCTs strategy historically has included the periodic formation of companies intended to develop specific therapeutic products. In this regard, PCT management founded a GMP cord blood company (formerly named DomaniCell, and now our subsidiary NeoStem Family Storage, LLC), a cardiac cell therapy company (our subsidiary Amorcyte) and an immunotherapy company (our 80% owned subsidiary Athelos). In this way, PCT successfully leveraged its capabilities to bring its own cell therapy product portfolio to the market.
More recently, PCT has secured from clients in addition to cash fees, equity participation, rights to back-end royalties and locked in commercial manufacturing. For example, in January 2012, PCT entered into an agreement with Islet Sciences, Inc. (Islet), a development stage biotechnology company engaged in the research, development and commercialization of patented technologies in the field of transplantation therapy for patients with diabetes. Pursuant to the agreement, PCT is providing contract manufacturing and regulatory services related to the development of Islet Sciences PTM, an injectable suspension of microencapsulated insulin-producing, pancreatic islet cells which are harvested from designated pathogen free pigs. In partial consideration for these services, PCT has received an equity interest in Islet and has the right to certain royalties and to manufacture on commercialization.
PCT believes that it is qualified and experienced to reduce the risk of development of cell therapy products because it has:
|||the expertise to cost efficiently and rapidly analyze the potential for product development through commercialization;|
|||the structure in place to develop new cell therapy products and to enable the commencement of Phase 1 clinical trials for such products;|
|||the personnel and facilities in place to offer cost effective development and manufacturing services;|
|||the technical, scientific, clinical, and business expertise to make timely go/no go development decisions for potential cell therapy products;|
|||the fiscal discipline and low incremental capital investment to cut project development early if chances for success are low thus preserving resources for future product development.|
In light of the above, NeoStems business development focuses on all stages of regenerative medicine, cell and tissue therapeutic product companies, academic stem cell and other cell therapy clinical trials, device companies serving the regenerative medicine sector, investors and pharmaceutical companies with an interest in a cell or tissue therapeutic or research product, and any other potential client with needs in the manufacturing and development of a cell or tissue-based product. Serving such clients, NeoStem aims to:
|||Establish a nationwide and international infrastructure, capacity and expertise to meet clients needs|
|||Maximize penetration of start-up companies in the sector|
|||Optimize use of PCTs physical plants|
|||Evaluate international opportunities and enter markets as necessary|
|||Develop information systems, logistics and proprietary intellectual property (e.g., process patents)|
|||Work closely with the FDA (and other regulatory authorities as appropriate)|
|||Be a leader in services for the development, regulatory approval and commercialization of cell and tissue therapies around the world|
|||Be a leader in the development and manufacture of cells and tissues as therapeutic agents in cGTP (current Good Tissue Practices) cGMP facilities|
|||Leverage PCTs domain experience to create product-based companies which would exclusively use PCTs services for manufacturing, delivery and commercialization|
We expect that the number of companies in the cell therapy field will continue to increase and the relative distribution of stage of development of the therapeutics will begin to weigh more heavily towards Phase 2 and Phase 3 trials. These trials generate greater revenue because of the volume of manufacturing activity they require.
To prepare for the potential of increased manufacturing activity, PCT invested in and built a state-of-the-art manufacturing facility in Allendale, New Jersey, complementing the capacity of its Mountain View, California facility. Further, the additional capacity is designed to produce products that will be acceptable in other areas of the world as well as the United States. Current key clients of PCT are expected to continue to generate revenues for PCT as maturing products advance towards commercialization. PCT is looking at opportunities to expand its manufacturing activities into Europe and to the manufacturing facility retrofitted by NeoStem and PCT in Beijing, China.
We believe that todays commercially available transportation systems are not designed for shipment of biological or other perishable goods and will not be able to meet the demands of the emerging cell therapy market. A successful transportation network for cell therapy will require a completely secure point-to-point chain of control and custody; cGMP standard operating procedures in all phases of transit; a highly specialized and trained air and ground courier network; quality assurance at each transfer point; and real-time package tracking.
We strive to maintain high standards in transportation and handling of client cell products. Shipments of products are tracked as PCT and its clients develop confidence in the abilities of PCTs transportation partners. PCT is laying the groundwork for such a network as part of its business development process.
While reliable ground carriers with experience in the transport of blood products already exist in major metropolitan areas of the country, air carriers meeting such needs are limited. PCT evaluated the major domestic express carriers, including Federal Express and UPS, and concluded that even their highest-level services are inadequate to meet the sectors needs. However, PCT identified and validated AirNet Systems, Inc., a specialty air carrier with a fleet of over 100 aircraft serving over 100 cities nationwide, as a transportation partner. AirNet has built its business on check delivery and other services to banks, and it now specializes in shipping medical products, including whole blood and blood products, tissue for transplantation, and diagnostic specimens. AirNet also handles cryopreserved specimens and biologics. PCT currently uses the services of AirNet for its transportation needs..
In the United States, through a wholly-owned subsidiary of PCT, NeoStem Family Storage, LLC, we offer Family Banking of stem cells, which services include collection, processing and storage of cells for newborns as well as adults. This enables healthy individuals to donate and store their stem cells for personal therapeutic use in the future, if needed. NeoStem Family Storage provides cGMP compliance, the highest FDA standard, for stem cell banking, which gives us a competitive advantage in the industry.
Our process for collecting adult stem cells for autologous use involves the administration of a mobilizing agent prior to collection, allowing the migration of stem cells from bone marrow to peripheral blood. Once the stem cells have reached the bloodstream, an individual goes through a safe and minimally-invasive procedure called apheresis, similar to donating platelets, at one of the collection centers in our network. Then, the stem cells are processed and stored under cGMP standards at one of PCTs facilities. Our process does not change or alter the underlying cells and does not require cell expansion technology.
We believe that individuals will view the ability to pre-donate and store autologous adult stem cells for future personal therapeutic use as a valuable part of a bio-insurance program. The benefits of pre-donation include: having a known supply of autologous stem cells rather than an uncertain supply of compatible allogeneic stem cells; collecting and storing the cells while healthy, since autologous stem cells may be compromised once a patient becomes sick; and storing the patients cells when available, since the quantity and quality of stem cells generally diminish with age. This perceived value of pre-donation should increase as additional indications for stem cell-based therapies are developed. For example, first line therapy for exposure to radiation continues to be stem cell transplantation. With the threat of nuclear disaster and terrorism, we believe this is a critical program to protect human health.
Our processing at PCTs facilities typically occurs in class 10,000, Controlled Environment Rooms (CER) in a class 100 Biologic Safety Cabinet (BSC). Environmental monitoring, done weekly, includes air sampling, contact plates for surface monitoring, and Met One particle counts. PCTs cleaning and sanitizing program involves daily, weekly, monthly, and quarterly cleaning protocols for the equipment and the rooms with bactericidal and sporicidal agents to control introduction of microorganisms and insect and pest control procedures. PCT has ongoing equipment validation, calibration and preventive maintenance programs to ensure reproducibility and consistency of results.
PCT employs an inspection and testing program for incoming materials, and for in-process and final products, as required. PCT employs scientifically sound procedures approved by a quality assurance function, and performs product sterility testing and release assays reviewed by the quality assurance department. PCT has labeling controls to prevent product mix-ups, employs a materials management program to ensure that only approved materials are used in manufacturing and to provide forward and backward traceability. A supplier approval program further ensures that the raw materials used are made under acceptable conditions and provides a high degree of confidence in their efficacy. A separate quality unit is charged with the responsibility for review and approval of anything that affects the identity, strength, quality, and purity of the cell therapy product.
Our research shows that while cord blood banking is gaining in acceptance, the market is still in its infancy with cord blood banking occurring for only 3.5% of total births in the United States. However, we hope to expand this business by offering to parents banking their infants cord blood the opportunity to also bank their own adult stem cells. Patients, regardless of age, can choose stem cell and immune system cell collection and storage as a form of personal insurance that their stem cells will be available for their own use if needed in the future. Building on PCTs experience in immune reconstitution we will be working to optimize collection yields for clients.
We also intend to focus marketing and educational programs on current uses for stem cells over potential future uses and leverage the combined collection business with the umbilical cord business as it has historically been a more prevalent revenue opportunity. We also plan to leverage and market key endorsements, including our government research grants, our relationship with the Vaticans Pontifical Council, and celebrity and corporate endorsements.
Our Amorcyte subsidiary is a clinical stage therapeutics company pursuing cell-based therapies for cardiovascular diseases. Amorcytes most advanced product candidate is AMR-001, a chemotactic hematopoietic stem cell product comprised of autologous bone marrow (BM) derived CD34+/CXCR4+ cells selected to treat damaged heart muscle following acute myocardial infarction (AMI). AMR-001 is being evaluated to determine its effect on myocardial perfusion and ability to prevent subsequent major adverse cardiac events following a significant AMI by preserving heart muscle tissue. AMR-001 is intended to increase microvascular blood flow in the myocardium (heart muscle) via neoangiogenesis (development and formation of new blood vessels), thereby reversing post-heart attack induced ischemia (restriction of blood supply) and rescuing tissue from hibernation and preventing eventual cell death (apoptosis). AMR-001 is injected 5 to 11 days post-stent placement (the repair phase) into the peri-infarct zone (that is, the living tissue on the periphery of the dead tissue), to restore perfusion (or blood flow) surrounding the site of the heart attack.
In September 2010, the U.S. Patent Office granted Amorcyte U.S. Patent 7,794,705 protecting this therapeutic compound and method of treatment. In January 2012, the U.S. Patent Office granted Amorcyte U.S. Patent 8,088,370, expanding the protection of AMR-001 to include treatment of all vascular injury caused by vascular insufficiency, not just AMI.
Amorcyte completed a Phase 1 trial of AMR-001 in patients with damaged heart muscle following AMI and has begun enrolling patients in its PreSERVE Phase 2 trial investigates AMR-001s ability to preserve heart function after a heart attack. We believe that Amorcytes Phase 1 study was the first stem cell trial to show dose-related, significant improvement over standard of care in perfusion following AMI, the lack of which perfusion remains a significant cause of morbidity and mortality in the United States and world-wide. Current interventions or medications have limited ability to prevent progressive myocardial cell apoptosis leading to cardiac deterioration and downstream major adverse cardiac events. We also believe that there are applications for AMR-001 in congestive heart failure, and, we expect to begin a Phase 1 clinical trial of AMR-001 for that indication by 2013.
PCT is continuing to offer its expertise in cell therapy and core process development to provide a cost advantage for AMR-001 manufacturing for the Phase 2 clinical trial through commercialization.
In January 2012, we enrolled the first patient in our PreSERVE Phase 2 trial, a 160 patient multicenter, randomized, double-blind, placebo-controlled U.S. clinical trial to evaluate the efficacy and safety of a single intra-coronary infusion of a minimum of 10 million cells of AMR-001 post AMI in subjects with ejection fractions of 48% or less. To date, 10 clinical trial sites have been activated. The objective of the Phase 2 study is to determine the safety and the effect of cell infusion of CD34+ cells containing a subpopulation of biologically active CD34+/CXCR4+ cells, on cardiac function and outcomes of patients after AMI. The primary assessment for the effect of AMR-001 on cardiac function will be improvement in cardiac perfusion. We also intend to evaluate the impact of AMR-001 on cardiac function and adverse events post-myocardial infarction as defined by reduction in cumulative MACE at 6, 12, 18, 24 and 36 months, premature death, recurrent heart attack, congestive heart failure, significant arrhythmias, and acute coronary syndrome. Enrollment is expected to be completed after approximately one year with the first data readout in the second half of 2013.
If successful in Phase 2, we plan to proceed with a later stage trial(s) needed to demonstrate meaningful clinical benefit and, if successful, seek approval to commercialize AMR-001 to prevent the adverse consequences of AMI.
Results of the Phase 1 trial of Amorcytes AMR-001 were initially presented at the 2009 American College of Cardiology Annual Scientific Session and were the basis for the launch of the Phase 2 trial. The peer-reviewed full publication has been cited above (American Heart Journal, 2011). AMR-001 showed a dose-related significant improvement in myocardial perfusion (amount of blood in the heart). Resting Total Severity Score (RTSS) is a measure of perfusion and of prevention of cell death, and the metric employed in the Phase 1 study. Single-photon emission computerized tomography (SPECT), employed in the Phase 1 study, permits imaging where MRI would be ineffective as a result of stents, pacemakers and defibrillators. In brief, technetium dye used in a SPECT scan is taken up by the heart muscle. If the heart muscle is healthy and there is adequate blood flow, the muscle will take up the dye. If the heart muscle is not healthy, dye uptake is diminished or does not occur at all. The study results demonstrated that patients receiving 10 million cells (n=5) or 15 million cells (n=4) showed significant improvement in resting perfusion rates at six months as compared to patients receiving 5 million cells (n=6) or the control groups (n=15), as measured by the SPECT total severity score.
The Phase 1 data also showed that patients receiving 10 or 15 million cells showed a trend towards improvement in ejection fraction (the percentage of blood pumped out of the ventricles with each heart beat), end systolic volume (the blood volume remaining in a ventricle at the end of contraction and the beginning of filling, which can be used clinically as a measurement of the adequacy of cardiac emptying), and reduction in infarct size while subjects receiving 5 million cells or the control infusion did not.
Amorcytes business strategy focuses on cellular therapeutics for cardiovascular indications. The markets for Amorcytes targeted indications are expected to expand as the baby boomer generation ages.
Amorcyte has a dominant intellectual property position that includes ownership of the first U.S. issued patents for a chemotactic hematopoietic stem cell product (a product enriched for CD34+/CXCR4+ cell that migrates to areas of ischemic damage), with a delivery and the cell potency and stability that Amorcyte believes is necessary to efficaciously treat the consequences of a vascular injury, together with multiple modalities of delivering the cell product.
Additionally, members of Amorcytes management have been involved in obtaining reimbursement and regulatory approval of cell-based therapies. Dr. Pecora, Amorcytes Chief Scientific Officer, has been involved in the clinical testing of a variety of cell based therapies and is very experienced in the use of devices to
manipulate cells for human use. Dr. Preti, the President of Amorcytes exclusive cell processing provider PCT, has been involved in the development of laboratory regulations and standards. As officers of PCT, both Drs. Pecora and Preti were directly involved in the cGMP manufacturing of Dendreons cell therapy product, Provenge®, now an FDA approved product for prostate cancer as well as multiple other cell therapy products under development by PCTs multiple clients. Dr. Pecora is an advisor to several insurance companies on matters regarding new technologies and reimbursement for complex therapies, including cell-based therapies.
Although other companies are developing stem cell based therapies for cardiovascular disease, we believe Amorcyte is in a strong competitive position due to the very early indicia of effect seen in its Phase 1 trial, cGMP manufacturing experience, and dominant patent portfolio.
There are five categories of competitive therapies representing different sources of stem cells: fat derived cells, mesenchymal cells, cord blood, adult stem cells and hematopoietic (bone marrow derived) cells. Of these, the allogeneic sources (that is, where donor and recipient are different persons) face a series of technical limitations that can minimize their clinical value, including the potential need for immunosuppressants, toxicity concerns and durability issues. Of the autologous sources of stem cells (donor and recipient the same) listed above, only Amorcyte, to our knowledge, has positive Phase 1 data and a cGMP process for manufacturing, together with a patented technology supporting dosing.
As part of the pre-clinical development work done by Amorcyte, validation experiments of four different coronary artery balloon catheters were performed, leading to their approval for use in the Phase 1 clinical trial. Intra-coronary artery delivery has an advantage over intra-cardiac muscle delivery because the procedure can be performed at virtually any cardiac catheterization laboratory (intra-muscle delivery is limited to experienced centers) and is less invasive. Amorcytes product had a validated 48 hour product shelf life in the Phase 1 study, but now has been validated to 72 hours. A shelf life of greater than 24 hours allows the product (following manufacturing and distribution from the manufacturing site) to be stored locally in a blood bank refrigerator for use at a convenient elective time, and importantly eases the logistic burdens anticipated with commercial distribution of the therapy, reducing the need for multiple regionally placed manufacturing facilities.
There are approximately 160,000 patients per year who have an ST Elevation Myoardial Infarction (or STEMI, the most dangerous type of heart attack resulting from a sudden blockage of one of the arteries that supplies nutrient-rich blood to the heart muscle) resulting in a reduced left ventricular ejection fraction (that is, the fraction of blood pumped out of the left ventricle with each heartbeat) of 48% or less. These patients represent a large cost segment and are the greatest financial burden for many managed care programs, post heart attack. Amorcyte expects this burden to increase as the baby boomer population ages. AMR-001, if approved, could have a significant pharmacoeconomic benefit by preventing downstream cardiac adverse events.
Amorcytes therapeutic strategy focuses on developing product candidates designed to prevent subsequent major adverse cardiac events following a significant AMI by preserving heart muscle tissue. AMI remains a significant cause of morbidity and mortality in the United States and worldwide. Current interventions or medications have limited ability to prevent progressive myocardial cell death leading to cardiac functional deterioration and downstream major adverse cardiac events.
AMR-001, Amorcytes lead product candidate is an autologous derived (donor and recipient the same), CD34+/CXCR4+selected stem cell product, which we believe, has the potential to limit progressive cardiomyocyte (heart muscle cell) loss following AMI and to maintain cardiac muscle function and prevent further adverse cardiac events. The AMR-001 platform can be applied to other conditions resulting from underlying ischemia including chronic myocardial ischemia post-AMI, congestive heart failure, critical limb ischemia and cryopreserved preparations of AMR-001 for future vascular insufficiency. We expect to begin a Phase 1 trial in CHF by 2013.
Pre-clinical (animal) models of induced AMI have shown that CD34+/CXCR4+ expressing cells home along a gradient of hypoxia-induced Stromal-Derived Factor-1 that is, these cells migrate naturally to oxygen-deprived locations. More specifically, these cells home to the viable tissue surrounding the infarcted (dead) myocardium, known as the peri-infarct zone, because of the steep SDF gradient created by cells under ischemic (oxygen deprived) stress. Moreover, CD34+/CXCR4+ expressing cells have been shown to be capable of inducing neoangiogenesis (development and formation of new blood vessels) over time and preventing late heart cell death due to chronic ischemia (restriction of blood supply). These cells were also shown to prevent cell death through alternative pathways. Other studies demonstrated that CD34+/CXCR4+ cells that take up residence in the peri-infarct zone are likely the cell type that affects neo-angiogenesis, relieves ischemia and prevents apoptosis. Collectively these results provided the rationale for the exploration of a pharmaceutical grade specific cell-based therapy with a defined hypothesized mechanism of action to reduce the incidence and severity of MACE after an extensive AMI.
AMR-001 works by increasing microvascular blood flow in the myocardium (heart muscle) via neoangiogenesis (development and formation of new blood vessels), thereby reversing post-heart attack induced ischemia (restriction of blood supply) and rescuing tissue from hibernation and preventing eventual cell death (apoptosis). The treatment process works as follows:
|||A patients own bone marrow is harvested and CD34+/CXCR4+ cells are isolated using Amorcytes patented technology to increase the potency of the product.|
|||The isolated cells are infused via catheter into the infarct-related artery 7 to 10 days following an AMI which we believe is the optimal time frame for cellular intervention, after the pro-inflammatory hot phase and prior to permanent scar formation.|
|||The infused CD34+/CXCR4+ cells home to the at-risk tissue along a hypoxia-induced Stromal-Derived Factor-1 gradient to a signal emitted from the infarct as described above, inducing neoangiogenesis and a resultant functional benefit.|
Amorcytes Phase 1 trial results are supportive of this mechanism of action (CD34+/CXCR4+ cell induced neoangiogenesis resulting in a functional cardiac benefit) and have been published in Am Heart J 2011; 161:98-105. The role of these CD34+ cells in functional improvement and mechanism of action has also been demonstrated in an animal model (Wang J et al., Circ Res 2010; 106:1904-1911).
Our PCT subsidiary provides all of Amorcytes cell processing and processing services, including in connection with our PreSERVE Phase 2 trial of AMR-001 for acute myocardial infarction, and PCT may in the future perform such services for other clinical trials that we may launch. While it is advantageous for our Company to have the capability to perform these services in-house, this means that a portion of PCTs potential external revenue-generating capacity is being diverted in furtherance of our Companys own development efforts. PCT will dedicate approximately 20% of its existing revenue generating capacity in 2012 for our own internal development activities which could have a material and adverse impact on our future revenue growth and profitability.
There have been several recent and important developments in the Amorcyte patent portfolio. In addition to our centerpiece US patent 7,794,705 covering composition and method of vascular injury repair post-acute myocardial infarction, the US Patent and Trademark Office on January 3, 2012 issued incremental claims in US patent 8,088,370 for vascular insufficiency, materially expanding the reach of our patent protection into all forms of cardiac insufficiency, including congestive heart failure and chronic myocardial ischemia. We believe further that these claims extend protection for vascular insufficiency conditions beyond the cardiac setting.
Athelos is a Delaware corporation 80% owned by NeoStem through PCT. To further expand and diversify NeoStems efforts in cell therapy, the mission of Athelos is to develop a persons immune cells as a therapeutic product to treat disorders of the immune system. Many immune-mediated diseases are a result of an imbalance in the immune system wherein inflammatory cells go unchecked. Therapy using regulatory T cells (T-reg) represents a novel approach to restoring immune balance by enhancing T-reg cell number and function to inhibit pathogenic immune responses.
Through exclusive world-wide licenses, Athelos has secured the rights to a broad patent estate within the T-reg field, covering natural T-regs (nTregs) as well as induced T-regs (iTregs). Both types of T-regs have been shown in pre-clinical studies to be important in modulating autoimmune and inflammatory diseases. Natural T-regs have been evaluated by others in early phase human clinical trials and shown to be safe with suggestions of clinical benefit in graft-versus-host disease. Both types of T-regs have demonstrated the ability to treat conditions like diabetes, inflammatory bowel disease and organ transplant tolerance in animal models of disease. To complement those important intellectual property rights, Athelos has established consulting relationships with thought leaders in the field of T-reg therapy for immune disorders, including David Horowitz, MD, Chief of the Division of Rheumatology and Immunology at the University of Southern California Keck School of Medicine, and Bruce Blazar, MD, Chief of Blood and Marrow Transplantation and Director of Center of Translational Medicine, Masonic Cancer Center, University of Minnesota. Athelos plans to investigate the clinical feasibility of T-reg-based therapeutics to prevent and treat graft vs. host disease, solid organ rejection as well as a broad class of other autoimmune diseases. This ongoing research program is developing methods to isolate and expand human T-regs for large scale manufacturing and for evaluation in Phase 1 clinical trials. Results from ongoing Phase 1 work under several independent physician INDs of T-reg cell therapy for autoimmune disorders will determine the future clinical direction.
Mariusz Ratajczak, M.D., Ph.D., head of the Stem Cell Biology Program at the James Graham Brown Cancer Center at the University of Louisville, has discovered that mammalian bone marrow contains a heterogeneous population of stem cells that has properties similar to those of an embryonic stem cell. These cells, first described in mice, are referred to as very small embryonic-like stem cells, or VSELs. We are engaged in research and development of new therapies based on VSELTM Technology with the University of Louisville Research Foundation and on our own, and have a worldwide exclusive license to VSELTM Technology.
The use of human VSELs for regenerative medicine presents another possibility of capturing the key advantages associated with embryonic stem cells without the ethical or moral dilemmas associated with the use of fetal cells, or the potential negative biological effects associated with embryonic stem cells, such as their propensity to form tumors. Yet another potential benefit to this unique population of adult stem cells is the advantage of being able to use autologous stem cells (i.e., the patients own cells) for therapy, as opposed to having to rely on donor cells which are susceptible to immune rejection. NeoStems research and development laboratory in Cambridge, Massachusetts has identified cells in human blood and bone marrow that have many of the key properties described for murine VSELs. This research includes the demonstration of primitivism, pluripotency, tri-lineage differentiation and the ability of these cells to expand in culture. These observations provide the groundwork for the development of VSELTM therapies to regenerate or repair damaged or diseased tissues in human subjects.
NeoStem is currently engaged in the early stage development of therapies using VSELTM, and other in-licensed technologies using mesenchymal stem cells, for indications such as wound healing, orthopedics and opthalmics. More specifically, through grants, we are funding studies at the University of Michigan using human VSELs to promote bone healing in animals. Those experiments have indicated that human VSELs can differentiate into bone and blood vessel cells, and can form coherent human bone in a mouse. We have also funded research at the Schepens Eye Research Institute, a charitable corporation of Massachusetts and an affiliate of Harvard Medical School, relating to VSEL treatment for macular degeneration a leading cause
of blindness in the Western world. Early results using mouse models of retinal damage have shown VSELs display remarkable survivability characteristics, as well as the potential to be integrated into the retinal ganglion layer of cells and to differentiate along the retinal lineage. We expect to begin a Phase 1 safety trial by 2013.
In parallel with those studies, we are engaged in a multi-year sponsored research agreement with Roger Williams Medical Center, funded by the Department of Defense, to study the use of VSELs and mesenchymal stem cells for the treatment of chronic wounds.
Outlined below is an illustration of stages of pre-clinical and clinical development:
|*||This work is being done pursuant to independent physician INDs that will help determine the Companys clinical direction.|
|**||Pursuant to our exclusive license agreement with Dr. Vincent Falanga, NeoStem controls the world-wide rights to Dr. Falangas wound healing technology utilizing autologous bone marrow-derived cultured mesenchymal stem cells and very small embryonic-like (VSEL) stem cells. Dr. Falanga has been treating human cutaneous wounds under a physician IND for several years. Recently, NeoStem was awarded a Department of Defense funded grant to examine rapid wound healing utilizing MSCs and VSELs and we are collaborating with Dr. Falanga and the Roger William Medical Center, as our sub-awardee, on that grant.|
|***||We are providing contract manufacturing and regulatory services to Islet Sciences, Inc. and in connection with that arrangement have acquired an equity interest in them as well as a right to backend royalties and commercial manufacturing.|
To further drive our stem cell initiatives, we will continue to target key governmental agencies, congressional committees and not-for-profit organizations to contribute funds for our research and development programs. In 2010 we were awarded a $700,000 contract from the U.S. Army Medical Research and Material Command, Telemedicine and Advanced Technology Research Center (USAMRMC-TATRC). This contract will fund through 2014 the evaluation and use of topically applied bone marrow-derived adult mesenchymal stem cells for rapid wound healing.
NeoStem recently commenced a study awarded and funded by the Department of Defense Peer Reviewed Medical Research Program (PRMRP) of the Office of the Congressionally Directed Medical Research Programs (CDMRP). Almost $2,000,000 from this grant will be used to fund research through 2015 on the use of VSELs to treat osteoporosis and improve bone health.
In addition to these awards, we have submitted a PHASE II SBIR grant proposal, based on the positive results of our Phase 1SBIR studies, to the NIH-SBIR program for $1.6 million to continue work on VSELs in bone regeneration. We were also recently invited to submit a clinical trial proposal to CDMRP in collaboration with Walter Reed Medical Center for a multi-million dollar award to explore the use of VSELs to treat combat wound injuries. These recent submissions, together with our other submitted grants, to the extent funded, would not only further research efforts already underway in the areas of wound healing, bone regeneration and retinal disease, but potentially could launch new inquiries and further diversify our base of research partners in areas such as reconstructive surgery and radiation sickness. We may continue to apply for SBIR grants but will not be able to draw down funds until we re-attain our status as a small business post our divestiture of Erye.
In May 2010, the Vaticans Pontifical Council for Culture and NeoStem announced what has been characterized as the Vaticans first-ever contract of collaboration with an outside commercial venture to advance stem cell research. The initiative partners NeoStem and the public charity it helped form, The Stem for Life Foundation, with the Pontifical Council and its charitable organization, STOQ International, to expand research and raise awareness of adult stem cell therapies. The partnership entails work on collaborative activities with the goal of advancing scientific research on adult stem cells and exploring their clinical application in the field of regenerative medicine, as well as the cultural impact of such research. The Pontifical Council pledged $1 million in connection with these activities for which a donor provided a contribution in 2011.
In addition to research initiatives, NeoStem and the Pontifical Council are spearheading an education campaign geared towards generating awareness of the cultural relevance of such a fundamental shift in medical treatment options, particularly with regard to the impact on theological and ethical issues. Specifically, NeoStem and the Pontifical Council are pursuing the development of educational programs, publications and academic courses with an interdisciplinary approach for theological and philosophical faculties, including those of bioethics, around the world.
As one of the initial highlights of this partnership, in November 2011 we were honored to co-host a three day event at the Vatican that was the first international conference on adult stem cells. Entitled Adult Stem Cells: Science and the Future of Man and Culture. This event brought together a unique roster of Church leaders, policymakers, government health ministers, ambassadors to the Holy See, scientists, stem cell companies and patients who have participated in adult stem cell trials.
The gathering also featured Tommy Thompson, former U.S. Secretary of Health and Human Services, who called upon President Obama to create a commission of private sector business leaders to recommend ways to coordinate discovering and funding therapies that use adult stem cells. This first event co-sponsored by NeoStem and the Pontifical Council for Culture since the two entered into a formal partnership in 2010 is part of a larger effort to foster education and networking in support of adult stem cell research.
All initiatives aim at providing information, teaching and research regarding important issues of human health and of the present and future of medical progress in relation to adult stem cell research and with respect to the great value of human life. NeoStem and the Pontifical Council for Culture through their collaboration aspire to reach religious leaders and academicians working in the Pontifical and Catholic Institutions but also to extend their work and results to different institutions beyond the Catholic environment.
The biotechnology industry, specifically our areas of cell processing and manufacturing, clinical development of cellular therapies and cell collection, processing and storage, are characterized by rapidly evolving technology and intense competition. Our competitors include pharmaceutical, biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and government agencies engaged in drug discovery activities or funding, both in the United States and abroad. Many of these companies are well-established and possess technical, research and development, financial, and sales and marketing resources significantly greater than ours. In addition, many of our smaller potential competitors have formed strategic collaborations, partnerships and other types of joint ventures with larger, well
established industry competitors that afford these companies potential research and development and commercialization advantages in the technology and therapeutic areas currently being pursued by us. Academic institutions, governmental agencies and other public and private research organizations are also conducting and financing research activities which may produce products directly competitive to those being commercialized by us. Moreover, many of these competitors may be able to obtain patent protection, obtain FDA and other regulatory approvals and begin commercial sales of their products before us.
The primary competitors in the field of cell therapy for AMI and other cardiovascular-related disorders include public companies like Baxter International Inc., MesoBlast Limited, Athersys, Inc., Aastrom Biosciences, Inc., Cytomedix, Inc., Pluristem Therapeutics Inc. and Cytori Therapeutics, Inc. These companies are pursuing cell based approaches for cardiovascular diseases that relate to AMI (chronic ischemia, congestive heart failure, dilated cardiac myopathy and related indications like critical limb ischemia). The field remains highly competitive. However, we believe we have a differentiated approach utilizing a highly purified, active cell population, which is covered by composition of matter intellectual property.
In the general area of cell-based therapies, we potentially compete with a variety of companies, most of whom are specialty medical products or biotechnology companies. Some of these, such as Baxter, Johnson & Johnson, Medtronic and Miltenyi Biotec, are well-established and have substantial technical and financial resources compared to ours. However, as cell-based products are only just emerging as viable medical therapies, many of our most direct competitors are smaller biotechnology and specialty medical products companies. These include Advanced Cell Technology, Inc., Cytomedix, Inc., Arteriocyte Medical Systems, Inc., Athersys, Inc., Bioheart, Inc., Cytori Therapeutics, Inc., Genzyme Corporation, Harvest Technologies Corporation, Mesoblast, Osiris Therapeutics, Inc., Pluristem, Inc. and others.
In addition, cord blood banks such as ViaCord, a PerkinElmer company, or LifebankUSA, a Celgene company, easily could enter the field of adult stem cell collection because of their processing labs, storage facilities and customer lists. We estimate that, combined, there are approximately 75 cord blood banks in the U.S., approximately 36 of which are private autologous banks, meaning that the donor and recipient are the same, and approximately 39 of which are public allogeneic banks, meaning that the donor and recipient are not the same. Hospitals that have transplant centers to serve cancer patients may elect to provide some or all of the services that we provide. According to the National Marrow Donor Program, there are approximately 52 hospitals in the U.S. with stem cell transplant centers. These competitors may have better experience and access to greater financial resources than us. In addition, other established companies may enter our markets and compete with us.
We believe we have a strategic advantage over our competitors based on our ability to meet cGMP regulatory requirements in an industry that is widely dispersed with a range of quality issues.
The health care industry is one of the most highly regulated industries in the United States. The federal government, individual state and local governments, as well as private accreditation organizations, oversee and monitor the activities of individuals and businesses engaged in the development, manufacture and delivery of health care products and services. Federal laws and regulations seek to protect the health, safety, and welfare of the citizens of the United States, as well as to prevent fraud and abuse associated with the purchase of health care products and services with federal monies. The relevant state and local laws and regulations similarly seek to protect the health, safety, and welfare of the states citizens and prevent fraud and abuse. Accreditation organizations help to establish and support industry standards and monitor new developments. The following is a general description of the current material laws and regulations.
Manufacturing facilities that produce cellular therapies are subject to extensive regulation by the FDA. In particular, FDA regulations set forth requirements pertaining to establishments that manufacture human cells, tissues, and cellular and tissue-based products (HCT/Ps). Title 21, Code of Federal Regulations, Part 1271 (21 CFR Part 1271) provides for a unified registration and listing system, donor-eligibility, cGTP, and other requirements that are intended to prevent the introduction, transmission, and spread of communicable diseases by HCT/Ps. More specifically, key elements of Part 1271 include:
|||Registration and listing requirements for establishments that manufacture HCT/Ps;|
|||Requirements for determining donor eligibility, including donor screening and testing;|
|||cGTP requirements, which include requirements pertaining to the manufacturers quality program, personnel, procedures, manufacturing facilities, environmental controls, equipment, supplies and reagents, recovery, processing and process controls, labeling, storage, record-keeping, tracking, complaint files, receipt, pre-distribution shipment, distribution, and donor eligibility determinations, donor screening, and donor testing;|
|||Adverse reaction reporting;|
|||Labeling of HCT/Ps; and|
|||FDA inspection, retention, recall, destruction, and cessation of manufacturing operations.|
PCT currently collects, processes, stores and manufactures HCT/Ps, including manufacturing cellular therapy products. NeoStem Family Storage also collects, processes, and stores HCT/Ps. Therefore, both PCT and NeoStem Family Storage must comply with cGTP (current Good Tissue Practices, 21 CFR Part 1271) and with the cGMP guidelines that apply to biological products. PCTs management believes that certain other requirements pertaining to biological products, such as requirements pertaining to premarket approval, do not currently apply to PCT because PCT is not currently investigating, marketing or selling cellular therapy products. If either PCT or NeoStem Family Storage changes its business operations in the future, the FDA requirements that apply to PCT or NeoStem Family Storage may also change.
Certain state and local governments regulate cell-processing facilities by requiring them to obtain other specific licenses. As required under applicable state law, PCTs New Jersey and California facilities are licensed, respectively, as a blood bank in New Jersey and as a drug manufacturing facility in California. PCT also maintains licenses with respect to states that require licensure of out-of-state facilities that process cell, tissue and/or blood samples of residents of such states (e.g., New York and Maryland). PCT has the relevant state licenses needed for processing and is AABB (American Association of Blood Banks) accredited for this purpose. PCTs management believes that it is in material compliance with currently applicable federal, state, and local laboratory licensure requirements, and intends to continue to comply with new licensing requirements that may become applicable in the future.
Certain states may also have enacted laws and regulations, or may be considering laws and regulations, regarding the use and marketing of stem cells or cell therapy products, such as those derived from human embryos. While these laws and regulations should not directly affect PCTs business, they could affect the business of some of PCTs clients and therefore the amount of business PCT receives from these clients.
The Clinical Laboratory Improvement Amendments (CLIA) extends federal oversight to clinical laboratories that examine or conduct testing on materials derived from the human body for the purpose of providing information for the diagnosis, prevention, or treatment of disease or for the assessment of the health of human beings. CLIA requirements apply to those laboratories that handle biological matter. CLIA requires that these laboratories be certified by the government, satisfy governmental quality and personnel standards, undergo proficiency testing, be subject to biennial inspections, and remit fees. The sanctions for failure to comply with CLIA include suspension, revocation, or limitation of a laboratorys CLIA certificate necessary to conduct business, fines, or criminal penalties. Additionally, CLIA certification may sometimes be needed when
an entity, such as PCT or NeoStem Family Storage, desire to obtain accreditation, certification, or license from non-government entities for cord blood collection, storage, and processing. PCT has obtained CLIA certification for its facilities in New Jersey. PCT has been advised that, currently, CLIA certification is not required for its PCT facilities in California. However, to the extent that any of the activities of PCT or NeoStem Family Storage (for example, with regard to processing or testing blood and blood products) require CLIA certification, PCT intends to obtain and maintain such certification and/or licensure.
The Stem Cell Therapeutic and Research Act of 2005 established a national donor bank of cord blood and created a national network for matching cord blood to patients. The National Marrow Donor Program (NMDP) carries out this legislation, which entails acting as the nations Cord Blood Coordinating Center and actively recruiting parents for cord blood donations. The NMDP also administers the National Cord Blood Inventory (NCBI), which has a goal of collecting 150,000 cord blood units that could be used to treat patients all over the United States. Importantly, the legislation also authorized federal funding to support the legislations goals for collecting cord blood units.
The existence and proliferation of this public cord blood bank may adversely affect PCT and/or the business of NeoStem Family Storage, because parents may opt to donate their newborns cord blood to the public registry and to use the public registry if stem cells from cord blood are needed for treatment purposes. In this regard, an important advantage of the national, public cord blood collection system is that it costs nothing for patients to donate their cord blood. Additionally, major medical organizations, including the American Academy of Pediatrics (AAP), the American Medical Association (AMA), the American College of Obstetricians and Gynecologists (ACOG), and the American Society of Blood and Marrow Transplantation (ASBMT) do not recommend private storage, except in very limited instances. Further, this national, public cord blood registry is widely accepted by the medical community, and therefore physicians and others in the health care community may be less willing to use or recommend a private cord blood facility.
Government authorities in the United States, at the federal, state and local level, and in other countries, extensively regulate, among other things, the research, development, testing, manufacture, including any manufacturing changes, packaging, storage, recordkeeping, labeling, advertising promotion, distribution, marketing, import and export of biological products such as AMR-001. The process of obtaining required regulatory approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time and money, and there is no guarantee that Amorcyte will successfully complete the steps needed to obtain regulatory approval of AMR-001 or any future product candidates. In addition, these regulations may change and Amorcytes product candidates may be subject to new legislation or regulations.
In the United States, pharmaceutical products, including cellular therapies, are subject to extensive pre- and post-market regulation by the U.S. FDA. The Federal Food, Drug, and Cosmetic Act (FD&C Act), and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications, or (NDAs), warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.
Pharmaceutical product development in the U.S. typically involves preclinical laboratory and animal tests, the submission to the FDA of a notice of claimed investigational exemption or an investigational new drug application (IND), which must become effective before clinical testing can commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.
Preclinical tests include laboratory evaluation of product chemistry, formulation and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements including good laboratory practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information including information about product chemistry, manufacturing and controls and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before a clinical trial can begin. Submission of an IND may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development.
Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted in compliance with federal regulations; good clinical practice, or GCP, as set forth in FDA regulations and guidance, which is meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The FDA may order the temporary or permanent discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial is not being conducted in accordance with FDA requirements, or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRBs requirements, or may impose other conditions.
Clinical trials to support NDAs for marketing approval are typically conducted in four sequential phases, but the phases may overlap.
|||Phase 1: Studies are initially conducted in a limited population to test the product candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients, such as cancer patients when the drug is too toxic to be ethically given to health individuals.|
|||Phase 2: Studies are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.|
|||Phase 3: These are commonly referred to as pivotal studies. When Phase 2 evaluations demonstrate that a dose range of the product is effective and has an acceptable safety profile, Phase 3 clinical trials are undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically-dispersed clinical trial sites.|
|||Phase 4: In some cases, FDA may condition approval of an NDA or Biologic License Application (BLA) for a product candidate on the sponsors agreement to conduct additional clinical trials after NDA or BLA approval. In other cases, a Sponsor may voluntarily carry out additional trials post approval to gain more information about the drug. Such post approval trials are typically referred to as Phase 4 studies.|
After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product may begin in the U.S. The NDA must include the results of all preclinical, clinical, and other testing and a compilation of data relating to the products pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantial application user fee, currently exceeding $1.8 million, and the manufacturer and/or sponsor under an approved new drug application are also subject to annual product and establishment user fees, currently almost $99,000 per product and over $520,000 per establishment. These fees are typically increased annually.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agencys threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of new drug applications. Most such applications for standard review drug products are reviewed within ten months; most applications for priority review drugs are reviewed in six months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics, priority review is further limited only for drugs intended to treat a serious or life-threatening disease relative to the currently approved products. We expect FDA to amend each of these goals to extend them by two months for applications received after September 2012. The review process for both standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission. The FDA may also refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.
Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve the product unless compliance with current good manufacturing practice, or GMP a quality system regulating manufacturing is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in the indication studied.
After the FDA evaluates the NDA and the manufacturing facilities, it issues an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDAs satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in 2 or 6 months depending on the type of information included.
An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require substantial post-approval testing and surveillance to monitor the drugs safety or efficacy and may impose other conditions, including labeling restrictions which can materially affect the potential market and profitability of the drug. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Biological products are approved for marketing under provisions of the Public Health Service Act, or PHS Act. However, because most biological products also meet the definition of drugs under the FD&C Act, they are also subject to regulation under FD&C Act provisions. The PHS Act requires the submission of a biologics license application (BLA), rather than an NDA for market authorization. Clinical development of biologics is conducted in accordance with the IND regulations for drugs described above. The PHS Act emphasizes the importance of manufacturing control for products that cannot be defined to help reduce the increased risk of the introduction of adventitious agents. The PHS Act also provides authority to the FDA to immediately suspend licenses in situations where there exists a danger to public health, to prepare or procure
products in the event of shortages and critical public health needs, and to authorize the creation and enforcement of regulations to prevent the introduction or spread of communicable diseases in the US and between states.
Manufacturers of cell and tissue based products must comply with the FDAs cGTP rules and regulations which govern the methods used in, and the facilities and controls used for, the manufacture of such products. The primary intent of the cGTP requirements is to ensure that cell and tissue based products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable disease.
As with drugs, after approval of biologics, manufacturers must address any safety issues that arise, are subject to recalls or a halt in manufacturing, and are subject to periodic inspection after approval.
The Patient Protection and Affordable Care Act, or Affordable Care Act, signed into law on March 23, 2010, included a subtitle called the Biologics Price Competition and Innovation Act of 2009, or BPCI Act, which created an abbreviated approval pathway for biological products shown to be similar to, or interchangeable with, an FDA-licensed reference biological product. This is conceptually similar to the established process for drug approval in that it attempts to minimize duplicative testing. Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical study. Interchangeability requires that a product must demonstrate that it can be expected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. However, complexities associated with the larger and often more complex structures of biological products, as well as the process by which such products are manufactured, pose significant hurdles to implementation which are still being worked out by the FDA.
A reference biologic is granted twelve years of exclusivity from the time of first licensure of the reference product. The first biologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with the reference product has exclusivity against other biologics submitting under the abbreviated approval pathway for the lesser of (i) one year after first commercial marketing, (ii) eighteen months after the initial application if there is no legal challenge, (iii) 18 months after the resolution in the applicants favor of a lawsuit challenging the biologics patents if an application has been submitted, or (iv) 42 months after the application has been approved if a lawsuit is ongoing within the 42 month period.
Once an NDA or BLA is approved, a product will be subject to certain post-approval requirements. For instance, FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet.
Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or BLA or NDA supplement or BLA supplement before the change can be implemented. An NDA or BLA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA supplements and BLA supplements as it does in reviewing NDAs or BLAs. The FDA has broad enforcement authority under the FFDCA, and failure to abide by these regulations can result in enforcement action, including the issuance of a Warning Letter directing entities to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and federal civil and criminal investigations, prosecutions and penalties. State enforcement actions relating to promotional violations are also becoming more common.
Adverse experiences associated with the use of the drug must be reported to the FDA and could result in the imposition of market restrictions through labeling changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following approval.
FDA can require post-approval studies and clinical trials, known as Phase 4 studies, if the FDA finds, after approving the drug, that scientific data, including information regarding related drugs, deem it appropriate. The purpose of such studies would be to assess a known serious risk or signals of serious risk related to the drug or to identify an unexpected serious risk when available data indicates the potential for a serious risk. The FDA may also require a labeling change if it becomes aware of new safety information that it believes should be included in the labeling of a drug.
As a condition of NDA or BLA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drugs safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Failure to comply with statutory and regulatory requirements also subjects a manufacturer to possible legal or regulatory action, including Warning Letters, the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations, and civil and criminal penalties.
Additional FDA laws and regulations govern the quality control, manufacture, packaging, and labeling procedures of products regulated as a drug, biological product, or medical device, including cellular therapies comprised of HCT/Ps. These laws and regulations include requirements for cGMP. These requirements are designed to ensure that a facilitys processes and products resulting from those processes meet defined safety requirements and have the identity, strength, quality and purity characteristics that they are represented to have.
The cGMP requirements, set forth in 21 CFR Parts 210 and 211, are federal regulations that govern the manufacture, processing, packaging and holding of drug and cell therapy products. The objective of compliance with cGMP standards is to protect the public health and safety by ensuring that:
|||Products have the identity, strength, quality and purity that they purport or are represented to possess;|
|||Products meet their specifications; and|
|||Products are free of objectionable microorganisms and contamination.|
A central focus of the cGMP requirements is to design and build quality into the manufacturing processes and the facilities in which products are produced. This is done by implementing quality systems and processes, such as:
|||Identifying critical points that need to be controlled, monitored and tested.|
|||Preparing a set of written instructions or procedures, including product specifications, to ensure consistency and reproducibility of results and product characteristics.|
|||Designing systems and procedures to prevent contamination and ensure product integrity.|
|||Documentation of product testing results and procedures.|
|||Validating the process and test methods to ensure reliability of results and consistency in processing.|
|||Protecting the product from introduction of contamination or objectionable microorganisms by manufacturing in a clean room environment, which includes control of particulates and microorganisms while ensuring adequate space and proper facility controls.|
In addition, drug manufacturers and certain of their subcontractors are required to register their establishments with FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and quality-control to maintain compliance with cGMPs.. Further, failure to comply with applicable FDA requirements can result in regulatory inspections and associated observations, warning letters, other requirements of remedial action, and, in the case of failures that are more serious, suspension of manufacturing operations, seizure, injunctions, product recalls, fines, and other penalties. Management believes that its facilities are in material compliance with applicable existing FDA requirements, and intends to continue to comply with new requirements that may apply in the future.
Additionally, FDA, other regulatory agencies, or the United States Congress may be considering, and may enact laws or regulations regarding the use and marketing of stem cells, cell therapy products, or products derived from human cells or tissue. These laws and regulations can affect us directly or the business of some of PCTs clients and therefore the amount of business PCT receives from these clients.
Under the Pediatric Research Equity Act, or PREA, NDAs or BLAs or supplements to NDAs or BLAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers or deferrals for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.
The Best Pharmaceuticals for Children Act, or BPCA, provides NDA holders a six-month extension of patent and non-patent exclusivity and BLA holders a six-month extension of non-patent exclusivity for a drug if certain conditions are met. Conditions for exclusivity include the FDAs determination that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, FDA making a written request for pediatric studies, and the applicant agreeing to perform, and reporting on, the requested studies within the statutory timeframe. Applications under the BPCA are treated as priority applications with all of the benefits that designation confers.
The Administrative Simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH Act), require health care plans, health care providers and health care clearinghouses, collectively defined under HIPAA as Covered Entities, to comply with standards for the use and disclosure of health information within such organizations and with third parties. These include standards for:
|||Common health care transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures;|
|||Unique identifiers for providers, employers, health plans and individuals; and|
|||Security and privacy of health information.|
Although the obligations of HIPAA only apply directly to Covered Entities, any Covered Entity that uses third parties (referred to in HIPAA as Business Associates) to perform functions on its behalf involving the creation or use of certain patient health information is required to have a contract with the Business Associate that limits the use and disclosure of such information by the Business Associate.
HIPAA does not preempt, or override, state privacy laws that provide even more protection for individuals health information. These laws requirements could further complicate Amorcytes ability to obtain necessary research data from its collaborators. In addition, certain state privacy and genetic testing laws may directly regulate Amorcytes research activities, affecting the manner in which it uses and discloses individuals health information, potentially increasing the cost of doing business, and exposing Amorcyte and the combined company to liability claims. In addition, patients and research collaborators may have contractual rights that further limit Amorcytes ability to use and disclose individually identifiable health information. Claims that Amorcyte violated individuals privacy rights or breached its contractual obligations, even if Amorcyte is not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm the business.
While management believes that the current business operations of PCT or NeoStem Family Storage would not cause either of them to be considered a Covered Entity, there is a risk that due to conflicting interpretations of the regulations, NeoStem Family Storage may be a Covered Entity. If NeoStem Family Storage is a Covered Entity, there is a risk of liability that NeoStem Family Storage may not be complying fully with all HIPAA requirements. PCT has signed Business Associate Agreements where requested by PCTs customers who are Covered Entities, which would require compliance with certain privacy and security requirements relating to individually identifiable health information created or used in connection with such relationships. PCT is in substantial compliance with such Business Associate Agreements. However, given its complexity and the possibility that the regulations may change and may be subject to changing and even conflicting interpretation, PCTs ability to comply fully with all of the HIPAA requirements and requirements of its Business Associate Agreements is uncertain. Further, as a result of amendments the HITECH Act, PCTs and NeoStem Family Storages compliance burden has increased and they will be subject to audit and enforcement by the federal government and, in some cases, by state authorities. Further, they are obligated to publicly disclose wrongful disclosures or losses of personal health information.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback statute and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.
In late March 2010, the Federal government enacted a comprehensive health care reform package which consists of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (Affordable Care Act). Among other provisions, the Affordable Care Act imposes individual and employer health insurance requirements, provides certain insurance subsidies (e.g., premiums and cost sharing), mandates extensive insurance market reforms, creates new health insurance access points (e.g., State-based health insurance exchanges), expands the Medicaid program, promotes research on comparative clinical effectiveness of different technologies and procedures, and makes a number of changes to how products and services will be reimbursed by the Medicare program. Amendments to the Federal False Claims Act under the Affordable Care Act have made it easier for private parties to bring qui tam (whistleblower) lawsuits against companies, under which the whistleblower may be entitled to receive a percentage of any money paid to the government.
There are a number of provisions in the Affordable Care Act that may directly impact our customers and, therefore, indirectly affect us. For example, the Affordable Care Act expands the number of individuals that will be covered by either private or public health insurance, which may, in turn, increase the pool of potential purchasers for our customers products to the extent they are reimbursable by private or public health insurance. The Affordable Care Act also requires health insurance issuers in the individual and small group markets to cover certain essential health benefits, which include prescription drugs and which may increase coverage for our customers products. In addition, the Affordable Care Act reduces income and raises costs for our customers through, for instance, the imposition of drug price discounts for Medicare Part D enrollees in the donut hole and the imposition of an annual fee on prescription drug and biologic manufacturers. Such provisions may cause our customers to seek to restrain costs in other areas, including the services which we provide. The effective dates of the various provisions within the Affordable Care Act are staggered over the next several years, with some changes occurring immediately. Much of the interpretation of the Affordable Care Act will be subject to administrative rulemaking, the development of agency guidance, and court interpretation.
In addition to those described above, other federal and state laws and regulations that could directly or indirectly affect our ability to operate the business and/or financial performance include:
|||State and local licensure, registration and regulation of laboratories, the processing and storage of human cells and tissue, and the development and manufacture of pharmaceuticals and biologics;|
|||Other laws and regulations administered by the United States FDA, including the Federal Food, Drug, and Cosmetic Act and related laws and regulations and the Public Health Service Act and related laws and regulations;|
|||Laws and regulations administered by the United States Department of Health and Human Services, including the Office for Human Research Protections;|
|||State laws and regulations governing human subject research;|
|||Federal and state coverage and reimbursement laws and regulations, including laws and regulations administered by the Centers for Medicare & Medicaid Services and state Medicaid agencies;|
|||The federal Medicare and Medicaid Anti-Kickback Law and similar state laws and regulations;|
|||The federal physician self-referral prohibition commonly known as the Stark Law, and state equivalents of the Stark Law;|
|||Occupational Safety and Health (OSHA) requirements;|
|||State and local laws and regulations dealing with the handling and disposal of medical waste; and|
|||The Intermediate Sanctions rules of the IRS providing for potential financial sanctions with respect to Excess Benefit Transactions with HUMC or other tax-exempt organizations.|
In addition to privacy law requirements and regulations enforced by the FDA, we are also subject to various local, state and federal laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including chemicals, micro-organisms and various radioactive compounds used in connection with our research and development activities. These laws include, but are not limited to, the Occupational Safety and Health Act, the Toxic Test Substances Control Act and the Resource Conservation and Recovery Act. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by state and federal regulations, there can be no assurances that accidental contamination or injury to employees and third parties from these materials will not occur. Our insurance program does not include environmental coverage.
In addition to regulations in the United States, our cellular development activities may be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of biological products. Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. The requirements governing the conduct of clinical trials and the approval process vary from country to country and the time may be longer or shorter than that required for FDA approval. In the European Union, marketing authorizations may be submitted under a centralized or decentralized procedure. The centralized procedure is mandatory for the approval of biotechnology products and many pharmaceutical products, and provides for the grant of a single marketing authorization that is valid in all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions and is available at the request of the applicant for medicinal products that are not subject to the centralized procedure.
In addition to regulations in Europe and the United States, we may be subject to a variety of other foreign regulations governing, among other things, the conduct of clinical trials, pricing and reimbursement and commercial distribution of its products. If Amorcyte fails to comply with applicable foreign regulatory requirements, it may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
To date, Amorcyte has not initiated any discussions with the European Medicines Agency or any other foreign regulatory authorities with respect to seeking regulatory approval for AMR-001 in Europe or in any other country outside the United States.
In 2009, we began certain adult stem cell initiatives in the Peoples Republic of China (China or PRC) including: (i) constructing a stem cell research and development laboratory and processing and manufacturing facility in the Beijing Facility; (ii) establishing relationships with hospitals to provide stem cell-based therapies, and (iii) obtaining product licenses covering certain adult stem cell therapeutics focused on regenerative medicine.
In December 2011, Chinas Ministry of Health announced its intention to more tightly regulate stem cell clinical trials and the use of stem cell treatments in the PRC. Additionally, we operate our regenerative medicine business in China through a wholly foreign owned entity (WFOE) and variable interest entities (VIEs). While often foreign companies use structures similar to the ones pursuant to which we have operated our regenerative medicine business in the PRC, and while such arrangements are not uncommon in connection with business operations of foreign companies in China in industry sectors in which foreign direct investments are limited or prohibited, recently there has been greater scrutiny by the business community of the VIE structure. Accordingly, the Company has determined to take steps to restrict, and expects to ultimately eliminate, its regenerative medicine business in the PRC.
The Beijing Facility is located at the Life Science Innovation Center, Life Science Park, Zhongguancum, Beijing. It has been designed for comprehensive cell manufacturing, collection, processing and storage that can enable the PCT business model to launch in the PRC should the opportunity be presented. With the upcoming expiration of this lease in May 2012, the Company is considering its options with respect to extending the lease to allow for manufacturing of cell therapies, which will depend in part upon guidance from the PRC Ministry of Health with respect to regulations applicable to stem cell clinical research and applications.
We have a 51% ownership interest in Erye. Our current senior executive management team at Erye, Mr. Shi, Chairman, and Madame Zhang, General Manager, joined Erye in 1998, who in conjunction with others bought it from the PRC government in 2003 and, in the years that followed, transformed it into a profitable private enterprise. Erye had approximately 692 employees as of March 1, 2012, of which approximately 413 were full-time.
The Erye Merger was consummated pursuant to the terms of an Agreement and Plan of Merger, dated November 2, 2008, as amended (the Erye Merger Agreement). Pursuant to the Erye Merger Agreement, on October 30, 2009, China Biopharmaceuticals Holdings, Inc. (CBH) merged with and into our wholly owned subsidiary. Following the Erye Merger, Erye Economy and Trading Co. Ltd. (EET) (the Erye Merger), an entity controlled by management of Erye, continued to own the remaining 49% ownership interest in Erye.
An amended joint venture agreement and articles of association of Erye was approved by the requisite PRC governmental authorities on or about December 28, 2009 (the Joint Venture Agreement). Under the Joint Venture Agreement, for the three years commencing with the fiscal quarter after which the revised Joint Venture Agreement became effective: (i) 49% of net profit, after tax, will be distributed to EET (which owns the remaining 49% of Erye), and loaned back to Erye for use in connection with its construction of the new Erye facility (to be repaid gradually after construction is completed); (ii) 45% of the net profit after tax will be provided to Erye as part of the new facility construction fund, which will be characterized as paid-in capital for our 51% interest in Erye; and (iii) only 6% of the net profit will be distributed to us directly for our operating expenses.
Erye was founded more than 50 years ago and represents an established, vertically-integrated pharmaceutical business, focused primarily on the manufacturing and sale of antibiotics. Historically, Erye has concentrated its efforts on the manufacturing and distribution of generic antibiotic products and has received more than 160 production certificates from the SFDA covering both antibiotic prescription drugs and active pharmaceutical intermediates, or APIs. Eryes revenue for 2010 and 2011 was approximately $69.6 million and $63.4 million, respectively.
Our Pharmaceutical Manufacturing China reportable segment consists of our interest in the Erye business. We are considering strategic alternatives with respect to our 51% interest in Erye, as described further below under the caption Pharmaceutical Manufacturing China Strategic Alternatives With Respect to Erye.
China has a large population with a rapidly growing demand for pharmaceutical drugs and has committed to providing increased governmental insurance to provide a larger segment of the population greater access to pharmaceuticals. The antibiotics market in China is approximately $11 billion. The overall pharmaceuticals market in China is forecasted to reach $110 billion by 2015.
In early 2009, the PRC government announced that improving healthcare for its citizens would be a major priority and Chinas State Council approved the spending of $124 billion on its healthcare system between 2009 and 2011. This spending initiative, coupled with a population approaching 1.4 billion, makes China a large market opportunity for pharmaceutical drugs. As part of this initiative, China has created the New Rural and Urban Cooperative Medical Insurance System. More than 70% of the drugs produced by Erye are covered under this new medical insurance system.
Erye offers a broad portfolio of anti-infective drugs, with no single product accounting for more than 10% of total revenues for 2011. In 2011, approximately seven of the top 20 antibiotics used in Chinese hospitals were products offered by Erye. Eryes top ten products, by revenue, for 2011, are set forth in the following table:
|Product Name||Product Type||% of Sales|
|1.0g ceftizoxime sodium injection||Injectable Finished Product||6||%|
|piperacillin sodium and sulbactam sodium for injection (1.5g)||Injectable Finished Product||4||%|
|Amoxicillin and Sulbactam for injection (1.5g)||Injectable Finished Product||4||%|
|Mezlocillin sodium for injection (1.0g)||Injectable Finished Product||4||%|
|Cefamandole Natate for injection (0.5g)||Injectable Finished Product||4||%|
|1.2g Injection Amoxicillin Sodium and Clavulanate Potassium||Injectable Finished Product||3||%|
|Cefamandole Natate for injection (1.0g)||Injectable Finished Product||3||%|
|Top of Form 0.5g injection Ceftizoxime||Injectable Finished Product||3||%|
|Mezlocillin sodium for injection (2.0g)||Injectable Finished Product||3||%|
|Mezlocillin sodium for injection (3.0g)||Injectable Finished Product||3||%|
Erye is currently focused on bringing more differentiated and higher-margin product offerings to its portfolio.
In China, consumers generally receive prescription drugs through hospitals. Antibiotics are distributed almost exclusively through hospitals. Since pharmaceutical manufacturers in China are not permitted to sell directly to hospitals, it is essential to have an effective and extensive distributor network. Eryes distributor network covers all of mainland Chinas provinces and municipalities and generates sales principally through three channels:
|||exclusive distributors of prescription drugs, referred to as co-sales teams: this distribution channel handles the clinical promotion and distribution of differentiated, higher-margin product lines, within exclusive province-based and municipality-based territories;|
|||non-exclusive distributors of prescription drugs: this distribution channel is devoted to selling established product lines that require little, if any, clinical promotion; and|
|||exclusive distributors of APIs: this distribution channel is devoted to selling APIs to large pharmaceutical manufacturers nationwide.|
Erye has an internal sales and marketing team of more than 80 individuals that supervise the distributor network, assist with clinical promotions and manage hospital relationships. Many of Eryes sales executives have long-term experience in pharmaceutical sales and previously held sales positions with state-owned pharmaceutical companies, where they established long-standing relationships with large distribution centers in several key regions nationwide and, in particular, within the Yangzi River Triangle.
In 2005, the PRC government issued a mandate requiring the relocation of many of Eryes existing manufacturing facilities. In order to comply with this mandate and to meet the growing demands of its business, Erye acquired land use rights to approximately 27 acres in the Xiangcheng District of Suzhou and, in 2007, commenced the construction of a new, state-of-the-art production facility. This new campus-style facility includes 16 buildings containing a total of approximately 53,186 square meters of space.
Erye has substantially completed the construction of its new manufacturing facility. Erye began transferring its operations to its new manufacturing facility in January 2010. The relocation and new production lines have been completed and have received cGMP certification. To date, Erye has received the following SFDA cGMP certifications:
|||solvent crystallization sterile penicillin;|
|||freeze dried raw sterile penicillin;|
|||cephalosporin powder for injection;|
|||freeze dried powder for injection; and|
|||its capsule line.|
We recognize that there will be continuous price pressure on Erye as over 70% of the manufactured drugs are on the essential drug list. During 2011, there has been evidence of such price pressure e.g., on March 2, 2011 the National Development and Reform Commission issued price cuts for medical insurance drugs which substantially impacts two of Eryes drugs. We anticipate that Piperacillin Sodium Sulbactam Sodium will experience as much as a 50% price decline while the price of Ligustrazine Phosphate may be reduced by approximately 75%. As of December 31, 2011 the price reduction experienced by Erye on these products was approximately 24%. In 2010 Piperacillin Sodium Sulbactum Sodium accounted for approximately 3% of sales and Ligustrazine Phosphate accounted for approximately 2.5% of sales and through the twelve months ended December 31, 2011 accounted for approximately 5% and 1% of sales, respectively. In addition, in late 2011 the Ministry of Health of the PRC issued for public comment, a draft policy Administrative Measures on Clinical Use of Antibiotics to curb their overuse, which has in part had, and may in the future have, the effect of limiting the sales volume of certain antibiotics of Erye. See Government Regulation Pharmaceutical Manufacturing China.
The estimated total cost of the new facility is approximately $39 million.
Erye provides a well-established and capable platform and network for the introduction of pharmaceuticals, and other health-related products, to the vast domestic patient and consumer markets in China.
In 2010, Erye engaged in research and development for antitumor drugs and Penem antibiotics. In 2011, Erye completed the registration documents for three cancer drugs and two Impenem products, which were also submitted for SFDA approval. Also in 2011, Erye received production approval for Mezlocillin sodium and Sulbactam sodium for injection.
In connection with our interest in Erye, we rely upon the experience of Erye as well as certain of our other PRC advisors and consultants with the Drug Administration Law of China, which governs the licensing, manufacturing, marketing and distribution of pharmaceutical products in China. Additionally, our operations are subject to various PRC regulations and permit systems.
The application and approval procedure in China for a newly-developed drug product is nearly as detailed and lengthy as that for U.S. new drug applicants, requiring the documentation of pharmacological studies, toxicity studies and pharmacokinetics and drug metabolism (PKDM) studies and new drug samples. Documentation and samples are then submitted to a provincial food and drug administration, or the provincial FDA. The provincial FDA sends its officials to the applicant to check the applicants research and development facilities and to arrange a new drug examination committee meeting for approval deliberations. This process usually takes three months. After the documentation and samples are approved by the provincial FDA, the provincial FDA will submit the approved documentation and samples to the SFDA. The SFDA examines the documentation and tests the samples and arranges a new drug examination committee meeting for approval deliberations. If the application is approved by the SFDA, the SFDA will issue a clinical trial
license to the applicant allowing the applicant to conduct human clinical trials. The clinical trial license approval typically takes one year. The applicant completes the clinical trial process and prepares documentation and files submitted to the SFDA for new drug approval. The clinical trial process usually takes one or two years depending on the category and class of the new drug. The SFDA examines the documentation and gives final approval for the new drug and issues the new drug license to the applicant. This process usually takes 8 months. As a result, the entire process for new drug approval, from start to finish, usually takes three to four years.
In late 2011, the PRC Ministry of Health issued, for public comment, a draft policy Administrative Measures on Clinical Use of Antibiotics to curb their overuse. The proposed guidelines set forth three categories of antibiotics, which include (1) restricted, (2) non-restricted, and (3) special-use only. According to the October 12, 2011 China Healthcare report published by Deutsche Bank, AG (the China Healthcare report), it has been projected that the limitation of antibiotic usage in China will reduce the historical compound annual growth rate which has been approximately 20%. According to the China Healthcare report, it has been estimated that Chinas population consumes about ten times the global per capita average of antibiotics. These regulations have not been finalized but issuance of a draft policy has created uncertainty on the part of distributors and has reduced purchases by distributors and in part has contributed to sales reduction during 2011.
The PRC government is in the process of reviewing its industry policies relating to the pharmaceutical industry and, as a part of this review, has been reviewing drug permits and licenses that have been issued. As of now, Erye maintains good standing of its drug permits and licenses. Although the PRC government has published regulations regarding stem cell clinical applications, there is currently not implemented guidance. Without guidance, it is difficult to definitively know how the regulations are to be implemented.
Pharmaceutical operations in China are still at an early stage of development due to heavy state involvement in the past. However, competition from China-based drug manufacturing companies is growing rapidly. Our direct competitors are domestic pharmaceutical companies and new drug research and development institutes such as Harbin Pharmaceutical Group Holding Co., Ltd., Shanghai Asia Pioneer Pharmaceutical Co., Ltd, Shandong Lukang Pharmaceutical Co., Ltd., Shandong Luoxin Pharmacy Stock Co. Ltd., China Pharma Holdings, China Biologic Products, China Sky One Medical, Sinovac Biotech and Tianyin Pharma. We also face competition from foreign companies who have strong proprietary pipelines and strong financial resources.
As part of our plan to focus our business on capturing the paradigm shift to cell therapies following our January 2011 acquisition of PCT, we are pursuing strategic alternatives with respect to our 51% interest in Erye. We are planning to devote our resources and management efforts to cell therapy manufacturing and development, and other related activities, including adult stem cell collection and storage. We also believe that if we could monetize Erye, we would have additional capital needed to pursue the development of cell therapies. To that end, in June 2011, we engaged a financial advisor to lead the effort to pursue the possible divesture of our 51% interest in Erye. Marketing efforts have led to a few nonbinding letters of intent. However, in addition to the factors set forth below, it is too early to determine whether these or other proposals will lead to definitive agreements.
Any sale of our interest would also be subject to a right of first refusal held by Suzhou Erye Economy & Co. Ltd. (EET) pursuant to the terms of the Joint Venture Agreement between a subsidiary of ours and EET. EET owns the remaining 49% interest in Erye. A number of issues have arisen between EET and us with respect to the operation and financing of Erye. For instance, while EET is required to lend back to Erye dividends received by it to finance Eryes move to and construction of its new facilities, Erye has recently reported to us that such arrangement is no longer tax efficient in light of the ratio of Eryes shareholder loans to its registered capital. In connection with exploring ways to remedy the additional tax burden caused by the level of shareholder loans and in preparing for a sale process, other issues have also surfaced, including the issue of our Company and Erye needing to obtain all Chinese regulatory approvals (and associated registrations) required to reflect the legal title of our 51% interest in Erye as being held by the proper entity
within our Companys group which is its current beneficial owner as that term is used under U.S. law. The Company believes it has now determined what governmental approvals (and associated registrations) will need to be issued by the Suzhou Municipal Bureau of Foreign Investment and Commerce and the Suzhou Administration for Industry and Commerce to remediate these deficiencies and the Company has had counsel in China prepare these filings. The Companys management believes these regulatory deficiencies can be remediated and should not delay a possible divestiture of the Companys interests in Erye that is currently under evaluation. However, the Company requires the cooperation of the officers of Erye as to which no assurance can be given, and we could be compelled to seek to replace those officers or to commence legal action to obtain the required consents or otherwise move forward with requisite filings. In addition, even if the filings are made, no assurance can be given that any unremediated regulatory deficiencies would not have an adverse effect on the operating results and liquidity of Erye and the Company and will not impede or delay efforts to divest the Companys interest in Erye. In addition, the remediation process is expected to trigger certain tax liabilities and penalties, however the ultimate liability will be based on future discussions with the relevant Chinese authorities. The Company cannot reasonably assess the exposure as of December 31, 2011.
We have not yet determined to sell our interest in Erye, and will not do so until we can assess the level of interest generated, the potential price and transaction terms we might be offered and any regulatory impediments to a transaction. The challenging nature of the current China pharmaceutical market makes it a difficult time for us to be pursuing a divestiture of our 51% ownership interest in Erye, and we expect that any sale of this interest will result in our not recouping our original investment. The process to divest Erye has also led to our interests becoming unaligned with those of the 49% shareholder, as it from time to time has indicated a desire to be a buyer, and this has led to strained relations between the parties. A sale of our interest in Erye, if a sale can be consummated, would have a material effect on the business, results of operations and balance sheet of our Company. Factors that may impede a sale may include, but not be limited to, (i) EETs right of first refusal and the significant time and money that exercise of such right could cause a potential purchaser, (ii) the need for any purchaser to negotiate a new Joint Venture Agreement and a shareholder loan repayment schedule with EET if EET does not wish to either sell its interest or exercise its right of first refusal, (iii) recent regulatory changes in China which reduce prices that may be charged for certain of Eryes products and limit use of antibiotics, (iv) recent disappointing financial performance by Erye resulting at least in part from such changes, including a decrease in revenues in 2011 and a net loss for fourth quarter 2011, (v) tax or regulatory issues affecting Erye, including those described above and other tax increases described in this filing which will adversely affect Erye going forward, (vi) availability of financing for a potential purchaser, and (vii) other factors typical of any sale process.
We aggressively are seeking international patent protection for our own internally developed technologies, as well as those technologies to which we have an exclusive license. The following is an overview of the key components of our patent estate, both issued and pending, to which NeoStem claims original ownership or exclusive rights pursuant to license:
NeoStem is prosecuting patent applications for in-house developed technologies that cover processes by which stem cells are isolated from various tissues. We have filed patent applications covering low-dose, short course, cytokine induction of stem cell mobilization as well as claims to methods of isolating adult stem cells using various proprietary techniques. In addition, we have filed applications for what we believe are novel stem cell populations. These applications have been filed in the U.S. and outside the U.S.
Pursuant to our VSELTM Technology license agreement with the University of Louisville, we have the exclusive, world-wide rights, to technology and know-how relating to very small embryonic-like stem cells. These patent applications, filed in the U.S. and abroad, relate to VSEL stem cell methods of isolation, collection, treating disease, as well as other related technology.
Amorcyte presently has three issued patents for our lead clinical product, AMR-001. In addition to our U.S. 7,794,705 patent (and a corresponding patent in South Africa) covering composition and method of vascular injury repair post-acute myocardial infarction, the US Patent and Trademark Office recently granted U.S. 8,088,370 for vascular insufficiency, materially expanding the reach of our patent protection into all forms of cardiac insufficiency, including congestive heart failure and chronic myocardial ischemia. We believe
that these claims extend protection for vascular insufficiency to conditions beyond the cardiac setting. Amorcyte has applications pending around the world for three families of patents comprising no fewer than 18 applications in a dozen countries.
Athelos has secured exclusive world-wide rights to a broad patent estate comprised of approximately 30 issued patents and approximately 50 pending patent applications from major U.S. academic institutions. Those patent rights relate to regulatory T cell compositions, the in vitro culture of regulatory T cells and methods of treating or preventing certain conditions and/or diseases by use of regulatory T cells, as well as certain materials known as artificial antigen presenting cells. Most patent families within the estate have been filed in the U.S. and under the Patent Cooperation Treaty pursuant to which they have been/are being nationalized in other countries, generally including Australia, Japan, Europe, China, Canada, or some combination thereof.
Pursuant to our exclusive license agreement with Vincent Falanga, M.D., we have an exclusive, world-wide license to technology and know-how relating to wound healing using autologous mesenchymal stem cells to treat wounds.
There can be no assurance that any of our patent applications will issue as patents, or that, should patents issue, they will be found valid if contested in litigation. The patent positions of biotechnology companies are highly uncertain and involve complex legal, scientific and factual questions, the answers to which cannot be predicted with certainty.
As of March 1, 2012, NeoStem had approximately 786 employees, including those employees of our subsidiaries, broken down as follows: PCT had 69 employees, Erye had 692 employees, of which 413 are full time and 279 are part time and NeoStem China had 1 employee. Amorcyte and Athelos have no employees unique to them. NeoStem US had 24 employees. None of our employees are covered by a collective bargaining agreement. All of Eryes employees are located in Jiangsu Province, China. Although a significant number of Eryes employees have employment contracts, none of the employees are covered by a collective bargaining agreement. As further discussed in this report, we are pursuing the divestiture of the majority of our China operations.
Our principal executive offices are located at 420 Lexington Avenue, Suite 450, New York, New York 10170, and our telephone number is (212) 584-4180. Our Common Stock is currently traded on the NYSE Amex under the symbol NBS. We maintain a corporate website at www.neostem.com. The contents of our website are not part of this report and should not be relied upon in connection herewith.
NeoStem, Inc. was incorporated under the laws of the State of Delaware in September 1980 under the name Fidelity Medical Services, Inc. and commenced operations in the adult stem cell collection, processing and storage services business in January 2006.
This report includes trademarks, service marks and trade names owned by us or other companies. All trademarks, service marks and trade names included in this report are the property of their respective owners.
The following table sets forth certain information about the executive officers of our Company. There are no family relationships among any of the below named persons. For biographical information regarding our executive officers, see the discussion under the caption Biographical Information below.
|Robin L. Smith, M.D.||47||Chief Executive Officer and Chairman of the Board|
|Andrew L. Pecora, M.D., F.A.C.P.||54||Chief Medical Officer of NeoStem, Chief Medical Officer of PCT and Chief Scientific Officer of Amorcyte|
|Larry A. May||62||Vice President and Chief Financial Officer|
|Catherine M. Vaczy||50||Vice President and General Counsel|
|Joseph Talamo||43||Vice President, Corporate Controller and Chief Accounting Officer|
|Jason Kolbert||52||Vice President of Strategic Business Development|
|Madam Zhang Jian||50||Vice President of Pharmaceutical Operations, NeoStem and General Manager, Erye|
|Shi Mingsheng||60||Chairman of the Board, Eyre|
|Robert A. Preti, Ph.D.||55||President and Chief Scientific Officer of PCT|
Dr. Robin L. Smith joined us as Chairman of our Advisory Board in September 2005 and, effective June 2, 2006, became the Chief Executive Officer and Chairman of the Board. Dr. Smith, who received a medical degree from Yale University in 1992 and a masters degree in business administration from the Wharton School in 1997, brings to us extensive experience in medical enterprises and business development. From 2000 to 2003, Dr. Smith served as President & Chief Executive Officer of IP2M, a multi-platform media company specializing in healthcare. During her term, the company was selected as being one of the ten fastest growing technology companies in Houston. IP2M was sold to a publicly-traded company in February 2003. Previously, from 1998 to 2000, she was Executive Vice President and Chief Medical Officer for HealthHelp, Inc., a National Radiology Management company that managed 14 percent of the healthcare dollars spent by large insurance companies.
Dr. Smith has acted as a senior advisor to, and investor in, both publicly-traded and privately-held companies including but not limited to China Biopharmaceuticals Holdings, Inc. (CBH), the Madelin Fund, HC Innovations Inc., Navstar Media Holdings, Strike Force, Health Quest, Red Lion Partners and All American Pet, where she has played a significant role in restructuring and or growing the companies. Dr. Smith served on the Board of Directors of two privately held companies, Talon Air and Biomega, and also served on the Chemotherapy Foundation Board of Trustees and The New York Theatre Ballet. She currently serves on the Board of Trustees of the NYU Medical Center Board, is a member of the Board of Directors for the New York University Hospital for Joint Diseases and serves on the Board of Choose Living. Dr. Smith is the President and serves on the Board of Trustees of The Stem for Life Foundation.
Andrew L. Pecora, M.D., F.A.C.P., is co-founder and past Chairman and Chief Executive Officer of Progenitor Cell Therapy, LLC (PCT), which is a subsidiary of the Company. Dr. Pecora has served as NeoStems Chief Medical Officer since August 17, 2011. Dr. Pecora also serves as PCTs Chief Medical Officer pursuant to an employment agreement that became effective on January 19, 2011, currently providing for an annualized base salary of $210,000 and option grants to purchase 400,000 shares of NeoStem Common Stock at a per share exercise price of $1.50 (and an option granted on August 17, 2011 to purchase an additional 500,000 shares of NeoStem Common Stock at a per share exercise price of $0.71). Prior to our acquisition of PCT, Dr. Pecora had served from 1999 to 2011 as Chairman, Chief Executive Officer and Chief Medical Officer of PCT, and as a member of PCTs Board of Managers. Dr. Pecora is also Chief Scientific
Officer of Amorcyte, LLC, a subsidiary of the Company acquired in October 2011, and held such position prior to the acquisition. Dr. Pecora served as the Chairman and Director of the John Theurer Cancer Center at Hackensack University Medical Center (HUMC) from 2001 to 2011, and commencing 2011 Dr. Pecora serves the John Theurer Cancer Center as Chief Innovations Officer, Professor and Vice President of Cancer Services. Since 1996 Dr. Pecora has been Co-Managing Partner of the Northern New Jersey Cancer Center, which is a private physicians practice group affiliated with HUMC. He has also been a Professor of Medicine at the University of Medicine and Dentistry of New Jersey since 2004. Dr. Pecora serves on the board of Cancer Genetics, Inc. and is chairman of the board of Tetralogics, Inc., a company developing small molecules to treat cancer. Dr. Pecora brings a variety of business development and practical business skills to NeoStem. He has worked with numerous companies in developing their products and manages a large clinical practice and the cancer department at a major health care institution. Dr. Pecora also has significant experience in the design of clinical trials (Phase 1 to 3), institutional review board practices, conduct of clinical trials, clinical research, and payor relationships both domestically and on a global basis. Dr. Pecora received an M.D. from the University of Medicine and Dentistry of New Jersey, graduating with honors. He went on to complete his medical education in internal medicine at New York Hospital and in hematology and oncology at Memorial Sloan-Kettering Cancer Center, both in New York City. He is board certified in internal medicine, hematology, and oncology. Dr. Pecoras appointment to the NeoStem Board of Directors was a term of the Companys merger agreement with PCT in January 2011.
Mr. May, the former Treasurer of Amgen (NASDAQ GS: AMGN), one of the worlds largest biotechnology companies, initially joined us to assist with licensing activities in September 2003. He became an officer upon our acquisition of the business of NS California in January 2006. For the last 25 years, Mr. May has worked in the areas of life science and biotechnology. From 1983 to 1998, Mr. May worked for Amgen as Corporate Controller (1983 to 1988), Vice President/Corporate Controller/Chief Accounting Officer (1988 to 1997), and Vice President/Treasurer (1997 to 1998). At Amgen, Mr. May helped build Amgens accounting, finance and IT organizations. From 1998 to 2000, Mr. May served as the Senior Vice President, Finance & Chief Financial Officer of Biosource International, Inc., a provider of biologic research reagents and assays. From 2000 to May 2003, Mr. May served as the Chief Financial Officer of Saronyx, Inc., a company focused on developing productivity tools and secure communication systems for research scientists. From August 2003 to January 2005, Mr. May served as the Chief Financial Officer of NS California. In March 2005, Mr. May was appointed CEO of NS California and in May 2005 he was elected to the Board of Directors of NS California. He received a Bachelor of Science degree in Business Administration & Accounting in 1971 from the University of Missouri.
Ms. Vaczy joined us in April 2005 as Vice President and General Counsel. Ms. Vaczy is responsible for overseeing our legal affairs. From 1997 through 2003, Ms. Vaczy held various senior positions at ImClone Systems Incorporated, a then publicly-traded company developing a portfolio of targeted biologic treatments to address the medical needs of patients with a variety of cancers, most recently as its Vice President, Legal and Associate General Counsel. While at ImClone, Ms. Vaczy served as a key advisor in the day-to-day operation of the company and helped forge a number of important strategic alliances, including a $1 billion co-development agreement for Erbitux®, the companys targeted therapy approved for the treatment of metastatic colorectal and head and neck cancers. From 1988 through 1996, Ms. Vaczy served as a corporate attorney advising clients in the life science industry at the New York City law firm of Ross & Hardies. Ms. Vaczy is Secretary and serves on the Board of Trustees of The Stem for Life Foundation. Ms. Vaczy received a Bachelor of Arts degree in 1983 from Boston College and a Juris Doctor from St. Johns University School of Law in 1988.
Joseph Talamo has been NeoStems Vice President, Corporate Controller and Chief Accounting Officer since June 2011. From 1996 to 2010, Mr. Talamo held various senior positions at OSI Pharmaceuticals, Inc. (OSI), a publicly-traded biopharmaceutical company focused on discovering, developing and commercializing products for the treatment of cancer, diabetes and obesity, and most recently served as its
Vice President and Corporate Controller from 2006 to 2010 and its Corporate Controller from 2002 to 2006. While at OSI, Mr. Talamo helped build the accounting and finance infrastructure to support the clinical development and commercial launch of Tarceva®, OSIs targeted therapy approved for the treatment of patients with non-small cell lung cancer and pancreatic cancer. Prior to OSI, Mr. Talamo worked at Bristol-Myers Squibb from 1995 to 1996 in the Financial Reporting and Consolidations Group, and at KPMG from 1993 to 1995 in the Health Care and Life Sciences Audit Group. Mr. Talamo also served as Treasurer of the OSI Pharmaceuticals Foundation from 2008 to 2010. Mr. Talamo received a Bachelor of Business Administration in Accounting from Hofstra University in 1991, and a Master of Business Administration in Finance from Hofstra University in 1999. Mr. Talamo is a certified public accountant in the State of New York.
Jason Kolbert joined us in March 2011 as Vice President of Strategic Business Development. Prior to joining NeoStem, Mr. Kolbert served as a managing director and the head of research at National Securities from 2009 to 2011 where he followed emerging biotechnology companies with an emphasis in cell based therapeutics. Prior to joining National Securities, Mr. Kolbert spent seven years at Susquehanna International Group where he managed a dedicated life science fund and later led a team of analysts to cover emerging life science companies. Mr. Kolberts work has been featured in the media with multiple presences on CNBC and well known financial and industry publications. Mr. Kolberts career began as a chemist in the pharmaceutical industry, during which time he pursued his masters in business administration in finance. As a fluent Japanese speaker, with a background in chemistry and a finance degree he was recruited by Schering-Plough into a corporate finance position reporting to the President. Upon returning from Japan, Mr. Kolbert joined Salomon Smith Barney (7 years) in research working with industry leaders across multiple sectors in the healthcare space focused on companies in Asia and the U.S. Mr. Kolbert received his undergraduate degree in Chemistry from the State University of New York New Paltz, where he graduated with honors and holds a Masters Degree in Business with a specialization in finance from the University of New Haven.
Ms. Zhang Jian has been our Vice President Pharmaceutical Operations since June 2010 and General Manager of Erye since 2003. She was elected to be the Chairwoman and a director of CBH on April 30, 2007, and served to 2009. From the end of 2007 until the consummation of the Erye Merger in 2009, Ms. Zhang Jian was the Chief Financial Officer (CFO) of CBH. Prior to being the General Manager for Erye, she served for more than 5 years as the deputy general manager of Suzhou Number 2 Pharmaceutical Company and more than a year as the deputy general manager of Suzhou Number 4 Pharmaceutical Company after working in various positions in charge of human resources and quality control. Ms. Zhang graduated from Central Television University majoring in electronics and later graduated with a certificate in accounting from Suzhou Adult Education University and a graduate degree in finance and accounting from the School of Finance and Economics of Suzhou University. Ms. Zhang has extensive background and experience in the pharmaceuticals industry having worked in various managerial positions and various aspects of the industry. She has turned Erye into a successful operation after taking it over from the PRC government with Mr. Shi Mingsheng and others in 2003.
Pursuant to the terms of the Erye Merger agreement, Shi Mingsheng was appointed to the NeoStem Board of Directors on March 11, 2010. Shi Mingsheng has been serving as chairman of the board of directors of Suzhou Erye Pharmaceuticals Company Ltd. (Erye) (of which entity NeoStem has acquired a 51% interest), since 2003. Mr. Shi was a director of CBH (from which NeoStem acquired its interest in Erye), from 2007 to 2009. Currently, Mr. Shi is also the chairman of Suzhou Erye Economy and Trading Co. Ltd. (EET), which entity owns the remaining 49% ownership interest in Erye. Prior to these affiliations, Mr. Shi served for five years as the assistant director of Suzhou No. 4 Pharmaceutical Limited Company, and for seven years as the deputy director of Suzhou No. 4 Pharmaceutical Limited Company, and for five years as the factory director of Suzhou No. 2 Pharmaceutical Limited Company, the predecessor company of Erye. Mr. Shi has a bachelors degree in Economics & Management from the Party School of the CPC. Mr. Shi holds a professional title which is Senior Economist.
Dr. Preti serves as President of PCT, pursuant to an employment agreement that became effective on January 19, 2011, currently providing for a base salary of $350,000, discretionary bonuses, and an option grant to purchase 400,000 shares of NeoStem Common Stock at a per share exercise price of $1.50. Dr. Preti also serves as Chief Scientific Officer of PCT. Prior to our acquisition of PCT, Dr. Preti had served from 1999 to 2011 as President and Chief Scientific Officer for PCT, and as a member of PCTs Board of Managers.
Dr. Preti was Scientific Director of Hackensack University Medical Centers stem cell laboratory from 1996 1999. Prior to that, he served as director at the Clinical Services Division of the New York Blood Center from 1989 to 1996. He is one of the countrys leading authorities on cell engineering and the principal investigator for a number of clinical trials relating to stem cell transplantation. He was a founding member and Treasurer of the International Society for Hematotherapy and Graft Engineering and served for 10 years on its Executive Committee and Board of Directors. He is now representing Cellular Therapy as a Director of the American Association of Blood Banks. Dr. Preti has authored numerous papers in the field and has been invited to speak at national and international meetings relating to the manufacturing, regulatory and quality aspects of cell therapy and regenerative medicine. In addition to having served as an inspector for the Foundation for Accreditation of Cellular Therapy, Dr. Preti also serves on professional and state committees charged with the development of regulations for cellular therapy. Dr. Preti received his Doctor of Philosophy degree from New York University, graduating with distinction. During his tenure at NYU, Dr. Preti studied and received his degrees in Cellular Biology, with a specialty in hematology, studying erythropoiesis under the mentorship of Albert S. Gordon, PhD. Immediately following his graduate work, Dr. Preti joined Marrow Tech, Inc. (which later became Advanced Tissue Sciences) where he served as Group Leader in the development Marrow Techs proprietary three-dimensional, matrix-based hematopoietic culture system for ex vivo expansion of bone marrow stem cells.
THE RISKS DESCRIBED BELOW ARE NOT THE ONLY RISKS FACING THE COMPANY. ADDITIONAL RISKS THAT WE DO NOT YET KNOW OF OR THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K. THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT HISTORIC FACTS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN OR IMPLIED BY FORWARD-LOOKING STATEMENTS. IF ANY OF THE RISKS OCCUR, OUR BUSINESS STRATEGY, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
Our business, financial condition, operating results and cash flows can be affected by a number of factors, including, but not limited to, those set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. The risks described below are not the only ones we face, but those we currently consider to be material. There may be other risks which we now consider immaterial, or which are unknown or unpredictable, with respect to our business, our competition, the regulatory environment or otherwise that could have a material adverse effect on our business.
We are a company with a limited operating history, limited capital, and limited sources of revenue. Since our inception in 1980, we have incurred net losses of approximately $143.1 million through December 31, 2011. We incurred net losses attributable to common shareholders of approximately $47.8 million for the year ended December 31, 2011 and approximately $23.5 million for the year ended December 31, 2010, and we expect to incur additional operating losses and negative cash flow in the future. The revenues from our United States Cell Therapy segment are not sufficient to cover costs attributable to that business. We expect to incur losses and negative cash flow for the foreseeable future as a result of development activities associated with our product candidate AMR-001 (including clinical trials), our VSELTM Technology, a T-cell therapeutic and other research and development efforts to advance cell therapeutics. We also expect to continue to incur significant expenses related to sales, marketing, general and administrative and product research and development in connection with the development of our business.
Although Erye, a Chinese pharmaceutical company in which we acquired a 51% interest in October 2009, had revenues of approximately $63.4 million for the year ended December 31, 2011, and approximately $69.6 million for the year ended December 31, 2010, it has only a limited history of earnings. Pursuant to the October 2009 joint venture agreement that governs the ownership and management of Erye, or the Joint Venture Agreement, for the three-year period commencing on the first day of the first fiscal quarter after the Joint Venture Agreement became effective distributions are made as follows: (i) 49% of undistributed profits, after tax, will be distributed to Suzhou Erye Economy and Trading Co. Ltd., or EET, which owns the remaining 49% of Erye, and loaned back to Erye for use in connection with its construction of and relocation to the new Erye facility (to be repaid gradually after construction is completed); (ii) 45% of the net profit after tax due to the Company will be provided to Erye as part of the new facility construction fund, which will be characterized as paid-in capital for our 51% interest in Erye; and (iii) only 6% of the net profit will be distributed to us directly for our operating expenses. As a result, we will not be able to supplement our cash flow fully from the income expected to be generated by Erye in the short term. We are pursuing strategic alternatives with respect to our interest in Erye.
PCT became a wholly-owned subsidiary of NeoStem on January 19, 2011, upon the closing of the PCT Merger. PCT has not generated any significant amount of revenue nor been profitable in any quarter since inception.
We consummated our acquisition of Amorcyte on October 17, 2011. Our Amorcyte subsidiary has no product revenue and to date has not received regulatory approval to commercialize any of its products under development. Amorcyte has not completed development of any of its product candidates. Because of the numerous risks associated with drug and biologics development, we are unable to predict whether the development efforts of our Amorcyte subsidiary will be successful. In January 2012, we commenced enrollment of Amorcytes Phase 2 PreSERVE clinical trial. The trial is expected to cost approximately $14 million over the first two years and anticipated to cost up to approximately $18 million over a five year period, inclusive of manufacturing costs.
Beginning with our January 2011 acquisition of PCT, we began to shift our business plan to focus on capturing the paradigm shift to cell therapies. It is anticipated that our recent acquisition of Amorcyte will help to further our expansion into the cell therapy field. However, we have limited experience in the areas of cell therapy development and marketing of cell therapy products, and in the related regulatory issues and processes. While the founders of PCT, Dr. Andrew Pecora and Dr. Robert Preti, will continue to provide services in connection with development activities, we can provide no assurances that our management will successfully oversee Amorcytes or our other clinical development activities and integrate these businesses into the NeoStem business.
We are heavily dependent upon the successful development of AMR-001 for cardiovascular disease. Our business could be materially harmed if we encounter difficulties in the development of this product candidate, such as:
|||delays in the ability to manufacture the product in quantities or in a form that is suitable for any required clinical trials;|
|||delays in the design, enrollment, implementation or completion of required clinical trials;|
|||an inability to follow our current development strategy for obtaining regulatory approval from the FDA because of changes in the regulatory approval process;|
|||less than desired or complete lack of efficacy or safety in clinical trials; and|
|||intellectual property constraints that prevent us from making, using, or commercializing the product candidate.|
As part of our plan to focus our business on capturing the paradigm shift to cell therapies following our January 2011 acquisition of PCT, we are pursuing strategic alternatives with respect to our 51% interest in Erye. We plan to devote our resources and management efforts to cell therapy manufacturing and development, and other related activities, including adult stem cell collection and storage. We believe that if we were to monetize Erye, we would have additional capital needed to pursue the development of cell therapies. To that end, in June 2011, we engaged a financial advisor to lead the effort to pursue the possible divesture of our 51% interest in Erye. Marketing efforts to date have led only to a few nonbinding letters of intent. However, in addition to the factors set forth below, it is too early to determine whether these or other proposals will lead to definitive agreements.
Any sale of our interest would be subject to a right of first refusal held by EET pursuant to the terms of the Joint Venture Agreement between a subsidiary of ours and EET. EET owns the remaining 49% interest in Erye. A number of issues have arisen between EET and NeoStem with respect to the operation and financing of Erye. For instance, while EET is required to lend back to Erye dividends received by it to finance Eryes move to and construction of its new facilities, Erye has recently reported to us that such arrangement is no
longer tax efficient in light of the ratio of Eryes shareholder loans to its registered capital. In connection with exploring ways to remedy the additional tax burden caused by the level of shareholder loans and in preparing for a sale process, other issues have also surfaced, including the issue of our and Erye's needing to obtain all Chinese regulatory approvals (and associated registrations) required to reflect the legal title of our interest in Erye as being held by the proper entity within our group which is its current beneficial owner as that term is used under U.S. law. The Company believes that we have now determined what government approvals (and associated registrations) will need to be issued by the Suzhou Municipal Bureau of Foreign Investment and Commerce and the Suzhou Administration for Industry and Commerce to remediate these deficiencies and the Company has had counsel in China prepare these filings. The Companys management believes these regulatory deficiencies can be remediated and should not delay a possible divestiture of the Companys interests in Erye that is currently under evaluation. However, the Company requires the cooperation of the officers of Erye, as to which no assurance can be given, and we may be compelled to seek to replace these officers or to commence legal action to obtain the required consents or otherwise move forward with requisite filings. In addition, even if the filings are made, no assurance can be given that any unremediated regulatory deficiencies would not have an adverse effect on the operating results and liquidity of Erye and our Company and will not impede or delay efforts to divest our interest in Erye. Also, the remediation process is expected to trigger certain tax liabilities and penalties; however, the ultimate liability will be based on discussions with the relevant Chinese authorities. The Company cannot reasonably assess the exposure as of December 31, 2011.
We have not yet determined to sell our interest in Erye, and will not do so until we can assess the level of interest generated, the potential price and transaction terms we might be offered and any regulatory impediments to a transaction. The challenging nature of the current China pharmaceutical market makes it a difficult time for us to be pursuing a divestiture of our 51% ownership interest in Erye, and we expect that any sale of this interest will result in our not recouping our original investment. The process to divest Erye has led to our interests becoming unaligned with those of the 49% shareholder, as it from time to time has indicated a desire to be a buyer, and this has led to strained relations between the parties. A sale of our interest in Erye, if a sale can be consummated, would have a material effect on the business, results of operations and balance sheet. Factors that may impede a sale may include, but not be limited to, (i) EETs right of first refusal and the significant time and money that exercise of such right could cause a potential purchaser, (ii) the need for any purchaser to negotiate a new Joint Venture Agreement and a shareholder loan repayment schedule with EET if EET does not wish to either sell its interest or exercise its right of first refusal, (iii) recent regulatory changes in China which reduce prices that may be charged for certain of Eryes products and limit use of antibiotics, (iv) recent disappointing financial performance by Erye resulting at least in part from such regulatory changes, including a decrease in revenues in 2011, and a net loss for fourth quarter 2011, (v) tax or regulatory issues affecting Erye, including those described above and other tax increases described in our filings which will adversely affect Erye going forward, (vi) availability of financing for a potential purchaser, and (vii) other factors typical of any sale process. There can be no assurance that any sale of our Erye interest will be made, or will be made at a price that provides material additional capital for our cell therapy development efforts.
Due to a number of factors including tightening of monetary policy in China, government-imposed pricing constraints on certain of its products, the additional expenses described above, and constraints on certain bank accounts arising from the Welman litigation described in Item 3 of this Form 10-K under the caption Legal Proceedings, Erye has experienced cash flow constraints and may consider seeking additional bank loans. In connection with the Welman litigation, as of December 31, 2011, approximately 15,656,000 RMB (approximately $2,460,000) of cash had been frozen in six Erye bank accounts. No assurances can be given that it will be able to secure additional credit on satisfactory terms, or at all.
Cell therapy is still a developing area of research, with few cell therapy products approved for clinical use. At the PCT level, the current market and current contracts principally consist of providing manufacturing of cell and tissue-based therapeutic products in clinical trials and processing of stem cell products for transplantation programs. Our Amorcyte and Athelos subsidiaries are involved in developing cell-based therapies: Amorcyte for cardiovascular indications, and Athelos for T-cell therapy for restoring normal immune responses. Our access to these markets will depend on the progress of our development activities, particularly with respect to Amorcyte, for which the Phase 2 clinical trial for AMR-001 is now enrolling, as well as subsequent trials. We also provide services related to the collection and storage of umbilical cord blood units and adult stem cells. There currently is no significant global market for stem cell processing or their collection and storage, nor is there any guarantee that such markets will develop in the near future, or at all. Major medical institutions currently do not generally recommend private storage, and we believe that the medical community is supportive of the public cord blood collective system. Patients can donate their cord blood to the system without charge. The market for cell and tissue-based therapies is early-stage, substantially research oriented, and financially speculative. Very few companies have been successful in their efforts to develop and commercialize a stem cell product. Stem cell products in general may be susceptible to various risks, including undesirable and unintended side effects, unintended immune system responses, inadequate therapeutic efficacy, or other characteristics that may prevent or limit their approval or commercial use. The demand for stem cell processing and the number of people who may use cell or tissue-based therapies is difficult to forecast. As there are no real experts who can forecast this market with accuracy, there is limited data from which the future use of our services may be forecasted. Our success is dependent on the establishment of a large global market for our products and services and our ability to capture a share of this market.
Our development efforts including our Phase 2 trial of AMR-001, are susceptible to the risks of failure inherent in the development and commercialization of therapeutic products based on new technologies. The novel nature of cellular therapeutics creates significant challenges with regards to product development and optimization, manufacturing, government regulation, third-party reimbursement and market acceptance. For example, the United States FDA has relatively limited experience regulating therapies based on cells, and there are few approved treatments utilizing cell therapy.
Even if we successfully develop and obtain regulatory approval for AMR-001 or any future cellular therapeutic product candidates, the market may not understand or accept them, which could adversely affect future sales. The degree of market acceptance of any such product candidates will depend on a number of factors, including:
|||the clinical safety and effectiveness of the product candidates, the availability of alternative treatments and the perceived advantages of the particular product candidates over alternative treatments;|
|||the relative convenience and ease of administration of the product candidates;|
|||our ability to separate the product candidates from the ethical and political controversies associated with stem cell product candidates derived from human embryonic or fetal tissue;|
|||ethical concerns that may arise regarding our commercial use of stem cells, including adult stem cells, in the manufacture of the product candidates;|
|||the frequency and severity of adverse events or other undesirable side effects involving the product candidates or the products or product candidates of others that are cell-based; and|
|||the cost of the products, the reimbursement policies of government and third-party payors and our ability to obtain sufficient third-party coverage or reimbursement.|
Our drug product candidates, and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in states and in other countries. Our failure to obtain regulatory approval for a product candidate would prevent us from commercializing the product candidate. We have not received regulatory approval to market any product candidate in any jurisdiction. Securing FDA approval typically requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each therapeutic indication to establish the product candidates safety and efficacy. Securing FDA approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the FDA. AMR-001 and any other potential future products of ours may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude the obtaining of regulatory approval or may prevent or limit commercial use.
The process of obtaining FDA and other regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved and challenges by competitors. Because all of its product candidates are based on its CD34+ stem cell technology, any adverse events in our Amorcyte subsidiarys clinical trials of one of its product candidates could negatively affect the clinical trials and approval process for Amorcytes other product candidates. Changes in regulatory approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application or may make it easier for our competitors to gain regulatory approval to enter the marketplace. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that Amorcytes data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying agency interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
Any of the following factors, among others, may cause regulatory approval for our drug product candidates to be delayed, limited or denied:
|||the product candidates require significant clinical testing to demonstrate safety and effectiveness before applications for marketing approval can be filed with the FDA;|
|||data obtained from preclinical and nonclinical animal testing and clinical trials can be interpreted in different ways, and the FDA may not agree with our respective interpretations or may require us to conduct additional testing;|
|||it may take many years to complete the testing of product candidates, and failure can occur at any stage of the process;|
|||negative or inconclusive results or the occurrence of serious or unexpected adverse events during a clinical trial could cause us to delay or terminate development efforts for a product candidate; and|
|||FDA may require expansion of the size and scope of the clinical trials.|
Any difficulties that we encounter in obtaining regulatory approval would have a substantial adverse impact on our ability to generate product sales, and could make any search for a collaborative partner more difficult.
Our research and development activities relating to our VSELTM Technology and other populations of adult stem cells also pose additional risks related to requirements for preclinical and clinical testing by regulatory authorities including the FDA, to demonstrate the safety and efficacy of the underlying therapy. The development of new drugs and therapies is often a long, expensive and difficult process and most attempts fail. Our VSELTM Technology is in the very early stages of development and will require many steps, tests and processes before we will be able to commence clinical testing in humans. There can be no assurance that a biologics license application, or BLA, with the FDA will not be required for our VSELTM Technology or our other stem cell technologies. The approval process for a BLA can take years, require human clinical trials and cost several million dollars. There also can be no assurance that we independently, or through collaborations, will successfully develop, commercialize or market our VSELTM Technology or other stem cells for any therapeutic indication. Should we fail to develop our VSELTM Technology or other adult stem cell technologies pursued by us, our business prospects, operating results and financial condition will be materially and adversely affected.
Before obtaining regulatory approval for the sale of AMR-001 or any other product candidate, we must conduct, at our own expense, extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials conducted by our Amorcyte subsidiary or on its behalf can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including the following:
|||regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;|
|||clinical trials of product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs that we expect to be pursuing;|
|||the number of patients required for clinical trials of product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;|
|||third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner or at all;|
|||we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks;|
|||regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;|
|||the cost of clinical trials of our product candidates may be greater than anticipated;|
|||we may be subject to a more complex regulatory process, since cell-based therapies are relatively new and regulatory agencies have less experience with them than with traditional pharmaceutical products;|
|||the supply or quality of our product candidates or other materials necessary to conduct clinical trials of these product candidates may be insufficient or inadequate; and|
|||our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators to halt or terminate the trials.|
During Amorcytes Phase 1 trial of AMR-001, serious adverse events in the treatment group were not significantly different in number compared to the control group. However, serious adverse events during the Phase 1 trial that occurred included one treatment group subject death from ventricular fibrillation soon after cell infusion. The ventricular fibrillation was attributed to recurrent myocardial infarction from stent thrombosis preceding cell infusion. This subjects death resulted in a clinical hold during the Phase 1 trial. The hold was removed upon FDAs review of the complete documentation on the patient and changes to enrollment procedures for additional subjects that was submitted by Amorcyte. Another treatment group subject was withdrawn because of acute stent thrombosis before cell infusion. One control subject and two additional treatment subjects experienced in-stent restenosis. One treatment subject experienced worsening of congestive heart failure.
There can be no assurance that similar or other events will not occur in future clinical trials of our Amorcyte subsidiary's product candidates that could give rise to safety concerns, particularly in light of the impaired heart function of patients who will be the target subject population of Amorcyte's future planned clinical trials.
If we are required to conduct additional clinical trials or other testing of AMR-001 beyond those that we currently contemplate, or if we are required to conduct additional trials or testing of future product candidates beyond what we currently anticipate, or if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive, or if there are safety concerns, we may:
|||be delayed in obtaining marketing approval for AMR-001 (or any future product candidate);|
|||not be able to obtain marketing approval;|
|||obtain approval for indications that are not as broad as intended;|
|||have the product removed from the market after obtaining marketing approval;|
|||be subject to additional post-marketing testing requirements; or|
|||be subject to restrictions on how the product is distributed or used.|
Our product development costs will also increase if we experience delays in testing or approvals. We cannot predict whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize product candidates or allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates and may harm our business and results of operations.
We initiated a Phase 2 clinical trial of AMR-001, enrolling our first patient in January 2012, and we are targeting enrolling approximately 160 patients over the course of a year or so. If the results of the Phase 2 clinical trial are positive and support Phase 3 development, we intend to initiate and complete one or more pivotal Phase 3 clinical trials before seeking regulatory approval to commercialize AMR-001. Our Amorcyte subsidiary is required to have certain validated and established manufacturing controls with respect to AMR-001 related to its safety, purity and potency when administered to patients. Manufacturing control issues will need to be addressed and resolved with the FDA if we seek to initiate a Phase 3 clinical trial of AMR-001. Specifically, we must develop a potency assay for AMR-001 and lot release specifications that correlate with AMR-001 activity or clinical response. We may not be successful in our efforts to address these chemistry, manufacturing and controls, or CMC, issues for AMR-001 in a manner satisfactory to the FDA. If we cannot initiate, or if we are delayed in initiating, a pivotal Phase 3 clinical program of AMR-001 as a
result of our failure to satisfy the FDAs CMC concerns or otherwise, the timing of our regulatory submission for commercialization of AMR-001 could be delayed, or we may not be able to seek regulatory approval to commercialize AMR-001 at all.
The number of CD34+/CXCR4+-cells and the composition of the CD34+ cell population from bone marrow vary from patient to patient. These cells are the basis of our product candidate AMR-001. Such variability in composition could adversely affect our ability to manufacture these product candidates derived from a patients bone marrow or to establish and meet acceptable specifications for release of the product candidate for use in a clinical trial or, if approved, for treatment of a particular patient. As a consequence, the development and regulatory approval process for these product candidates could be delayed or may never be completed.
To date, we have not completed the development of any products through regulatory approval. While Amorcyte and others have analyzed the potential of AMR-001 in preclinical studies with animals, the potential efficacy of AMR-001 in humans has only been evaluated in a Phase 1 clinical trial. The results of preclinical studies in animals may not be predictive of results in a clinical trial. Likewise, the outcomes of early clinical trials may not be predictive of the success of later clinical trials. The safety and efficacy data from our Phase 2 clinical trial of AMR-001 may be less favorable than the data observed in the Phase 1 clinical trial of this product candidate, which was based on small numbers of patients. There can be no assurances that the clinical trials of any product candidate will ultimately be successful. New information regarding the safety and efficacy of such product candidate may be less favorable than the data observed to date.
We may not be able to initiate or continue clinical trials of AMR-001 (or other product candidates) if we are unable to locate and enroll a sufficient number of eligible patients to participate in the clinical trials required by the FDA or other regulatory authorities. We may also be unable to engage a sufficient number of clinical trial sites to conduct our trials. The challenge of enrolling patients will become more difficult if we are required by the FDA or a similar regulatory agency outside the United States to conduct a trial on a larger population than we currently anticipate. In that event, we might be required to seek patients to participate in our trials from Europe or other foreign jurisdictions, which could raise regulatory uncertainties and increase clinical trial costs. Moreover, because our PCT subsidiary does not currently have FDA registered manufacturing facilities operating outside of the United States, our ability to conduct trials outside of the U.S. may be constrained by our ability to transport trial materials to foreign destinations within the expiry period of such materials unless we commence operation outside of the United States.
We and our investigators may also face challenges in enrolling patients to participate in our clinical trials due to the novelty of our cell-based therapies. Some patients may have concerns regarding cell therapy that may negatively affect their perception of therapies under development and their decision to enroll in the trials. Furthermore, patients suffering from diseases within target indications may enroll in competing clinical trials, which could negatively affect our ability to complete enrollment of our trials.
Additional factors that may affect our ability to enroll patients in clinical trials include:
|||the size of the patient population;|
|||patients willingness to receive a placebo or other inactive control on the control arm of a clinical study;|
|||the distance between patients and clinical test sites; and|
|||the eligibility criteria for the trial.|
Enrollment delays in clinical trials may result in increased development costs for product candidates, and inability to enroll a sufficient number of patients for any current or future clinical trials would result in significant delays or may require one or more clinical trials to be abandoned altogether.
The essential cell sorting system that we are using in our Phase 2 clinical trial of AMR-001 is being provided to us by the unaffiliated third party that owns the system. Any lack of continued availability of the system, for any reason, would have a material adverse effect on our AMR-001 product development and commercialization efforts. Although there are other available systems in the marketplace, we have not evaluated their costs or safety and effectiveness, or whether AMR-001 would be compatible with such systems. Moreover, if the system becomes unavailable during or after Phase 2, we would need to demonstrate that the Phase 2 data obtained with this system are still relevant to future trials using cells sorted with other systems.
We may in the future selectively pursue strategic collaborations for the development and commercialization of AMR-001 or other product candidates and for the international development and commercialization of such product candidates. For example, we anticipate that we might need to enter into a collaboration agreement with a third party to conduct and fund one or more pivotal Phase 3 clinical trials of AMR-001. In addition, we may not be able to commercialize AMR-001 successfully without entering into an arrangement with a third party to provide an approved method of administration.
There can be no assurance that we will be able to identify suitable collaborators or negotiate collaboration agreements on terms that are acceptable to us, or at all. In any future third-party collaboration, we would be dependent upon the success of the collaborators in performing their responsibilities and their continued cooperation. Such collaborators may not cooperate or perform their obligations under their agreements with us. We cannot control the amount and timing of our collaborators resources that will be devoted to performing their responsibilities under their agreements with us. Collaborators may choose to pursue alternative technologies in preference to those being developed in collaboration with us. The development and commercialization of product candidates will be delayed if collaborators fail to conduct their responsibilities in a timely manner or in accordance with applicable regulatory requirements or if they breach or terminate their collaboration agreements. Disputes with collaborators could also result in product development delays, decreased revenues and litigation expenses.
We are currently exploring in clinical development, the potential of Amorcytes AMR-001 to address certain targeted cardiovascular indications, and the potential of Athelos T-reg therapy for restoring normal immune responses. This technology is still in early stages of discovery and development, and our Amorcyte subsidiary has not proven in clinical trials that its product candidate will be safe and effective for the indications for which it intends to seek approval. Our Athelos subsidiarys T-reg therapeutic for autoimmune disorders is in earlier stages of clinical development. These and other cell therapy product candidates we may pursue are susceptible to various risks, including undesirable and unintended side effects, inadequate therapeutic efficacy or other characteristics that may prevent or limit their marketing approval or commercial use. For example, our Amorcyte subsidiary has not treated a sufficient number of patients to allow us to
evaluate the most frequent or most serious adverse events that could occur with AMR-001. Any undesirable side effects that might be caused by AMR-001 (or future cell therapy product candidates) could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications. We could also be required to change the manner in which a product candidate is administered, which could require that additional clinical trials be conducted. If the potential of AMR-001, Athelos T-reg therapeutic, or any other cell therapeutic product candidate of ours is not realized, whether as a result of unintended consequences or otherwise, the value of our technology and development programs could be significantly reduced.
Even if we obtain all applicable regulatory approvals and successfully commercialize one or more of our cell therapy candidates, contractual arrangements between our Company and a licensor, collaborator or other third party, as applicable, in connection with the respective product, may require that we make royalty or other payments to the respective third party, and as a result our Company would not receive all of the revenue derived from commercial sales of the respective product. For example, the Amorcyte Merger Agreement requires us to pay certain earn out payments following the first commercial sale of AMR-001 for the benefit of the former stockholders of Amorcyte, generally equal to 10% of net sales (or 30% of any sublicensing fees, royalties and milestone fees or profit sharing payments, in the event we license or otherwise grant an unaffiliated third party the right to commercialize or otherwise exploit AMR-001), less NeoStems out-of-pocket clinical development costs not previously paid or reimbursed and other expenses. Also, the license agreements relating to the T-reg therapeutics being developed by Athelos include obligations to pay royalties on net sales of licensed products, maintenance fees and milestone fees upon events such as initiation of clinical trial stages, license application filings and regulatory approvals. Where such an agreement applies, the payment by us of the applicable royalties and other fees mean that our Company does not receive all of the revenue upon a successful commercialization of the respective product candidate.
To support our own research and development activities for our VSELTM Technology, in September 2009 we signed a lease for approximately 8,000 square feet of office and laboratory space in Cambridge, Massachusetts that has served as our research and development headquarters. The Company is assessing its need for the Cambridge facility going forward given the acquisition of PCT with its Allendale, NJ and Mountain View, CA facilities which could accommodate this work. In May 2011 we sublet a portion of our Cambridge facility to another life science company. To pursue our current business strategy, we must have in place appropriate research capabilities, either on our own or through relationships with third parties. There can be no assurance that we will be successful in these efforts. Our additional research and development capacity also will require adequate sources of funding. There can be no assurance that any of these development efforts will produce a successful product or technology. Our failure to develop new products would have a material adverse effect on our business, operating results and financial condition.
The commercial viability of our stem cell technologies may depend on our ability to successfully isolate and expand the number of stem cells collected through adult stem cell collection processes in order to achieve a therapeutically-viable dose. Today, the number of very small embryonic-like stem cells that can be isolated from the peripheral blood of an adult donor is relatively small and this volume of cells may not be sufficient for therapeutic applications. Cell expansion processes may thus prove to be a critical component of our adult stem cell collection, processing and storage services as it relates to the VSELTM Technology and other potential cell technologies. There are many biotechnology laboratories attempting to develop cell expansion technology, but to date, cell expansion techniques remain very inefficient. There can be no assurance that such technology will be effective or available at all. The unavailability of cost effective and reliable expansion technologies could severely limit the commercial opportunities of our VSELTM Technology program and other potential cell technologies and limit our business prospects, which could have a material adverse effect on our business, operating results and financial condition.
Moreover, stem cell collection techniques are rapidly developing and could undergo significant change in the future. Such rapid technological development could result in our technologies becoming obsolete.
Successful biotechnology development in general is highly uncertain and is dependent on numerous factors, many of which are beyond our control. While our AMR-001 product candidate, our Athelos program and our VSELTM Technology appear promising, such technologies may fail to be successfully commercialized for numerous reasons, including, but not limited to, competing technologies for the same indication. There can be no assurance that we will be able to develop a commercially successful therapeutic application for this technology or other potential stem cell technologies.
Advances in other treatment methods or in disease prevention techniques could significantly reduce or entirely eliminate the need for our cell therapy services, planned products and therapeutic efforts. There is no assurance that cell therapies will achieve the degree of success envisioned by us in the treatment of disease. Nor is there any assurance that new technological improvements or techniques will not render obsolete the processes currently used by us, the need for our services or our planned products. Additionally, technological or medical developments may materially alter the commercial viability of our technology or services, and require us to incur significant costs to replace or modify equipment in which we have a substantial investment. We are focused on cell therapy, and if this field is substantially unsuccessful, this could jeopardize our success or future results. The occurrence of any of these factors may have a material adverse effect on our business, operating results and financial condition.
The value of our development programs, as well as the value of the ancillary supporting services that we provide (such as our stem cell collection, processing and storage business, or the processing and manufacturing services offered by our PCT subsidiary), could be significantly impaired, and our ability to become profitable and continue our business could be materially and adversely affected, if cell therapies under development by us or by others to treat disease are not proven effective, demonstrate unacceptable risks or side effects or, where required, fail to receive regulatory approval. The therapeutic application of cells to treat serious diseases is currently being explored by a number of companies. Cells collected and used for the same individual are referred to as autologous cells and those collected from an individual who is not the user of the cells are referred to as allogeneic cells. To our knowledge, the only allowed therapeutic uses of stem cells in the U.S., other than in connection with clinical trials, involves hematopoietic stem cell transplants to treat certain types of blood-based cancers (hematopoietic stem cells are the stem cells from which all blood cells are made) and adult autologous cultured cartilage cells for implantation for the repair of symptomatic cartilage defects of the femoral condyle (the distal end of the femur). No other stem cell therapeutic products have received regulatory approval for sale in the U.S. While stem cell-based therapy has been reported to be susceptible to various risks, including some undesirable side effects and immune system responses, these problems have been primarily associated with allogeneic use. Inadequate therapeutic efficacy also is a risk that may prevent or limit approval or commercial use of adult stem cells, whether for autologous use or allogeneic use. In addition, the time and cost necessary to complete the clinical development and to obtain regulatory approval of new therapies using stems cells are expected to be significant. If a market for underlying cell therapies never materializes, the market for ancillary and supporting services would also suffer.
Many of PCTs customers are engaged in research, development, production and marketing. The amount of customer spending on research, development, production and marketing has a large impact on our revenues and profitability, particularly the amount customers choose to spend on outsourcing. Customers determine the amounts that they will spend based upon, among other things, available resources and their need to develop new products, which, in turn, is dependent upon a number of factors, including their competitors research, development and production initiatives, and the anticipated reimbursement scenarios for specific products and
therapeutic areas. In addition, consolidation in the industries in which our customers operate may have an impact on such spending as customers integrate acquired operations, including research and development departments and their budgets. Our customers finance their research and development spending from private and public sources. A reduction in spending by our customers could have a material adverse effect on our business, financial condition and results of operations. If our customers are not successful in attaining or retaining product sales due to market conditions, reimbursement issues or other factors, our results of operations may be materially impacted. Further, the nature and duration of PCTs contracts with customers, which may be subject to repeated renegotiation and amendments which change the objectives of our work and the milestones which determine when revenues are received by us, can yield varying revenues and profits, which may have an adverse effect on our revenues.
Customers may experience adverse outcomes or encounter limitations in connection with our stem cell or cord blood collection and storage services. For example, when stem cells are collected from a customer for storage, there is the possibility of an infection acquired from the apheresis process, which is the process of extracting stem cells from a patients whole blood, which is an integral part of our collection process. Both our stem cell and cord blood collection and storage services may be subject to additional limitations, including (i) collection of insufficient quantities of stem cells for therapeutic applications; (ii) failure of the equipment supporting our cryopreservation storage service to function properly and thus maintain a supply of usable adult stem cells; and (iii) specimen damage, including contamination or loss in transit to us. Should any of these events occur, our reputation could be harmed, our operations could be adversely affected and litigation could be filed against us. Our systems and operations are vulnerable to damage or interruption from fire, flood, equipment failure, break-ins, tornadoes and similar events for which we do not have redundant systems or a formal disaster recovery plan. We may not carry sufficient business interruption insurance and/or liability insurance to compensate for losses and claims that might arise in the event of such an interruption. Any claim of adverse side effects or limitations or material disruption in our ability to maintain continued uninterrupted storage systems could have a material adverse effect on our business, operating results and financial condition.
In addition, the value of our cord blood storage services is related to the higher success rate of autologous cord blood transplants over unrelated ones. If medical research discovers new and more effective medical procedures that make allogeneic cord blood transplants safer and more effective, the clinical advantage of storing a childs umbilical cord blood for his or her own future therapeutic use may significantly decline.
We believe that we can provide services and produce materials for clinical trials and for human use at our existing facilities, which we believe are compliant with FDA requirements for cGMP, and cGTP. We also believe that we have sufficient capacity to meet expected near term demand. However, we may need to, depending on demand, expand our manufacturing capabilities for cell therapy services and products in the future. In 2007, PCT acquired an additional facility in Allendale, New Jersey, which became a cGMP compliant facility in 2010. The demand for our services and products could, at times, exceed existing manufacturing capacity. If we do not meet rising demand for products and services on a timely basis or are not able to maintain cGMP compliance standards, then our clients and potential clients may elect to obtain the products and services from competitors, which could materially and adversely affect our revenues.
Components of therapeutic products approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMP. Manufacturers of cell-based product candidates such as AMR-001 also must comply with the cGTP. In addition, therapeutic products may be required to modify their manufacturing process from time to time in response to FDA requests. Manufacture of live cellular-based products is complex and subjects companies to significant regulatory burdens that may change over time. We may encounter difficulties in the production of our product candidates due to our limited manufacturing
experience. Although Amorcyte's cell processing services are provided in-house through its sister subsidiary PCT, we may not have sufficient manufacturing capacity to meet any commercial demand that might develop should AMR-001 demonstrate efficacy, receive necessary approvals and be cleared for commercialization. These difficulties could reduce sales of our products, if any are approved for marketing, increase costs or cause production delays, any of which could damage the reputation and diminish potential profitability.
We expect that we would need to significantly expand our manufacturing capabilities to meet potential demand for commercial production of product candidates that might attain regulatory approval. Such expansion would require additional regulatory approvals. We may also encounter difficulties in the commercial-scale manufacture that may be required following any regulatory approval. PCT is currently developing new processes and is in discussions with other companies to develop new instruments to improve manufacturing efficiency. Improving the speed and efficiency of our manufacturing process including cell sorters and other instruments PCT uses in connection with AMR-001production is a key element of our business plan. We cannot provide assurances that we will be able to develop process enhancements that are acceptable to the FDA, on a timely basis, on commercially reasonable terms, or at all. If we fail to develop these improvements, we could face significantly higher capital expenditures than we anticipate in connection with AMR-001 development, increased facility and personnel costs and other increased operating expenses. We may need to demonstrate that product candidates manufactured using new processes or instruments are comparable to the product candidates used in clinical trials. Depending on the type and degree of differences, we may be required to conduct additional studies or clinical trials to demonstrate comparability.
In addition, some changes in manufacturing processes or procedures, including a change in the location where a product candidate is manufactured, generally require FDA or foreign regulatory authority review and approval prior to implementation. We may need to conduct additional preclinical studies and clinical trials to support approval of any such changes for Amorcyte. Furthermore, this review process could be costly and time-consuming and could delay or prevent the commercialization of product candidates.
We process and store adult autologous stem cells from our network of U.S. adult stem cell collection centers and the umbilical cord blood of customers of NeoStem Family Storage, LLC at PCTs facility in Allendale, New Jersey, and may do so at PCTs Mountain View, California, facility in the future. We also process and store cellular therapy products for clinical trials at PCTs facility in Allendale, New Jersey, and may do so at PCTs Mountain View, California, facility. If these facilities or the equipment in these facilities was to be significantly damaged or destroyed, we could suffer a loss of some or all of the stored adult autologous stem cells, cord blood units, and cellular therapy products. Depending on the extent of loss, such an event could reduce the ability of us, NeoStem Family Storage, LLC, and PCT to provide stem cells when requested, could expose us, NeoStem Family Storage, LLC, and PCT to significant liability from our customers, and could affect the ability to continue to provide adult autologous stem cells and umbilical cord blood preservation services and manufacturing of cellular therapy services and products. While we believe that we have insured against losses from damage to or destruction of our facilities consistent with typical industry practices, if we have underestimated our insurance needs, we may not have sufficient insurance to cover losses beyond the limits on its policies. Such events could have a material adverse effect on our value.
Furthermore, AMR-001 for our Amorcyte subsidiary's clinical trials is produced by PCT at PCTs facilities. Because PCT serves as Amorcytes exclusive provider of all cell processing services (including production of AMR-001 for clinical trials), Amorcyte relies on PCTs Allendale or Mountain View facilities and on the continuing suitability of PCTs facility to provide necessary services. If PCTs Allendale or Mountain View facilities (or the equipment therein) are significantly damaged or destroyed, Amorcyte will likely experience significant disruptions to the manufacturing capacity for AMR-001, which capacity might not be quickly or inexpensively replaced. In such a situation, we may be required to negotiate agreements with third parties for cell processing services, which would likely increase our operating costs. In the event of a temporary or protracted loss of PCTs facility or equipment, it is possible that Amorcyte might not be able to transfer manufacturing to a third party. Even if Amorcyte could transfer manufacturing to a third party, the shift would likely be expensive and time-consuming, particularly since the new facility would need to comply with the necessary regulatory requirements and Amorcyte would need FDA approval before selling any
products manufactured at that facility. Such an event could delay clinical trials or, if any Amorcyte product candidates are approved by the FDA, reduce sales of such products.
The degree of market acceptance of our products and services depends upon a number of factors, including the strength of our sales and marketing support. If our marketing is not effective, our ability to generate revenues could be significantly impaired. Due to capital constraints, our marketing and sales activities have been somewhat limited and thus we may not be able to make our services known to a sufficient number of potential customers and partners. Limitations in our marketing and sales activities, and the failure to attract enough customers, will affect our ability to operate profitably.
We have no experience in the selling, marketing or distribution of biologic products. To achieve commercial success for any product that might be approved in the future for marketing, we would be required either to develop a sales and marketing organization or to outsource these functions to third parties.
We may be unable to establish marketing, sales and distribution capabilities necessary to commercialize and gain market acceptance for any of its product candidates and to be competitive. In addition, co-promotion or other marketing arrangements with third parties to commercialize product candidates could significantly limit the revenues derived from such product candidates, and these third parties may fail to commercialize the product candidates successfully.
The biotechnology and life science industries are highly competitive. They include multinational biotechnology and life science, pharmaceutical and chemical companies, academic and scientific institutions, governmental agencies, and public and private research organizations. Many of these companies or entities have significantly greater financial and technical resources and production and marketing capabilities than do we. The biotechnology and life science industries are characterized by extensive research and development, and rapid technological progress. Competitors may successfully develop services or products superior or less expensive than cell therapy services or products, rendering our services less valuable or marketable.
Historically, in the U.S. we have faced competition from other established operators of stem cell preservation businesses and providers of stem cell storage services. Today, there is an established and growing market for cord blood stem cell banking. We are aware of at least one other company with established stem cell banking services that processes and stores stem cells collected from adipose, or fat, tissue. This type of stem cell banking requires harvesting fat by a liposuction procedure. Embryonic stem cells represent yet another alternative to pre-donated and stored adult stem cells. As techniques for expanding stem cells improve, thereby allowing therapeutic doses, the use of embryonic stem cells and other collection techniques of adult stem cells could increase and compete with our services. We are also aware that other technologies are being developed, for example, to turn skin cells into cells that behave like embryonic stem cells or to harvest stem cells from the pulp of baby teeth. While these and other approaches remain in early stages of development, they may one day be competitive.
In addition, cord blood banks such as ViaCord, a Perkin Elmer company, or LifebankUSA, a Celgene company, easily could enter the field of adult stem cell collection because of their processing labs, storage facilities and customer lists. We estimate that, combined, there are approximately 75 cord blood banks in the U.S., approximately 36 of which are private autologous banks, meaning that the donor and recipient are the same, and approximately 39 of which are public allogeneic banks, meaning that the donor and recipient are
not the same. Hospitals that have transplant centers to serve cancer patients may elect to provide some or all of the services that we provide. According to the National Marrow Donor Program, there are approximately 52 hospitals in the U.S. with stem cell transplant centers. These competitors may have better experience and access to greater financial resources than do we. In addition, other established companies may enter our markets and compete with us. There can be no assurance that we will be able to compete successfully.
NeoStem Family Storage, LLC will also have to compete with the national, public cord blood banking program, which has the support of the medical community and which receives federal funding. In this regard, NeoStem Family Storage, LLC also competes with public cord blood banks such as the New York Blood Center (National Cord Blood Program), University of Colorado Cord Blood Bank, Milan Cord Blood Bank, Dusseldorf Cord Blood Bank, and other public cord blood banks around the world. Public cord blood banks provide families with the option of donating their cord blood for public use at no cost. The Stem Cell Therapeutic Act provides financing for a national system of public cord blood banks in the United States to encourage cord blood donations from an ethnically diverse population. In addition, many states are evaluating the feasibility of establishing cord blood repositories for transplantation purposes. An increase in the number and diversity of publicly available cord blood units from public banks would increase the probability of finding suitably matched cells for a family member, which may result in a decrease in the demand for private cord blood banking. If the science of human leukocyte antigens, or HLA, typing advances, then unrelated cord blood transplantation may become safer and more efficacious, similarly reducing the clinical advantage of related cord blood transplantation. Such events could negatively affect our business and revenues.
The cell therapy industry is subject to rapid and intense technological change. Our cell therapy development programs face, and will continue to face, intense competition from pharmaceutical, biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and governmental agencies engaged in drug discovery activities or funding, both in the United States and abroad. Some of these competitors are pursuing the development of drugs and other therapies that target the same diseases and conditions that we are targeting with our product candidates, including AMR-001.
Amorcytes product candidate generally targets patients without other revascularization options. Therefore, we do not believe that Amorcyte will compete directly with pharmaceutical therapies being developed to treat less severe stages of our target indications. However, to the extent that therapies are developed that reverse the progression of the ischemic damage or improve blood flow to damaged tissue, they could have the effect of reducing demand for Amorcyte's product candidate. In addition, because Amorcytes product candidate may require the removal of bone marrow from the patient, potential competing products that do not require this invasive procedure may have a competitive advantage against Amorcyte products in terms of patient appeal. New pharmaceutical agents or devices that improve the repair of cardiac injury after a heart attack, with the result that fewer patients develop ischemic heart failure, would also represent a competitive threat for AMR-001. Furthermore, cell-based therapies, such as skeletal myoblasts, bone marrow-derived stem cells and adipose cells are being pursued by companies such as Aastrom Biosciences, Inc., Angioblast Systems, Inc., Athersys, Inc., Pluristem Therapeutics, Inc., ReNeuron Group, Stemedica Cell Technologies Inc. and Bioheart, Inc. Some other companies, such as Cytori and Miltenyi, are developing devices to facilitate the production of therapeutic cell populations by clinicians for the treatment of Amorcytes target indications. Such devices may be approved by the FDA under a less rigorous regulatory process, and less extensive clinical testing and manufacturing controls than Amorcyte is required to pursue for AMR-001. Development and approval of such a device on the basis of this more limited dataset may take less time than development of AMR-001 and substantially affect our ability to market an Amorcyte product candidate if approved.
As a general matter, our Company may also face competition in the future from other companies that are researching and developing cell therapies. We are aware of many companies working in this area. Many of the companies competing against us have financial and other resources substantially greater than ours. In addition, many of these competitors have significantly greater experience in testing pharmaceutical and other therapeutic products, obtaining FDA and other regulatory approvals of products, and marketing and selling those products. If we obtain necessary regulatory approval and commences significant commercial sales of any products, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited or no commercial-scale experience. Mergers and acquisitions in the pharmaceutical and
biotechnology industries may result in even more resources being concentrated by our competitors. Competition may increase further as a result of advances made in the commercial applicability of our technologies and greater availability of capital for investment in these fields.
As a result, competitors of ours may:
|||develop products that are safer or more effective than ours;|
|||obtain FDA and other regulatory approvals or reach the market with their products more rapidly than we can, reducing the potential sales of our product candidates;|
|||develop new or improved technologies and scientific advances;|
|||obtain patent protection that could impact our ability to market our product candidates;|
|||devote greater resources to market or sell their products;|
|||initiate or withstand substantial price competition more successfully than we can;|
|||recruit skilled scientific workers from the limited pool of available talent; and|
|||take advantage of acquisition or other opportunities more readily than we can.|
The success of our U.S. autologous adult stem cell business depends on continuing and growing market acceptance of our collection, processing and storage services as well as cell therapy generally. Increasing the awareness and demand for our services requires expenditures for marketing and education of consumers and medical practitioners who, under present law, must order stem cell collection and treatment on behalf of a potential customer. The time and expense required to educate and to build awareness of our services and their potential benefits, and about cell therapy in general, could significantly delay market acceptance and our ultimate profitability. The successful commercialization of our services will also require that we satisfactorily address the concerns of medical practitioners in order to avoid resistance to recommendations for our services and ultimately reach our potential consumers. No assurances can be given that our business plan and marketing efforts will be successful, that we will be able to commercialize our services, or that there will be market or clinical acceptance of our services by potential customers or physicians, respectively, sufficient to generate any material revenues for us. To date, only a minimal number of collections have been performed at the collection centers in our network.
Given the specialized nature of cell therapy and the fact that it is a young field, there is an inherent scarcity of experienced personnel in the field. The Company is substantially dependent on the skills and efforts of current senior management for their management and operations, as well as for the implementation of their business strategy. As a result of the difficulty in locating qualified new management, the loss or incapacity of existing members of management or unavailability of qualified management or as replacements for management who resign or are terminated could adversely affect the Companys operations. The future success of the Company also depends upon our ability to attract and retain additional qualified personnel (including medical, scientific, technical, commercial, business and administrative personnel) necessary to support our anticipated growth, develop our business, perform our contractual obligations to third parties and maintain appropriate licensure, on acceptable terms. There can be no assurance that we will be successful in attracting or retaining personnel required by us to continue to grow our operations. The loss of a key employee, the failure of a key employee to perform in his or her current position or our inability to attract and retain skilled employees, as needed, could result in our inability to continue to grow our business or to implement our business strategy, or may have a material adverse effect on our business, financial condition and operating results.
Current cell therapy products have a limited shelf life, in certain instances limited to less than 12 hours. Thus, there are constraints on transit times between the time the cell product is extracted from a patient and the product arrives at one of our facilities for processing, as well as constraints on the time that a processed product leaves our facility and arrives for re-infusion in the patient. Therefore, cell therapy facilities need to be located in major population centers in which patients of the cell therapy products are likely to be located and within close proximity of major airports from which they can be timely delivered. Building new facilities requires significant commitments of time and capital, which we may not have available in a timely manner. Even if such new facilities are established, there may be challenges to ensuring that they are compliant with cGMP, other FDA requirements, and/or applicable state or local regulatory requirements. We cannot be certain that we would be able to recoup the costs of establishing a facility and attaining regulatory compliances in a given market. Thus, the limited biologic shelf life of cell therapy products is a hindrance on the rate at which we can expand our cell processing and manufacturing services into new geographic markets and requires significant capital risk by us, which we may or may not be able to recover.
Weaknesses in our existing transportation carriers include the lack of a true point-to-point chain of control, non-controlled X-ray and inspection, no guarantee of package orientation, handling or storage conditions and in many cases no standard, documented and tracked operating procedures. While reliable ground carriers with experience in the transport of blood products already exist in major metropolitan areas of the country, air carriers meeting such needs are limited. We evaluated the major domestic express carriers, and concluded that even their highest-level services are inadequate to meet the sectors needs. However, we identified and validated only one specialty air carrier as a transportation partner, which specializes in shipping medical products, including whole blood and blood products, tissue for transplantation, and diagnostic specimens. There are presently few alternative sources for the safe transportation of cell therapy products. If this carrier should cease its medical shipping operations or otherwise be unable to properly meet our transportation needs, the lack of access to safe and effective transportation options could adversely affect our business.
Our business exposes us to potential product liability risks inherent in the testing, processing and marketing of cell therapy products. Such liability claims may be expensive to defend and result in large judgments against us. We face an inherent risk of product liability exposure related to the testing of AMR-001 and any future product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop following requisite approvals therefor. No product candidate has been widely used over an extended period of time, and therefore safety data is limited. Cell therapy companies derive the raw materials for manufacturing of product candidates from human cell sources, and therefore the manufacturing process and handling requirements are extensive, which increases the risk of quality failures and subsequent product liability claims. We presently have product liability insurance limited to $5 million per incident and $5 million in annual aggregate. In connection with the launch of our Phase 2 clinical trial of AMR-001, a clinical trial endorsement was added to our product liability policy, including Amorcyte as an additional insured.
We will need to increase our insurance coverage when we begin commercializing product candidates, if ever. If and when any product enters the commercialization phase, we may not be able to obtain or maintain product liability insurance on acceptable terms with adequate coverage or at all. If we are unable to obtain and maintain adequate insurance, or if claims against us substantially exceed our coverage, then our financial position could be significantly impaired.
Whether or not we are ultimately successful in any product liability litigation that may arise, such litigation could consume substantial amounts of our financial and managerial resources and could result in:
|||decreased demand for any products or product candidates we may develop;|
|||significant awards against us;|
|||substantial litigation costs;|
|||injury to our reputation; and|
|||withdrawal of clinical trial participants.|
We also maintain errors and omissions, directors and officers, workers compensation and other insurance appropriate to our business activities. If we were to be subject to a claim in excess of this coverage or to a claim not covered by our insurance and the claim succeeded, we would be required to pay the claim from our own limited resources, which could have a material adverse effect on our financial condition, results of operations and business. Additionally, liability or alleged liability could harm our business by diverting the attention and resources of our management and damaging our reputation and that of our subsidiaries.
Facilities engaged in the recovery, processing, storage, labeling, packaging or distribution of any HCT/Ps, or the screening or testing of a donor, are required to register with the FDA. Any third party retained by us to process our samples must be similarly registered with the FDA and comply with HCT/P regulations. We and any third-party processors are also required to comply with FDAs cGTP regulations. If we, or any third-party processors, fail to register or update registration information in a timely way, or fail to comply with cGTP regulations, we will be out of compliance with FDA regulations which could adversely affect our business. Adverse events or other considerations in the field of stem cell therapy that may occur could result in greater governmental regulation of our business, creating increased expenses for our stem cell collection and storage services.
Our manufacture of certain cellular therapy products for ourselves or on behalf of our customers triggers additional FDA requirements applicable to HCT/Ps, or products comprised of HCT/Ps, which are regulated as a drug, biological product, or medical device. FDA or cGMP, are federal regulations that govern the manufacture, processing, packaging and holding of cell therapy products regulated as drugs. FDAs Quality System Regulation, or QSR, similarly govern the manufacture, processing, packaging and holding of cell therapy products regulated as medical devices. We must comply with cGMP or QSR requirements including quality control, quality assurance and the maintenance of records and documentation for certain products. We may be unable to comply with these cGMP or QSR requirements and with other FDA, state and foreign regulatory requirements. These requirements may change over time and we or third-party manufacturers may be unable to comply with the revised requirements.
We also are subject to state and federal laws regulating the proper disposal of biohazardous materials. Although we believe we are currently in compliance with all such applicable laws, a violation of such laws, or the future enactment of more stringent laws or regulations, could subject us to liability for noncompliance and may require us to incur significant costs.
Some states impose additional regulation and oversight on clinical laboratories and stem cell laboratories operating within their borders and impose regulatory compliance obligations on out-of-state laboratories providing services to their residents. Many of the states in which we, our strategic partners or members of our collection network, engage in collection, processing or storage activities have licensing requirements with which we must comply. Additionally, there may be state regulations affecting the use of HCT/Ps that would affect our business. Certain licensing requirements require employment of medical directors and others with certain training and technical backgrounds and there can be no assurance that such individuals can be retained or will remain retained or that the cost of retaining such individuals will not materially and adversely affect our ability to market or perform our services or our ability to do so profitably. There can be no assurance that we, our strategic partners or members of our collection center network, will be able to obtain or maintain any necessary licenses required to conduct business in any states or that the cost of compliance will not materially and adversely affect our ability to market or perform our services or our ability to do so profitably.
Currently, PCT is licensed as a blood bank with respect to its activities in New Jersey, as a tissue bank with respect to its activities in New York and as a drug manufacturer with respect to its facility in California. We believe that PCT and NeoStem Family Storage, LLC are in material compliance with current federal, state, and local stem cell laboratory licensure requirements. However, the licensing requirements in the states where we are currently licensed may change, and PCT and/or NeoStem Family Storage, LLC may become subject to the additional licensing, registration and/or compliance requirements of other states, local governments and/or the federal government as PCT and/or NeoStem Family Storage, LLC expands its network and as new regulations are implemented. If we fail to comply with the various licensure requirements, certification and accreditation standards to which we are subject, we may be subject to a loss of licensure, certification, or accreditation that could adversely affect them.
Additionally, certain private entities have promulgated standards for certification, accreditation and licensing of cord blood businesses that may apply to our operations. These organizations include, but may not be limited to, AABB, formerly the American Association of Blood Banks, the Foundation for the Accreditation of Cellular Therapy (FACT), and the American Association of Tissue Banks (AATB). While our compliance with the standards of these organizations currently are voluntary, in some cases compliance with such standards may be necessary for a cord blood business to be accepted and competitive in the marketplace. Compliance with these standards and obtaining the applicable accreditation, certification, or license from such private organizations can be costly and time-consuming. These accreditation, certification, or license requirements may also change and new standards may be developed. If we fail to comply with applicable standards, or fail to obtain or maintain applicable accreditations, certifications, or licenses, our business may be adversely affected.
There can be no assurance that we will be able, or will have the resources, to continue to comply with regulations that govern our operations currently, or that we will be able to comply with any new regulations that may govern our operations, or that the cost of compliance will not materially and adversely affect our ability to market or perform our services or our ability to do so profitably. Failure to comply with these requirements may result in fines and civil or criminal penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any materials supplied by third parties is compromised due to their failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for, or successfully commercialize, product candidates that we may develop.
Our adult stem cell collection, processing and storage service is not a medical treatment, although it involves medical procedures. Our stem cell-related business is relatively new and is not addressed by many of the regulations applicable to our field. As a result, there is often considerable uncertainty as to the applicability of regulatory requirements. Although we have devoted significant resources to ensuring compliance with those laws that we believe to be applicable, it is possible that regulators may disagree with our interpretations, prompting additional compliance requirements or even enforcement actions.
We believe that the adult stem cells collected, processed and stored through our collection services are properly classified under the FDAs human cells, tissues and cellular- and tissue-based products, or HCT/P, regulatory paradigm but should not be classified as a medical device, biologic or drug. There can be no assurance that the FDA will not classify the adult stem cells collected, processed and stored through our collection services as a medical device, biologic or drug. Any such classification could have adverse consequences for us and make it more difficult or expensive for us to conduct our business by requiring regulatory clearance, approval and/or compliance with additional regulatory requirements.
The costs of compliance with such additional requirements or such enforcement may have a material adverse effect on our operations or may require restructuring of our operations or impair our ability to operate profitably.
To obtain marketing approvals for our product candidates in the United States, we must, among other requirements, complete adequate and well-controlled clinical trials sufficient to demonstrate to the FDA that the product candidate is safe and effective, for each indication for which approval is sought. Several factors could prevent completion or cause significant delay of these trials, including an inability to enroll the required number of patients. Negative or inconclusive results from, or serious adverse events during, a clinical trial could cause the clinical trial to be repeated or a development program to be terminated, even if other studies or trials relating to the program are successful. A serious adverse event is an event that results in significant medical consequences, such as hospitalization, disability or death, and must be reported to the FDA. We cannot predict whether safety concerns regarding our product candidates will or will not develop. The FDA can place a clinical trial on hold if, among other reasons, it finds that patients enrolled in the trial are or would be exposed to an unreasonable and significant risk of illness or injury. If safety concerns develop, we may, or the FDA or an institutional review board may require us to, stop the affected trials before completion.
One subject in the AMR-001 Phase 1 study died from ventricular fibrillation soon after infusion of the product candidate AMR-001. The ventricular fibrillation was attributed to recurrent myocardial infarction from stent thrombosis preceding AMR-001 infusion. This subjects death resulted in a clinical hold during the Phase 1 trial. The hold was removed upon FDAs review of the complete documentation on the patient and changes to the enrollment process that were submitted by Amorcyte.
The completion of our clinical trials may be delayed or terminated for many reasons, including if:
|||the FDA or other regulatory authority does not grant permission to proceed and places the trial on clinical hold;|
|||subjects do not enroll in our clinical trials at the rate expected;|
|||subjects experience an unacceptable rate or severity of adverse side effects;|
|||third-party clinical investigators do not perform the clinical trials on the anticipated schedule or consistent with the clinical trial protocol, good clinical practices required by the FDA and other regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner;|
|||inspections of clinical trial sites by the FDA or by institutional review boards of research institutions participating in the clinical trials, reveal regulatory violations that require the sponsor of the trial to undertake corrective action, suspend or terminate one or more sites, or prohibit use of some or all of the data in support of marketing applications; or|
|||the FDA or one or more institutional review boards suspends or terminates the trial at an investigational site, or precludes enrollment of additional subjects.|
Our development costs will increase if there are material delays in our clinical trials, or if we are required to modify, suspend, terminate or repeat a clinical trial. If we are unable to conduct our clinical trials properly and on schedule, marketing approval may be delayed or denied by the FDA.
Products for which we obtain marketing approval, if any, including the manufacturing processes, post-approval clinical data, adverse event reporting, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by, the FDA and comparable regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports, registration requirements, cGMP and cGTP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, requirements relating to product labeling, advertising and promotion, and recordkeeping. Even if a product candidate receives regulatory approval, the approval may be subject to additional limitations on the indicated uses for which the product may be marketed or to other conditions of approval. In addition, approval may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of previously unknown problems with a product, manufacturer or manufacturing process, or failure to comply with regulatory requirements, may result in actions such as:
|||changes in product manufacturing processes;|
|||restrictions on product marketing;|
|||restrictions on product distribution;|
|||requirements to conduct post-marketing clinical trials;|
|||withdrawal of a product from the market;|
|||refusal to approve pending applications or supplements to approved applications that we submit;|
|||recall of products;|
|||fines, restitution or disgorgement of profits or revenue;|
|||suspension or withdrawal of regulatory approvals;|
|||refusal to permit the import or export of our products;|
|||imposition of civil or criminal penalties.|
We may in the future seek to market AMR-001 or other product candidates outside the United States. In order to market such product candidates in the European Union and many other jurisdictions, we must submit clinical data concerning our product candidates and obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval from foreign regulators may be longer than the time required to obtain FDA approval. The regulatory approval process outside the United States may include all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, it is required that the product candidate be approved for reimbursement before it can be approved for sale in that country. In some cases this may include approval of the intended price to be charged for the product, if approved. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, or at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA, but a failure or delay in obtaining regulatory approval in one country may negatively affect the regulatory process in other
countries. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize any products in any market and therefore may not be able to generate sufficient revenues to support our business.
Our PCT facility located in Allendale, New Jersey is subject to various local, state and federal laws and regulations relating to safe working conditions, laboratory and manufacturing practices and the use and disposal of hazardous or potentially hazardous substances, including chemicals, micro-organisms and various radioactive compounds used in connection with Amorcytes research and development activities. In the United States, these laws include the Occupational Safety and Health Act, the Toxic Test Substances Control Act and the Resource Conservation and Recovery Act. No assurances can be given that accidental contamination or injury to employees, service providers and third parties from hazardous materials will not occur. We do not have insurance to cover claims arising from our use and disposal of these hazardous substances. Our insurance program does not include environmental coverage.
Our success will depend in part on our ability to obtain and maintain the regulatory exclusivity provided by the Public Health Service Act upon approval by the FDA of a biologics license application, or BLA, for Amorcyte product candidates or other product candidates, if any. This regulatory exclusivity is new, involves complex legal and factual questions and will likely be the subject of much litigation, and court decisions may introduce uncertainty in the enforceability or scope of regulatory exclusivity provided to an approved biologic product. Therefore, enforceability or scope of any regulatory exclusivity for an approved biologic product in the United States cannot be predicted with certainty, and may not provide sufficient protection against competitors.
We are subject to state and federal privacy laws related to the protection of our customers personal health information and state and federal laws related to the security of such personal health information and other personal data to which we would have access through the provision of our services. We are obligated to comply with privacy and security standards adopted under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (the HITECH Act). As a result of the HITECH Act, our compliance burden has increased, and we will be subject to audit and enforcement by the federal government and, in some cases, enforcement by state authorities. We may also be obligated to publicly disclose wrongful disclosures or losses of personal health information. We may be required to spend substantial amounts of time and money to comply with these requirements, any regulations and licensing requirements, as well as any future legislative and regulatory initiatives. Failure by us or our business partners to comply with these or other applicable regulatory requirements or any delay in compliance may result in, among other things, injunctions, operating restrictions, and civil fines and criminal prosecution and have a material adverse effect on the marketing and sales of our services and our ability to operate profitably or at all.
The healthcare industry is one of the most highly regulated industries in the United States. The federal government, individual state and local governments and private accreditation organizations all oversee and monitor the activities of individuals and businesses engaged in the delivery of health care products and services. Current laws, rules and regulations that could directly or indirectly affect our ability and the ability of our strategic partners and customers to operate each of their businesses could include, without limitation, the following:
|||State and local licensure, registration and regulation of laboratories, the collection, processing and storage of human cells and tissue and cord blood, and the development and manufacture of pharmaceuticals and biologics;|
|||The federal Clinical Laboratory Improvement Amendments;|
|||Laws and regulations administered by the FDA, including the Federal Food, Drug, and Cosmetic Act and related laws and regulations;|
|||The Public Health Service Act and related laws and regulations;|
|||Laws and regulations administered by the United States Department of Health and Human Services, including the Office for Human Research Protections;|
|||State laws and regulations governing human subject research;|
|||Occupational Safety and Health requirements;|
|||State and local laws and regulations dealing with the handling and disposal of medical waste;|
|||The federal Medicare and Medicaid Anti-Kickback Law and similar state laws and regulations;|
|||Federal and state coverage and reimbursement laws and regulations, including laws and regulations administered by the Centers for Medicare & Medicaid Services;|
|||The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), including the amendments included in the American Recovery and Reinvestment Act of 2009, commonly known as the HITECH Act, and regulations promulgated thereunder;|
|||The federal physician self-referral prohibition, commonly known as the Stark Law, and state equivalents of the Stark Law;|
|||State funding decisions on stem cell research and the development of cellular therapies; and|
|||The Intermediate Sanctions rules of the IRS providing for potential financial sanctions with respect to Excess Benefit Transactions with HUMC or other tax-exempt organizations.|
In addition, as we expand into other parts of the world, we will need to comply with the applicable laws and regulations in such foreign jurisdictions. We have not yet thoroughly explored the requirements or feasibility of such compliance. It is possible that we may not be permitted to expand our business into one or more foreign jurisdictions.
Although we intend to conduct our business in compliance with applicable laws and regulations and believe that we are in material compliance with applicable governmental healthcare laws and regulations, the laws and regulations affecting our business and relationships are complex, and many aspects of such relationships have not been the subject of judicial or regulatory interpretation. Furthermore, the cell therapy industry is the topic of significant government interest, and thus the laws and regulations applicable to us and our strategic partners and customers and to their business are subject to frequent change and/or reinterpretation and there can be no assurance that the laws and regulations applicable to us and our strategic partners and customers will not be amended or interpreted in a manner that adversely affects our business, financial condition, or operating results. For example, the federal government could issue tighter restrictions on private
cord blood banking that prevents NeoStem Family Storage, LLC from collecting cord blood for private banking. While we are not aware of any such developments or that any court or federal or state government is reviewing our operations, it is possible that such a review could result in a determination that would have a material adverse effect on our business, financial condition and operating results. Thus, there can be no assurance that we and our strategic partners and customers will be able to maintain compliance with all such healthcare laws and regulations. Failure to comply with such healthcare laws and regulations, as well as the costs associated with such compliance or with enforcement of such healthcare laws and regulations, may have a material adverse effect on our operations or may require restructuring of our operations or impair our ability to operate profitably.
To the extent that the health care provider customers cannot obtain coverage or reimbursement for our therapies and products, they may elect not to provide such therapies and products to their patients and, thus, may not need our services. Further, as cost containment pressures are increasing in the health care industry, government and private payors adopt strategies designed to limit the amount of reimbursement paid to health care providers. Such cost containment measures may include:
|||Reducing reimbursement rates;|
|||Challenging the prices charged for medical products and services;|
|||Limiting services covered;|
|||Decreasing utilization of services;|
|||Negotiating prospective or discounted contract pricing;|
|||Adopting capitation strategies; and|
|||Seeking competitive bids.|
Similarly, the trend toward managed health care and bundled pricing for health care services in the United States, which may accelerate under the health reform legislation approved by Congress on March 23, 2010 and thereafter signed into law (Health Reform), could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our therapeutic products under development.
We may receive a portion of our revenues from services rendered to patients enrolled in federal health care programs, such as Medicare, and we may also directly or indirectly receive revenues from federal health care programs. Federal health care programs are subject to changes in coverage and reimbursement rules and procedures, including retroactive rate adjustments. These contingencies could materially decrease the range of services covered by such programs or the reimbursement rates paid directly or indirectly for our products and services. To the extent that any health care reform favors the reimbursement of other therapies over our therapeutic products under development, such reform could affect our ability to sell our services, which may have a material adverse effect on our revenues.
The limitation on reimbursement available from private and government payors may reduce the demand for, or the price of, our services, which could have a material adverse effect on our revenues. Additional legislation or regulation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future which could adversely affect the revenues generated from the sale of our products and services.
Furthermore, there has been a trend in recent years towards reductions in overall funding for Medicare and Medicaid. There has also been an increase in the number of people who do not have any form of health care coverage in recent years and who are not eligible for or enrolled in Medicare, Medicaid or other governmental programs. The extent to which the reforms brought about under Health Reform may be successful in reducing the number of such uninsured is unclear, and the reduced funding of governmental
programs and increase in uninsured populations could have a negative impact on the demand for our services to the extent they relate to products and services which are reimbursed by government and private payors.
Both federal and state government agencies have heightened civil and criminal enforcement efforts. There are numerous ongoing investigations of health care companies, as well as their executives and managers. In addition, amendments to the Federal False Claims Act, including under Health Reform, have made it easier for private parties to bring qui tam (whistleblower) lawsuits against companies under which the whistleblower may be entitled to receive a percentage of any money paid to the government. The Federal False Claims Act provides, in part, that an action can be brought against any person or entity that has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. The government has taken the position that claims presented in violation of the federal anti-kickback law, Stark Law or other healthcare-related laws, including laws enforced by the FDA, may be considered a violation of the Federal False Claims Act. Penalties include substantial fines for each false claim, plus three times the amount of damages that the federal government sustained because of the act of that person or entity and/or exclusion from the Medicare program. In addition, a majority of states have adopted similar state whistleblower and false claims provisions.
We are not aware of any government investigations involving any of our facilities or management. While management believes that we are in material compliance with applicable governmental healthcare laws and regulations, any future investigations of our business or executives could cause us to incur substantial costs, and result in significant liabilities or penalties, as well as damage to our reputation.
The healthcare industry is undergoing fundamental changes resulting from political, economic and regulatory influences. In the U.S., comprehensive programs are under consideration that seek to, among other things, increase access to healthcare for the uninsured and control the escalation of healthcare expenditures within the economy. On March 23, 2010, health reform legislation was approved by Congress and has been signed into law. While we do not believe this legislation will have a direct impact on our business, the legislation has only recently been enacted and requires the adoption of implementing regulations, which may have unintended consequences or indirectly impact our business. For instance, the scope and implications of the recent amendments pursuant to the Fraud Enforcement and Recovery Act of 2009 (FERA), have yet to be fully determined or adjudicated and as a result it is difficult to predict how future enforcement initiatives may impact our business. Also, in some instances our clients may be health insurers that will be subject to limitations on their administrative expenses and new federal review of unreasonable rate increases which could impact the prices they pay for our services. If the legislation causes such unintended consequences or indirect impact, it could have a material adverse effect on our business, financial condition and results of operations.
The Stem Cell Therapeutic and Research Act of 2005 established requirements for a national donor bank of cord blood and for a national network for matching cord blood to patients. The federal government has entered into contracts with the National Marrow Donor Program (NMDP) to carry out the provisions of this legislation. Under these contracts, the NMDP acts as the nations Cord Blood Coordinating Center and actively recruits parents for cord blood donations. The NMDP also administers the National Cord Blood Inventory (NCBI), which has a goal of collecting 150,000 cord blood units that may be used for patients throughout the United States. The legislation also authorized federal funding to support its goals and requirements. Parents may opt to donate their newborns cord blood to the public registry and to use the public registry if stem cells from cord blood are needed for treatment purposes. In this regard, an important advantage of the national, public cord blood collection system is that it costs nothing for patients to donate
their cord blood. This national, public cord blood registry has also been widely accepted and supported by the medical community, so physicians and others in the health care community may be less willing to use or recommend a private cord blood facility when public collection is available. Additionally, major medical organizations, including the American Academy of Pediatrics (AAP), the American Medical Association (AMA), the American College of Obstetricians and Gynecologists (ACOG), and the American Society of Blood and Marrow Transplantation (ASBMT) do not recommend private storage, except in very limited instances. Further, we believe that the medical community is currently supportive of public cord blood donation and the national cord blood registry that is administered by the National Marrow Donor Program. For these reasons, a significant number of patients may choose to use to donate their cord blood to the national, public cord registry instead of privately banking cord blood. The medical community could also issue stronger recommendations and opinions that favor the use of the national registry. Therefore, the existence and proliferation of the national registry may adversely affect our business.
A key aspect of our business strategy is to establish strategic relationships in order to gain access to critical supplies, to expand or complement our research and development or commercialization capabilities, and to reduce the cost of research and development. There can be no assurance that we will enter into such relationships, that the arrangements will be on favorable terms or that such relationships will be successful. If any of our research partners terminate their relationship with us or fail to perform their obligations in a timely manner, our research and development activities or commercialization of our services may be substantially impaired or delayed.
Relationships with licensed professionals such as physicians may be subject to state and federal laws restricting the referral of business, prohibiting certain payments to physicians, or otherwise limiting such collaborations. If our services become approved for reimbursement by government or private insurers, we could be subject to additional regulation and perhaps additional limitations on our ability to structure relationships with physicians. Additionally, state regulators may impose restrictions on the business activities and relationships of licensed physicians or other licensed professionals. For example, many states restrict or prohibit the employment of licensed physicians by for-profit corporations, or the corporate practice of medicine. If we fail to structure our relationships with physicians in accordance with applicable laws or other regulatory requirements, it could have a material adverse effect on our business. Even if we do enter into these arrangements, we may not be able to maintain these relationships or establish new ones in the future on acceptable terms.
We own or hold exclusive rights to over 30 issued patents and over 80 pending patent applications. In January 2012, the U.S. Patent Office granted Amorcyte U.S. Patent No. 8,088,370 which expands the breadth of AMR-001 protection to include all treatments of vascular injury caused by vascular insufficiency. Given the nature of our therapeutic programs, our patents and patent applications cover certain methods of isolating, storing and using stem cells, including very small embryonic stem cells, as well as compositions and methods relating to T regulatory cells. There can be no assurance that the patent applications to which we hold rights will result in the issuance of patents, or that any patents issued or licensed to us will not be challenged and held to be invalid or of a scope of coverage that is different from what we believe the patents scope to be. Our success will depend, in part, on whether we can: obtain patents to protect our own products and technologies; obtain licenses to use the technologies of third parties if necessary, which may be protected by patents; and protect our trade secrets and know-how. Our inability to obtain and rely upon patents essential to our business may have a material adverse effect on our business, operating results and financial condition.
Our ability to successfully commercialize AMR-001, or any other product candidate, depends in large part on our ability to obtain and maintain patent protection for our product candidates. Issued patents may be challenged by third parties, resulting in patents being invalidated, rendered unenforceable, narrowed in scope, or enabling a third party to circumvent any such issued patents. The patent position of biotechnology companies is generally highly uncertain, involves complex legal and factual questions and has been the subject of much litigation and recent court decisions introducing uncertainty in the strength of patents owned by biotechnology companies. The legal systems of some foreign countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Therefore, any patents that we own or license may not provide sufficient protection against competitors.
The claims of the issued patents, and the claims of any patents which may issue in the future and be owned by or licensed to us, may not confer on us significant commercial protection against competing products. Also, any pending patent applications may not issue, and we may not receive any additional patents. The patents might not contain claims that are sufficiently broad to prevent others from utilizing the covered technologies. For instance, patents relating to our AMR-001 product candidate are limited to an isolated and nonexpanded population of autologous mononuclear cells enriched for CD34+ cells, which further contains a subpopulation of potent CD34+/CXCR4+ cells that have CXCR4-mediated chemotactic activity. Products that do not contain enriched CD34+/CXCR4+ cells, or which contain populations of cells that derive efficacy from a different mechanism of action, may not infringe the existing AMR-001 patents. Consequently, our competitors may independently develop competing products that do not infringe our patents or other intellectual property. To the extent a competitor can develop similar products using a different chemistry, these patents will not prevent others from directly competing with us.
Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any product candidate can be commercialized, any related patent may expire or remain in force for only a short period following commercialization of such product candidate, thereby reducing any advantages of the patent. For instance, one of the patents issued to our Amorcyte subsidiary relating to its technology will expire in 2028, subject to extension of the patent term for regulatory delay for any approved product for which Amorcyte is eligible. To the extent our product candidates based on that technology are not commercialized significantly ahead of this date, or to the extent we have no other patent protection on such product candidates, those product candidates would not be protected by patents beyond 2028 and we would then rely solely on other forms of exclusivity, such as regulatory exclusivity provided by the Federal Food, Drug and Cosmetic Act, which may provide less protection of our competitive position.
Similar considerations apply in any other country where we are prosecuting patents, have been issued patents, or have licensed patents or patent applications relating to its technology. The laws of foreign countries may not protect intellectual property rights to the same extent as do laws of the United States.
Despite our efforts to protect our intellectual property, third parties may infringe or misappropriate our intellectual property, including infringement of patents held by, or the patents of the respective potential collaborators or licensors of, our Amorcyte subsidiary. Our competitors may also independently develop similar technology, duplicate our processes or services or design around our intellectual property rights. We may have to litigate to enforce and protect our intellectual property rights to determine their scope, validity or enforceability. Intellectual property litigation is costly, time-consuming, diverts the attention of management and technical personnel and could result in substantial uncertainty regarding our future viability. The loss of intellectual property protection or the inability to secure or enforce intellectual property protection would limit our ability to develop or market our services in the future. This would also likely have an adverse effect on the revenues generated by any sale or license of such intellectual property. Furthermore, any public announcements related to such litigation or regulatory proceedings could adversely affect the price of our Common Stock.
As a result of any infringement of our intellectual property, we may be required to file infringement claims to counter infringement or unauthorized use. The cost of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb significant management time. In addition, in an infringement proceeding, a court may decide that a patent is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that patents used by us do not cover our technology. An adverse determination of any litigation or defense proceedings could put one or more of such patents at risk of being invalidated or interpreted narrowly and could put patent applications at risk of not issuing. Our Amorcyte subsidiary is aware of several companies that are employing stem cell sorting technology in their research and product development efforts. If these companies commercialize products that use cell sorting technology similar to Amorcytes, there can be no assurance that we would have a basis for initiating patent infringement proceedings or that if initiated we would prevail in such proceedings.
Interference proceedings conducted within the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications or those of our Amorcyte subsidiarys potential collaborators or licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction to our management. We may not be able, alone or with its potential collaborators and licensors, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments.
We may be subject to costly litigation in the event our technology is claimed to infringe upon the proprietary rights of others. Third parties may have, or may eventually be issued, patents that would be infringed by our technology. Any of these third parties could make a claim of infringement against us with respect to our technology. We may also be subject to claims by third parties for breach of copyright, trademark or license usage rights. Litigation and patent interference proceedings could result in substantial expense to us and significant diversion of efforts by our technical and management personnel. An adverse determination in any such proceeding or in patent litigation could subject us to significant liabilities to third parties or require us to seek licenses from third parties. Such licenses may not be available on acceptable terms or at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from commercializing our products, which would have a material adverse affect on our business, operating results and financial condition.
The research, development and commercialization activities conducted through our new Amorcyte subsidiary, including any product candidates resulting from these activities, may infringe or be claimed to infringe patents or other proprietary rights owned by third parties and to which Amorcyte does not hold licenses or other rights. There may be applications that have been filed but not published that, when issued, could be asserted against Amorcyte. These third parties could bring claims against Amorcyte that would cause us to incur substantial expenses and, if successful, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against Amorcyte, we could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.
Our Amorcyte subsidiary has not conducted an exhaustive search or analysis of third-party patent rights to determine whether its research, development or commercialization activities, including any product candidates resulting from these activities, may infringe or be alleged to infringe any third-party patent rights.
As a result of intellectual property infringement claims, or in order to avoid potential claims, Amorcyte may choose, or be required, to seek a license from the third party. These licenses may not be available on acceptable terms, or at all. Even if Amorcyte is able to obtain a license, the license would likely obligate the licensee to pay license fees or royalties or both, and the rights granted to the licensee might be nonexclusive, which could result in competitors gaining access to the same intellectual property. Ultimately, we could be
prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. All of the issues described above could also affect potential collaborators to the extent our Amorcyte subsidiary has any collaborations then in place, which would also affect the success of the collaboration and therefore the success of our Company as a whole.
There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims, we may become a party to other patent litigation and other proceedings, including interference or reexamination proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to its product candidates and technology. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
Certain of our license agreements require us to pay license fees, royalties and milestone payments and fees for patent filings and applications. Obtaining and maintaining patent protection and licensing rights also depends, in part, on our ability to pay the applicable filing and maintenance fees. Our failure to meet financial obligations under our license agreements in a timely manner or our non-payment or delay in payment of our patent fees, could result in the loss of some or all of our rights to proprietary technology or the inability to secure or enforce intellectual property protection. Additionally, our license agreements require us to meet certain diligence obligations in the development of the licensed products. Our failure to meet these diligence obligations under our license agreements could result in the loss of some or all of our rights under the license agreements. The loss of any or all of our intellectual property rights could materially limit our ability to develop and/or market our services, which would materially and adversely affect our business, operating results and financial condition.
A significant amount of our technology, especially regarding manufacturing processes, is unpatented and is maintained as trade secrets. The background technologies used in the development of our cell therapeutics are known in the scientific community, and it is possible to duplicate the methods that we use to create our product candidates. In an effort to protect these trade secrets, we require our employees, consultants and contractors to execute confidentiality agreements. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the relationship be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of confidential information. A breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom employees, consultants, collaborators or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. The disclosure of our trade secrets would impair our Companys competitive position.
Many countries, including some countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, most countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may be limited to monetary relief and may be unable to enjoin infringement, which could materially
diminish the value of the patent. Compulsory licensing of life-saving products is also becoming increasingly popular in developing countries, either through direct legislation or international initiatives. Such compulsory licenses could be extended to our Amorcyte subsidiarys respective product candidates, which may limit our potential revenue opportunities, including with respect to any future revenues which may result from AMR-001.
The Leahy-Smith America Invents Act (AIA), which was signed into law on September 16, 2011, significantly changes United States patent law. It may take some time to establish what the law means, since regulations that will govern how the new law is implemented have not yet been established, and since the law has not yet been implemented, it has not yet been interpreted by the lower courts, and reviewed by either the Federal Circuit Court of Appeals or the Supreme Court, a process that will take years. The first major change is that AIA switches the U.S. patent system from a first to invent system to a first to file system. Once the first to file system is in effect, there is a risk that another company may independently develop identical or similar patents at approximately the same time, and be awarded the patents instead of us. Once first to file is implemented, there will no longer be a need to determine who is the inventor of an invention. As a result, for the second major change, AIA abolishes interference proceedings, and establishes derivation proceedings to replace interference proceedings in all cases in which the time period for instituting an interference proceeding has not lapsed where an inventor named in an earlier application derived the claimed invention from a named inventor. Once derivation proceedings are in effect, there is a risk that the inventorship of any pending patent application can be challenged for reasons of derivation. The third major change is that AIA establishes post-grant opposition proceedings that will apply to patent applications filed after first to file becomes effective. Post-grant opposition will enable a person who is not the patent owner to initiate proceedings in the Patent office within 9 months after the grant of a patent that can result in cancellation of a patent as invalid. Therefore there is a risk that any of our patents once granted after the effective date of these provisions of the new law (March 16, 2013) may be subject to post-grant opposition, which will increase uncertainty on the validity of any newly granted patent or can ultimately result in cancellation of the patent.
The Chinese economy is not well established and is only recently emerging and growing as a significant market for consumer goods and services. Accordingly, there is no assurance that the market will continue to grow. Perceived risks associated with investing in China, or a general disruption in the development of Chinas markets could materially and adversely affect the business, operating results and financial condition of Erye and us.
A substantial portion of our assets are located in the PRC. As a result, it may be difficult for investors in the U.S. to enforce their legal rights, to effect service of process upon certain of our directors or officers or to enforce judgments of U.S. courts predicated upon civil liabilities and criminal penalties against our directors and officers located outside of the U.S.
In recent years, the PRC government has implemented measures for economic reform, the reduction of state ownership of productive assets and the establishment of corporate governance practices in business enterprises. However, many productive assets in China are still owned by the PRC government. In addition, the government continues to play a significant role in regulating industrial development by imposing business regulations. It also exercises significant control over the countrys economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
There can be no assurance that Chinas economic, political or legal systems will not develop in a way that becomes detrimental to our business, results of operations and financial condition. Our activities may be materially and adversely affected by changes in Chinas economic and social conditions and by changes in the policies of the government, such as measures to control inflation, changes in the rates or method of taxation and the imposition of additional restrictions on currency conversion.
Additional factors that we may experience in connection with having operations in China that may adversely affect our business and results of operations include:
|||our inability to enforce or obtain a remedy under any material agreements;|
|||PRC restrictions on foreign investment that could impair our ability to conduct our business or acquire or contract with other entities in the future;|
|||restrictions on currency exchange that may limit our ability to use cash flow most effectively or to repatriate our investment;|
|||fluctuations in currency values;|
|||cultural, language and managerial differences that may reduce our overall performance; and|
|||political instability in China.|
We have experienced difficulties in assimilating cultural, language and managerial differences with our subsidiaries in China. Personnel issues have developed in consolidating management teams from different cultural backgrounds. In addition, language translation issues from time to time have caused miscommunications. These factors make the management of our operations in China more difficult. Difficulties in coordinating the efforts of our U.S.-based management team with our China-based management team may cause our business, operating results and financial condition to be materially and adversely affected.
Chinas legal and judicial system may negatively impact foreign investors. The legal system in China is evolving rapidly, and enforcement of laws is inconsistent. It may be impossible to obtain swift and equitable enforcement of laws or enforcement of the judgment of one court by a court of another jurisdiction. Chinas legal system is based on civil law or written statutes and a decision by one judge does not set a legal precedent that must be followed by judges in other cases. In addition, the interpretation of Chinese laws may vary to reflect domestic political changes.
There are substantial uncertainties regarding the interpretation and application to our business of PRC laws and regulations, since many of the rules and regulations that companies face in China are not made public. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that apply to future businesses may be applied retroactively to existing businesses. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
The laws of China are likely to govern many of our material agreements, including, without limitation the Joint Venture Agreement. We cannot assure you that we will be able to enforce our interests or our material agreements or that expected remedies will be available. The inability to enforce or obtain a remedy under any of our future agreements may have a material adverse impact on our operations.
The PRC government has imposed regulations in various industries, including medical research and the stem cell business, that limit foreign investors equity ownership or prohibit foreign investments altogether in companies that operate in such industries. As a result, our ability to control our existing China-based business historically was limited.
If the relevant Chinese authorities find us or any business combination to be in violation of any laws or regulations, they would have broad discretion in dealing with such violation, including, without limitation: (i) levying fines; (ii) revoking our business and other licenses; (iii) requiring that we restructure our ownership or operations; and (iv) requiring that we discontinue any portion or all of our business.
In December 2011, Chinas Ministry of Health announced its intention to more tightly regulate stem cell clinical trials and the use of stem cell therapeutic treatments in the PRC. As a result of this and the factors noted above, the Company has determined to take steps to restrict, and expects to ultimately eliminate, its regenerative medicine business in the PRC.
On December 16, 2011, the SFDA and Ministry of Health (MOH) jointly issued a notice to halt unproven stem-cell clinical trials and suspend new application for stem-cell clinical trials until July 1, 2012. This ban has significantly added risk associated with our operation in China. Given the nature and extent of such notice as well as recent tightening in Chinese governments scrutiny of VIE structures in the prohibited business sectors, we are seeking to unilaterally terminate our cooperative agreements with local hospitals on cell-based therapies prior to the end of their term. In the event of a claim of default by the hospitals, we may be liable for damages for those hospitals direct and indirect losses resulting from our early termination of the cooperative agreements. Although the cooperative agreements provide that either side may terminate the agreements due to a force majeure event that includes adverse changes in government regulations directly affecting the performance of these agreements, the hospitals might claim that the aforesaid change and uncertainty of the regulatory environment does not constitute a force majeure event. In such event, we may need to litigate whether we had legitimate grounds to early terminate the agreements, which would be subject to the determination in a Chinese venue. We could also be exposed to other costs associated with the winding down of our PRC regenerative medicine business such as employee severance costs.
The Companys Beijing laboratory facility was originally intended for stem cell research and development, but has been equipped to provide comprehensive cell manufacturing, collection, processing and storage capabilities to enable the PCT business model to launch in the PRC and provide cells for clinical trials. The lease for this facility expires in May 2012 and the Company is considering its options with respect to extending this lease to allow for manufacturing for clinical trials in Asia. If the Company does not determine to renew the lease due to limitations on its utility under the new regulatory initiatives in China or otherwise, the Company may incur certain expenses in connection with returning the premises to the landlord.
PRC regulations prevent foreign companies from directly engaging in stem cell-related research, development and commercial applications in China. Therefore, to perform these activities, we operate our current stem cell-related business in China through domestic variable interest entities, or VIEs: Tianjin Niou Bio-Technology Ltd., or Tianjin Neo Bio-Technology, and Beijing Ruijieao Bio-Technology Ltd., or Beijing Ruijieao, each a Chinese domestic company controlled by the Chinese employees of NeoStem (China), Inc., our wholly foreign-owned entity, or the WFOE, through various business agreements, referred to, collectively, as the VIE documents. Tianjin Neo-Biotechnology conducts operations formerly conducted by another Company VIE, Qingdao Neo Biotechnology. We control these companies and operate these businesses through contractual arrangements with the companies and their individual owners, but we have no direct equity ownership or control over these companies. Our contractual arrangements may not be as effective in providing control over these entities as direct ownership. For example, the VIEs could fail to take actions required for our business or fail to conduct business in the manner we desire despite their contractual obligation to do so. These companies are able to transact business with parties not affiliated with us. If these companies fail to perform under their agreements with us, we may have to rely on legal remedies under PRC law, which may
not be effective. In addition, we cannot be certain that the individual equity owners of the VIEs would always act in our best interests, especially if they have no other relationship with us.
Although other foreign companies have used WFOEs and VIE structures similar to ours and such arrangements are not uncommon in connection with business operations of foreign companies in China in industry sectors in which foreign direct investments are limited or prohibited, recently there has been greater scrutiny by the business community of the VIE structure and, additionally, the application of a VIE structure to control companies in a sector in which foreign direct investment is specifically prohibited carries increased risks.
For example, if our structure is deemed in violation of PRC law, the PRC government could revoke the business license of the WFOE, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us. We may also encounter difficulties in enforcing related contracts. Any of these events could materially and adversely affect our business, operating results and financial condition.
In addition, the Ministry of Commerce, or the MOFCOM, promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors in August 2011, or the MOFCOM Security Review Rules, to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or Circular No. 6. The MOFCOM Security Review Rules came into effect on September 1, 2011 and replaced the Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM in March 2011. According to these circulars and rules, a security review is required for mergers and acquisitions by foreign investors having national defense and security concerns and mergers and acquisitions by which foreign investors may acquire the de facto control of domestic enterprises having national security concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review, the MOFCOM will look into the substance and actual impact of the transaction. The MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that our business falls into the scope subject to the security review, and there is no requirement for foreign investors in those mergers and acquisitions transactions already completed prior to the promulgation of Circular No. 6 to submit such transactions to MOFCOM for security review. The enactment of the MOFCOM National Security Review Rules specifically prohibits circumvention of the rules through VIE arrangement in the area of foreign investment in business of national security concern. Although we believe that our business, judging from its scale, should not cause any concern for national security review at its current state, there is no assurance that MOFCOM would not apply the same concept of anti-circumvention in the future to foreign investment in prohibited areas through VIE structure, the same way that our investment in China was structured.
For so long as we own an interest in Erye, we intend to rely partly on dividends paid to us under the October 2009 Joint Venture Agreement, attributable to our 51% ownership interest in Erye, to meet our future cash needs. Pursuant to the Joint Venture Agreement that governs the ownership and management of Erye, for the three-year period commencing on the first day of the first fiscal quarter after the Joint Venture Agreement became effective distributions are made as follows: (i) 49% of undistributed profits (after tax) will be distributed to EET and loaned back to Erye for use in connection with its construction of the new Erye facility (to be repaid gradually after construction is completed); (ii) 45% of the net profit after tax will be
provided to Erye as part of the new facility construction fund, which will be characterized as paid-in capital for our 51% interest in Erye; and (iii) only 6% of the net profit will be distributed to us directly for our operating expenses.
The payment of dividends by entities organized under PRC law to non-PRC entities is subject to limitations. Regulations in the PRC currently permit payment of dividends Erye only out of accumulated distributable earnings, if any, as determined in accordance with accounting standards and regulations in China. Moreover, Erye is required to appropriate from PRC GAAP profit after tax to other non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits (i.e., 50% of the registered capital of relevant company), the general reserve fund requires annual appropriation at 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end); the appropriation to the other funds are at the discretion of Erye. In addition, if Erye incurs additional debt on its own behalf to finance the building of the new facility in the future, the instruments governing the debt may restrict Eryes or the joint ventures ability to pay dividends or make other distributions to us. This may diminish the cash flow we receive from Eryes operations, which would have a material adverse effect on our business, operating results and financial condition.
Our interests in China will be subject to Chinas rules and regulations on currency conversion. In particular, the initial capitalization and operating expenses of the VIEs are funded by our WFOE. In China, the State Administration for Foreign Exchange, or the SAFE, regulates the conversion of the Chinese Renminbi into foreign currencies and the conversion of foreign currencies into Chinese Renminbi. Currently, foreign investment enterprises are required to apply to the SAFE for Foreign Exchange Registration Certificates, or IC Cards of Enterprises with Foreign Investment. Foreign investment enterprises holding such registration certificates, which must be renewed annually, are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the capital account, including capital items such as direct investments, loans, and securities, require approval of the SAFE. According to the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues Concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises promulgated on August 29, 2008, or the SAFE Notice 142, to apply to a bank for settlement of foreign currency capital, a foreign invested enterprise shall submit the documents certifying the uses of the RMB funds from the settlement of foreign currency capital and a detailed checklist on use of the RMB funds from the last settlement of foreign currency capital. It is stipulated that only if the funds for the settlement of foreign currency capital are of an amount not more than US$50,000 and are to be used for enterprise reserve, the above documents may be exempted by the bank. This SAFE Notice 142, along with the recent practice of Chinese banks of restricting foreign currency conversion for fear of hot money going into China, limits and may continue to limit our ability to channel funds to the VIE entities for their operation. There can be no assurance that the PRC regulatory authorities will not impose further restrictions on the convertibility of the Chinese currency. Future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our stockholders or to fund operations we may have outside of China, which could materially adversely affect our business and operating results.
We prepare our financial statements in U.S. dollars, while our underlying businesses operate in two currencies, U.S. dollars and Chinese Renminbi. It is anticipated that our Chinese operations will conduct their operations primarily in Renminbi and our U.S. operations will conduct their operations in dollars. At the present time, we do not expect to have significant cross currency transactions that will be at risk to foreign currency exchange rates. Nevertheless, the conversion of financial information using a functional currency of Renminbi will be subject to risks related to foreign currency exchange rate fluctuations. The value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in Chinas political and economic conditions and supply and demand in local markets. As we have
significant operations in China, and will rely principally on revenues earned in China, any significant revaluation of the Renminbi could materially and adversely affect our financial results. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations.
Beginning in July of 2005, the PRC government changed its policy of pegging the value of Renminbi to the U.S. dollar. Under the new policy, the value of the Renminbi has fluctuated within a narrow and managed band against a basket of certain foreign currencies. However, the Chinese government has come under increasing U.S. and international pressure to revalue the Renminbi or to permit it to trade in a wider band, which many observers believe would lead to substantial appreciation of the Renminbi against the U.S. dollar and other major currencies. There can be no assurance that Renminbi will be stable against the U.S. dollar. On June 19, 2010 the central bank of China announced that it will gradually modify its monetary policy and make the Renminbis exchange rate more flexible and allow the Renminbi to appreciate in value in line with its economic strength.
While the PRC government has implemented economic and market reforms, a substantial portion of productive assets in China are still owned by the PRC government. The PRC government also exercises significant control over Chinas economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Should the PRC government change its policies regarding economic growth and private ownership of manufacturing and other assets of Erye, we may lose rights to certain business assets and our business, operating results and financial condition may be materially harmed.
Some or all of our operations in China will be subject to oversight and regulation by the PRCs State Food and Drug Administration (SFDA). Government regulations, among other things, cover the inspection of and controls over testing, manufacturing, safety and environmental considerations, efficacy, labeling, advertising, promotion, record keeping and sale and distribution of pharmaceutical products. Such government regulations may increase our costs and prevent or delay the licensing, manufacturing and marketing of any of our products or services. In the event we seek to license, manufacture, sell or distribute new products or services, we likely will need approvals from certain government agencies such as the SFDA. The future growth and profitability of any operations in China would be contingent on obtaining the requisite approvals. There can be no assurance that we will obtain such approvals.
In 2004, the SFDA implemented new guidelines for the licensing of pharmaceutical products. All existing manufacturers with licenses were required to apply for the Good Manufacturing Practices, or cGMP, certifications. Erye has received the requisite certifications. However, should Erye fail to maintain its cGMP certifications or fail to obtain cGMP and other certifications for its new production facilities, this would have a material adverse effect on Eryes and our business, results of operations and financial condition.
According to Good Manufacturing Practices for Pharmaceutical Products (revised edition 2010), or the New GMP Rules promulgated by the Ministry of Health of the PRC on January 17, 2011 which became effective on March 1, 2011, all the newly constructed manufacturing facilities of drug manufacture enterprises in China shall comply with the requirements of the New GMP Rules, which are stricter than the original GMP standards. Therefore, should Erye fail to maintain its cGMP certifications in accordance with the New GMP Rules for its new production facilities, this would have a material adverse effect on Eryes and our business, results of operations and financial condition.
In addition, delays, product recalls or failures to receive approval may be encountered based upon additional government regulation, legislative changes, administrative action or changes in governmental policy and interpretation applicable to the Chinese pharmaceutical industry. Our pharmaceutical activities also may subject us to government regulations with respect to product prices and other marketing and promotional
related activities. Government regulations may substantially increase our costs for developing, licensing, manufacturing and marketing any products or services, which could have a material adverse effect on our business, operating results and financial condition.
The SFDA and other regulatory authorities in China have implemented a series of new punitive and stringent measures regarding the pharmaceuticals industry to redress certain past misconducts in the industry and certain deficiencies in public health reform policies. Given the nature and extent of such new enforcement measures, the aggressive manner in which such enforcement is being conducted and the fact that newly-constituted local level branches are encouraged to issue such punishments and fines, there is the possibility of large scale and significant penalties being levied on manufacturers. These new measures may include fines, restriction and suspension of operations and marketing and other unspecified penalties. This new regulatory environment has added significantly to the risks of our businesses in China and may have a material adverse effect on our business, operating results and financial condition.
Eryes financial performance is heavily dependent on government pricing policies and procedures, which are subject to change. The Rules on Introduction of Suzhous Local Enterprises Produced Drugs into Suzhous Local Medical Insurance Drugs Catalogue, which was promulgated in 2006, may soon cease to be effective. The cancellation of such Rules would likely reduce Eryes sales and profits. On March 2, 2011, the National Development and Reform Commission issued price cuts for drugs covered by national medical insurance which substantially impacts two of Eryes drugs. It is anticipated that the price of Piperacillin Sodium Sulbactum Sodium will decrease by 50% and the price of Ligustrazine Phosphate will be cut by 75%; in 2011 the price reduction experienced by Erye on these products was approximately 24%. In 2011 Piperacillin Sodium Sulbactum Sodium accounted for approximately 5% of sales and Ligustrazine Phosphate accounted for approximately 1% of sales. These policies regarding drug pricing and the resulting price reductions experienced by Erye will likely negatively affect the offers presented to us in connection with the divestiture of our 51% interest in Erye that we are pursuing.
Recently, the PRC Ministry of Health issued, for public comment, a draft policy Administrative Measures on Clinical Use of Antibiotics to curb their overuse. The proposed guidelines set forth three categories of antibiotics, which include (1) restricted, (2) non-restricted, and (3) special-use only. According to the October 12, 2011 China Healthcare report published by Deutsche Bank, AG (the China Healthcare report), it has been projected that the limitation of antibiotic usage in China will reduce the historical compound annual growth rate which has been approximately 20%. According to the China Healthcare report, it has been estimated that Chinas population consumes about ten times the global per capita average of antibiotics. These regulations have not been finalized but issuance of a draft policy has created uncertainty on the part of distributors and has reduced purchases by distributors and in part has contributed to sales reductions in 2011. This draft policy regarding antibiotic use and the uncertainty that has been created will likely negatively affect the offers that have been presented to us.
Erye began transferring its operations to its new manufacturing facility in January 2010. The construction of this facility is substantially complete. The relocation and new production lines have been completed and have received cGMP certification. To date Erye has received the following SFDA cGMP certifications:
|||solvent crystallization sterile penicillin|
|||freeze dried raw sterile penicillin|
|||cephalosporin powder for injection|
|||freeze dried powder for injection|
|||its capsule line.|
Eryes production is concentrated in a small number of production lines. Any interruptions in production with respect to those lines will have a material adverse effect on Eryes business and ours.
Our research and development activities in cell therapy in China may be conducted in cooperation with Beijing Ruijieao Biotechnology Ltd. Pursuant to the Interim Measures for the Administration of Human Genetic Resources, or the Measures, that took effect on June 10, 1998, China maintains a reporting and registration system on important pedigrees and genetic resources in specified regions. All entities and individuals involved in sampling, collecting, researching, developing, trading or exporting human genetic resources or taking such resources outside China must abide by the Measures. Human genetic resources refers to genetic materials such as human organs, tissues, cells, blood specimens, preparations or any type of recombinant DNA constructs, which contain human genome, genes or gene products as well as to the information related to such genetic materials.
It is possible that our research and development activities conducted by the Lab in cooperation with us in China may be regarded by PRC government authorities as human genetic resources research and development activities, and thus will be subject to approval by PRC government authorities. The sharing of patents or other corresponding intellectual property rights derived from such research and development operations is also subject to various restrictions and approval requirements established under the Measures.
With regard to the ownership of intellectual property rights derived from human genetic resources research and development, the Measures provide that the China-based research and development institution shall have priority access to information about the human genetic resources within China, particularly the important pedigrees and genetic resources in the specified regions and the relevant data, information and specimens and any transfer of such human genetic resources to other institutions shall be prohibited without obtaining corresponding approval from the Human Genetic Resource Administration Office of China, among other governmental authorities or agencies. No foreign collaborating institution or individual that has access to the above-mentioned information may publicize, publish, apply for patent rights or disclose it by any other means without obtaining government approval. In a collaborative research and development project involving human genetic resources of China between any Chinese and foreign institutions, intellectual property rights shall be allocated according to the following principles: (i) patent rights shall be jointly applied for by both parties and the resulting patent rights shall be owned by both parties if an achievement resulting from the collaboration is patentable; (ii) either party has the right to exploit such patent separately or jointly in its own country, subject to the terms of the collaboration; however, the transfer of such patent to any third party or authorizing any third party to implement such patent shall be carried out upon agreement of both parties, and the benefits obtained thereof shall be shared in accordance with their respective contributions; and (iii) the right of utilizing, transferring and sharing any other scientific achievement resulted from the collaboration shall be specified in the collaborative contract or agreement signed by both parties. Both parties are equally entitled to make use of the achievement which is not specified in the collaborative contract or agreement; however, the transfer of such achievement to any third party shall be carried out upon agreement of both parties, and the benefits obtained thereof shall be shared in accordance with their respective contributions.
If the research and development operations conducted by the Lab in cooperation with us in China are regarded by PRC government authorities as human genetic resources research and development activities, we may be required to obtain approval from PRC governmental authorities to continue such operations and the Measures may adversely affect our rights to intellectual property developed from such operations. Our inability to access intellectual property, or our inability to obtain required approvals on a timely basis, or at all, could materially and adversely affect our operations in China, and our operating results and financial condition.
Some of the PRC laws and regulations governing our business operations in China are vague and their official interpretation and enforcement may involve substantial uncertainty. These include, but are not limited to, laws and regulations governing our business and the enforcement and performance of our contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. Despite their uncertainty, we will be required to comply.
New laws and regulations that affect existing and proposed businesses may be applied retroactively. Accordingly, the effectiveness of newly enacted laws, regulations or amendments may not be clear. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
In addition, pursuant to Chinas Administrative Measures on the Foreign Investment in Commercial Sector, foreign enterprises are permitted to establish or invest in wholly foreign-owned enterprises or joint ventures that engage in wholesale or retail sales of pharmaceuticals in China subject to the implementation of relevant regulations. However, no specific regulations in this regard have been promulgated to date, which creates uncertainty. If specific regulations are not promulgated, or if any promulgated regulations contain clauses that cause an adverse impact to our operations in China, then our business, operating results and financial condition could be materially and adversely affected.
As the stem cell therapy industry is at an early stage of development in China, new laws and regulations may be adopted in the future to address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the stem cell therapy industry. There is no way to predict the content or scope of future Chinese stem cell regulation. There can be no assurance that the PRC government authorities will not issue new laws or regulations that impose conditions or requirements with which we cannot comply. Noncompliance could materially and adversely affect our business, results of operations and financial condition.
On December 16, 2011, Chinas Ministry of Health announced its intention to more tightly regulate stem cell clinical trials and stem cell therapeutic treatments in the PRC. The Ministry of Health ordered an immediate halt to unapproved stem cell clinical trials and applications, and put applications for new stem cell trials on hold until July 1, 2012. For those clinical trials for stem cell products already approved by the SFDA, the Clinical Trial Approval Instructions and the Good Clinical Practice, or GCP, shall be strictly followed, with unwarranted changes to the approved clinical trial protocol and profit-seeking activities strictly forbidden. As a result of this and other factors, the Company has determined to take steps to restrict, and expects to ultimately eliminate, its regenerative medicine business in the PRC. We are currently investigating the potential impact of the Ministry of Healths announcement, as well as other regulatory initiatives and regulations in China, on potential PRC-based operations through our Beijing Facility.
On April 6, 2007, the SAFE issued the Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, referred to as Circular 78. It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from the SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with the SAFE and make the necessary applications and filings if they participated in an overseas listed companys covered equity compensation plan prior to April 6, 2007. The 2009 Non-U.S. Plan authorizes the grant of certain equity
awards to our officers, directors and employees, some of whom are PRC citizens. Circular 78 may require our officers, directors and employees who receive option grants and are PRC citizens to register with the SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants of our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate our officers, directors and employees through equity compensation would be hindered and our business operations may be adversely affected.
We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. There can be no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
We anticipate that we will require additional capital to fund our current operating plan, including our existing U.S.-based cell therapy operations (such as clinical trials of AMR-001, development of our VSELTM technology and a T-cell therapeutic, our stem cell collection and storage business, and our cell manufacturing and processing operations).
Our research and development expenses have increased with the addition to our Company of our Amorcyte subsidiary, particularly as the Phase 2 clinical trial enrolls with respect to AMR-001. AMR-001 is in the development stage and will require significant investment before it can be commercialized. We anticipate that AMR-001 will not be commercially available for a number of years, if ever. Even if we raise additional capital in the event that Amorcytes Phase 2 clinical trial of AMR-001 produces positive results, it is anticipated that it will be necessary to enter into one or more collaboration agreements with one or more third parties to conduct and fund additional clinical trials, including larger, potentially pivotal Phase 3 clinical trials. If we are not able to enter into collaboration agreements on terms that are acceptable to us, we will need to raise additional capital to fund these trials or otherwise delay or abandon the trials. In addition, subject to obtaining regulatory approval of any present or future Amorcyte product candidate, we expect to incur significant commercialization expenses for product sales and marketing.
Our future capital requirements will depend on many factors, including:
|||The scope, progress and results of our historic cell therapy research, development, processing and manufacturing programs (including any revenues generated by our subsidiary PCT) and our adult and cord blood stem cell collection and storage business;|
|||the scope, progress, results, costs, timing and outcomes of the clinical trials of AMR-001 and any other product candidates;|
|||the scope, progress and results of other development programs being conducted by our Amorcyte subsidiary;|
|||the timing of entering into, and the terms of, any collaboration agreements with one or more third parties for one or more product candidates;|
|||the timing of and the costs involved in obtaining regulatory approvals for our product candidates, a process which could be particularly lengthy or complex given the FDAs limited experience with marketing approval for cell therapy products;|
|||the costs of operating, expanding and enhancing our manufacturing facilities and capabilities to support our clinical activities and, if any product candidates are approved, our commercialization activities;|
|||the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;|
|||revenues received from sales of our product candidates, if approved by the FDA; and|
|||if and when there is a divestiture of Erye.|
We would likely seek such funding through public or private financings or some combination of the two. We may also raise capital by selling shares of our Common Stock to Aspire Capital pursuant to the terms of our Purchase Agreement with Aspire Capital, as described below. We may also seek funding through collaborative arrangements if we determine them to be necessary or appropriate. Additional funding may not be available to us on acceptable terms, or at all. If we obtain capital through collaborative arrangements, these arrangements could require us to relinquish rights to the combined companys technology or product candidates and could result in our receiving only a portion of the revenues associated with the partnered product. If we raise capital through the sale of equity, or securities convertible into equity, it would result in dilution to our then existing stockholders. Issuances of our securities in connection with any future capital raise may additionally cause antidilution adjustments to our outstanding Series E 7% Senior Convertible Preferred Stock (the Series E Preferred Stock or the Series E Preferred Shares) and to the warrants issued in connection therewith. If we raise additional capital through the incurrence of indebtedness, the documents governing the terms of such debt would likely contain terms restricting our business activities, and holders of debt instruments would have rights and privileges senior to those of our equity investors. In addition, servicing the interest and principal repayment obligations under debt facilities could divert funds that would otherwise be available to support research and development, clinical or commercialization activities.
Our cash requirements may vary materially from those now planned because of expenses relating to marketing, advertising, sales, distribution, research and development and regulatory affairs (including the expenses related to clinical trials), as well as the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities. See also the discussion above under the caption Erye may require additional lines of credit and bank loans. Additional financing may not be available when needed or may not be available on terms acceptable to us. Our inability to obtain necessary capital or financing to fund these needs could adversely affect our business, results of operations and financial condition.
As of March 5, 2012, there were 114,348,438 shares of our Common Stock outstanding. In 2011, our Common Stock traded as low as $0.43 and as high as $2.10, and in 2010 traded as low as $1.10 and as high as $3.50. In addition to our low stock trading volume, some of the other factors which may contribute to our stocks price volatility include the issuance of a significant number of shares of our Common Stock or securities convertible into Common Stock in a short period of time, announcements of government regulation, new products or services introduced by us or by our competition, the status of our clinical trials, healthcare legislation, trends in health insurance, litigation, fluctuations in operating results, our success in commercializing our business, market conditions for cell therapy stocks or healthcare stocks in general as well as economic recession. We cannot assure you that the market price of our shares of Common Stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our shares of Common Stock include those set forth under Risk Factors and Cautionary Note Regarding Forward-Looking Statements.
Of particular note, our Company's development will be significantly dependent on our product candidates, and on the status and results of our clinical trials. Any clinical, regulatory or other development that significantly delays or prevents us from completing any of our trials, any material safety issue or adverse side effect to any study participant in any of these trials, or the failure of these trials to show the results expected would likely depress our stock price significantly and could prevent us from raising the substantial additional capital our Company will need to further develop our product candidates and technologies. Moreover, any material adverse occurrence in early-phase clinical trials could substantially impair our ability to initiate additional clinical trials to test our product candidates, whether for new indications or otherwise. This, in turn, could adversely impact our ability to raise additional capital and pursue our planned research and development efforts.
The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. While the market price of our Common Stock has been historically volatile, the clinical trials and additional development activities being undertaken through our Amorcyte subsidiary may contribute to additional volatility of the market price of our Common Stock, as investors react to the results of these clinical trials of product candidates and those of our competitors. In addition to the foregoing, factors that could contribute to enhanced volatility of our stock price include:
|||regulatory or legal developments in the United States and foreign countries;|
|||variations in our financial results or those of companies that are perceived to be similar to us;|
|||changes in the structure of healthcare payment systems;|
|||announcements by the Company of significant acquisitions, strategic partnerships, joint ventures or capital commitments;|
|||market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts reports or recommendations;|
|||sales of substantial amounts of our Common Stock by current stockholders;|
|||sales of our securities by insiders and large stockholders;|
|||additions or departures of key personnel;|
|||intellectual property, product liability or other litigation against us;|
|||expiration or termination of our potential relationships with collaborators; and|
|||the other factors described in this Risk Factors section.|
In addition, in the past stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies stock. Such litigation, if instituted against our Company, could cause us to incur substantial costs and divert managements attention and resources.
The issuance of Common Stock as mandatory redemption payments, dividend payments or upon conversion of some or all of our Series E Preferred Shares issued in November 2010 will dilute the ownership interests of our existing holders of our shares of Common Stock (as of March 5, 2012, 6,270,821 Series E Preferred shares were outstanding, convertible into an aggregate of 3,823,671 shares of our Common Stock). We are permitted to make each monthly mandatory redemption payment in shares of our Common Stock (at a discounted formula price), cash, or a combination of the two, subject to the terms governing our Series E Preferred Shares. In the past, we have elected to pay a portion (if not all) of each mandatory redemption payment in shares of our Common Stock, and may continue to do so. Although the dollar amount of such redemption payments are known, to the extent paid in shares of our Common Stock, the number of shares to be issued in connection with such redemption payments fluctuates based on our stock price. Any sales or perceived sales in the public market of our shares of Common Stock issuable upon such mandatory redemption payments or upon conversion could adversely affect prevailing market prices of our shares of Common Stock. The issuance of Common Stock upon conversion of the Series E Preferred Shares or upon such redemption payments may also have the effect of reducing our net income per share. In addition, the existence of the Series E Preferred Shares may encourage short selling by market participants because the conversion of the Series E Preferred Shares or the existence of the redemption payments could depress the market price of our shares of Common Stock. The number of shares issuable upon conversion of the Series E Preferred Shares is subject to weighted average antidilution adjustment.
If in the future we issue additional Common Stock, or securities convertible into or exchangeable or exercisable for Common Stock, our stockholders will experience additional dilution, and any such issuances may result in downward pressure on the price of our Common Stock.
In addition, we have a significant number of outstanding securities convertible into, or allowing the purchase of our Common Stock.
Investors will be subject to increased dilution upon conversion of our outstanding Series B preferred stock and upon the exercise of outstanding stock options and warrants. There were 114,348,438 shares of our Common Stock outstanding as of March 5, 2012. As of that date, Series B preferred stock outstanding could be converted into 10,000 shares of our Common Stock and stock options and warrants outstanding represented an additional 58,685,091 shares of our Common Stock that could be issued in the future. The number of shares issuable upon exercise of warrants issued with the Series E Preferred Stock are subject to weighted average antidilution adjustment. Most of the outstanding shares of our Common Stock, as well as the vast majority of the shares of our Common Stock that may be issued under our outstanding options and warrants, are not restricted from trading or have the contractual right to be registered. Also, the issuance of additional shares as a result of such conversion or purchase, or their subsequent sale, could adversely affect the price of our Common Stock.
Any significant increase in the number of shares offered for sale could cause the supply of our Common Stock available for purchase in the market to exceed the purchase demand for our Common Stock. Such supply in excess of demand could cause the market price of our Common Stock to decline.
On September 28, 2011, we entered into a Common Stock Purchase Agreement (the Purchase Agreement) with Aspire Capital Fund, LLC (Aspire Capital). Pursuant to the Purchase Agreement, we have a right to sell to Aspire Capital up to a maximum of 100,000 shares of our Common Stock per day, which total may be increased by mutual agreement up to an additional 1,000,000 shares per day. In addition, under certain circumstances we also have the right to sell to Aspire Capital an amount of stock equal to up to 30% of the aggregate shares of our Common Stock traded on the NYSE Amex on the next business day,
subject to a maximum number of shares determined by us. However, we may only effect sales of shares of our Common Stock to Aspire Capital pursuant to the Purchase Agreement (up to a maximum of $20 million in the aggregate) on a business day on which the closing sale price of our Common Stock is not less than 75% of the closing sale price of our Common Stock (rounded down to the nearest penny) on the business day immediately preceding the date the Purchase Agreement was executed. The extent to which we rely on Aspire Capital as a source of funding will depend on a number of factors, including the prevailing market price of our Common Stock and the extent to which we are able and desire to secure working capital from other sources. The aggregate number of shares that we can sell to Aspire Capital under the Purchase Agreement may in no case exceed 15,282,502 shares of our Common Stock (plus the 990,099 Commitment Shares previously issued), unless shareholder approval is obtained to issue more. The number of shares ultimately offered for sale to Aspire Capital under the Purchase Agreement is dependent upon the number of shares we elect to sell to Aspire Capital, if any, under the Purchase Agreement. Depending upon market liquidity at the time, sales of shares of our Common Stock under the Purchase Agreement may cause the trading price of our Common Stock to decline.
Aspire Capital may ultimately purchase all, some or none of the $20.0 million of Common Stock that we may sell to Aspire Capital pursuant to the Purchase Agreement. After Aspire Capital acquires any shares under the Purchase Agreement, it may sell all, some or none of those shares. Sales to Aspire Capital by us pursuant to the Purchase Agreement may result in substantial dilution to the interests of other holders of our Common Stock. The sale of a substantial number of shares of our Common Stock to Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales of our shares to Aspire Capital and the Purchase Agreement may be terminated by us at any time at our discretion without any cost to us.
Sales of a substantial number of our shares of Common Stock in the public markets, or the perception that such sales could occur, could depress the market price of our shares of Common Stock and impair our ability to raise capital through the sale of additional equity securities. It is anticipated that the holders of our Series E Preferred Shares will be selling any shares of Common Stock issued to them as mandatory redemption shares on each mandatory redemption date. In addition, a substantial number of shares of Common Stock are being offered by the Selling Stockholders under our effective Registration Statement on Form S-3 (File No. 333-173853) and we cannot predict if and when the Selling Stockholders may sell such shares of Common Stock in the public markets. As of January 20, 2012, one-half of the base stock consideration issued in connection with the PCT Merger had been released from escrow and these shares are now freely tradable (an aggregate of 5,300,000 shares of our Common Stock), with the remaining one-half of the base stock consideration scheduled to be released from escrow on January 20, 2013. We cannot predict if and when following this escrow release the recipients of the PCT Merger consideration may sell such shares of Common Stock in the public markets. Additionally, a substantial number of shares of Common Stock may come into the public markets as a result of the Amorcyte Merger: (i) at the closing, 5,843,483 shares of Common Stock were placed in escrow as the Base Stock Consideration, for eventual distribution to the former stockholders of Amorcyte (with the first release from escrow, consisting of 20% of the Base Stock Consideration, to be effected in April 2012), and (ii) up to 4,092,768 shares of our Common Stock may become issuable to the former Amorcyte stockholders as Contingent Shares if certain business milestones are achieved. We cannot predict if and when (following, as applicable, release of the Base Stock Consideration from escrow, or issuance of Contingent Shares if the relevant milestones are achieved) the recipients of the Amorcyte Merger consideration may sell such shares of Common Stock in the public markets. We cannot predict the number of the above-described shares that might be sold nor the effect that future sales of our shares of Common Stock would have on the market price of our shares of Common Stock.
At March 5, 2012, we had approximately 58,685,091 stock options and warrants outstanding. Holders of our outstanding options and warrants are given the opportunity to profit from a rise in the market price of our Common Stock. As long as these options and warrants are outstanding, the terms on which we could obtain additional capital may be adversely affected. The holders of these options and warrants might be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital by a new offering of securities on terms more favorable than those provided by these options and warrants.
We have concluded that as of December 31, 2011 we have a material weakness in our internal control relating to our financial reporting of Erye. Specifically, the Company has determined the accounting staff at Erye does not have sufficient qualified accounting and finance personnel. If we fail to (1) fully remediate the material weakness identified, or (2) we fail to maintain the adequacy of internal control over our financial reporting, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, as such standards are modified, supplemented or amended from time to time.
As private companies, PCT and Amorcyte were not subject to the requirements of Section 404 of the Sarbanes-Oxley Act. Now that the PCT Merger and the Amorcyte Merger have been consummated, we expect to continue to devote management time and other resources to ensure that the combined company complies with the requirements of Section 404. During the course of testing our disclosure controls and procedures and internal control over financial reporting, we may identify and disclose material weaknesses or significant deficiencies in internal control over financial reporting (which may or may not be related to PCT or Amorcyte) that will have to be remedied. Implementing any appropriate changes to our internal control may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal control over financial reporting, and any failure to maintain that adequacy or inability to produce accurate financial statements on a timely basis could result in our financial statements being unreliable, increase our operating costs and materially impair our ability to operate our business.
Failure to achieve and maintain effective internal control over financial reporting could result in a loss of investor confidence in our financial reports and could have a material adverse effect on our stock price. Additionally, failure to maintain effective internal control over our financial reporting could result in government investigation or sanctions by regulatory authorities.
As of March 5, 2012, our executive officers and directors collectively owned 33,727,064 shares of our Common Stock, representing approximately 29.5% of our outstanding Common Stock. As of such date, our executive officers and directors collectively beneficially owned 47,429,892 shares of our Common Stock. These beneficial holdings represent approximately 37.0% of our Common Stock. As a result, such persons may have the ability to exercise enhanced control over the approval process for actions that require stockholder approval, including: the election of our directors and the approval of mergers, sales of assets or other significant corporate transactions or other matters submitted for stockholder approval. Because of the beneficial ownership position of these persons, other stockholders may have less influence over matters submitted for stockholder approval. Furthermore, at certain times the interests of our substantial stockholders may conflict with the interests of our other stockholders.
Eric H.C. Wei, a member of our Board of Directors, is also the Managing Partner of RimAsia Capital Partners, L.P., or RimAsia. RimAsia, a substantial stockholder of our company, beneficially owns approximately 22.5% of our Common Stock as of March 5, 2012. Mr. Shi Mingsheng (the Chairman of the Board of Erye, and who became a director of our company in March 2010) and Madam Zhang Jian (our Vice President of Pharmaceutical Operations and the General Manager of Erye), together with certain other persons, have shared voting and dispositive power over the shares of our Common Stock held by Fullbright Finance Limited, or Fullbright. Fullbright, together with Mr. Shi, and Madam Zhang, beneficially owns approximately 4.6% of our Common Stock as of March 5, 2012. These relationships create, or, at a minimum, appear to create potential conflicts of interest when members of our companys senior management are faced with decisions that could have different implications for our company and the other entities with which our directors or officers are associated.
Although our company has established procedures designed to ensure that material related party transactions are fair to the company, no assurance can be given as to how potentially conflicted board members or officers will evaluate their fiduciary duties to our company and to other entities that they may owe fiduciary duties, respectively, or how such individuals will act in such circumstances. Furthermore, the appearance of conflicts, even if such conflicts ultimately do not harm our company, might adversely affect the publics perception of our business, as well as its relationship with its existing customers, licensors, licensees and service providers and its ability to enter into new relationships in the future.
We have the obligation to make monthly redemption payments on the Series E Preferred Shares, which mandatory redemption payments may be made at our option in cash or in shares of our Common Stock at a discounted formula price, except that our right to make payment in shares of Common Stock is dependent upon our satisfying certain Equity Conditions (defined in the certificate of designations for the Series E Preferred Stock) and is also subject to certain Dollar Volume Limitations (as defined). If we cannot satisfy the Equity Conditions, or if our trading prices and volume are such that we do not meet the Dollar Volume Limitations necessary for us to be able to make all or such portion of the monthly mandatory redemption payments as we desire in stock, we may be forced to make all (or a greater portion than we desire) of such monthly payments in cash. We may not have sufficient cash resources at the applicable time to make those cash payments, or to make such cash payments in full. Further, any failure to pay any amounts due to the holders of the Series E Preferred Shares, as well as certain other Trigger Events (as defined in the certificate of designations), including without limitation certain change in control transactions, our failure to timely deliver shares, our suspension of trading, and breaches of certain representations, warranties and covenants that are not timely cured, where a cure period is permitted, would permit the holders of our Preferred Shares to compel repurchase of such Series E Preferred Shares at a price per share equal to the sum of the liquidation preference plus accrued dividends plus the then applicable prepayment premium (10% if the repurchase occurs more than 12 months after the initial issuance date). If we are required to repurchase the Series E Preferred Shares in cash prior to maturity, no assurance can be given that we would have the cash or financial resources available to us to make such a payment, and such an acceleration could have a material adverse effect on our business and financial condition and may impair our ability to continue in business as a going concern.
The rights of the holders of the Series E Preferred Shares rank senior to the obligations to holders of our Common Stock. Upon our liquidation, the holders of Series E Preferred Shares are entitled to receive a liquidation preference of $1.00 per share, plus all accrued but unpaid dividends at the rate of 7% per annum prior and in preference to any distribution to the holders of any other class of our equity securities. Further, no dividends can be paid without the consent of the holders of a majority of the outstanding Series E
Preferred Shares, and the holders of Series E Preferred Shares, as well as the holders of the warrants which were issued to the purchasers of Series E Preferred Shares, have the right to participate in any payment of dividends or other distributions made to the holders of our Common Stock to the same extent as if they had converted the Series E Preferred Shares or exercised the warrants. The existence of such a senior security could have an adverse effect on the value of our Common Stock.
Under the securities purchase agreement pursuant to which the Series E Preferred Shares were sold, we are subject to certain covenants that limit our ability to create new series of preferred stock, other than series junior to the Series E Preferred Shares. We are also limited, with certain exceptions, in our ability and the ability of our subsidiaries (other than Erye) to incur debt and to pledge our assets. Such restrictions may have an adverse effect on our ability to operate our business while the Series E Preferred Shares are outstanding.
We presently operate two cell therapy manufacturing facilities, in Allendale, New Jersey and in Mountain View, California. Longer-term plans could include the acquisition and development of other such buildings within and outside of the United States, to be developed into replicable and scalable manufacturing facilities, strategically located to best serve clients needs. Inherent in the nature of cell therapy today is the biologic shelf life of the cell therapy product itself. This limits the transit times between the time the cell product is extracted from a patient until it arrives at a manufacturing facility and the time that a processed product leaves the manufacturing facility and arrives for re-infusion in the patient. Therefore, it is preferable for cell therapy manufacturing facilities to be located in major population centers and within close proximity of major airport hubs.
In 2007, PCT acquired the facility in Allendale, New Jersey which has been developed into a cell manufacturing facility. 22,000 square feet of the Allendale facilitys approximately 30,000 square feet have been developed. The Allendale facility is comprised of ISO Class 7, Class 10,000 manufacturing suites, in addition to quality control, research and development laboratories and support facilities. It has been designed to meet the accreditation requirements of the Foundation for the Accreditation of Cellular Therapy (FACT) and to comply with the FDAs requirements, including applicable cGMP regulations, and to meet the standards of the American Association of Blood Banks (AABB). The facility is also in compliance with a range of state and federal regulatory and licensing requirements. The Allendale facility is subject to two mortgages in favor of T.D. Bank, N.A. having an aggregate principal amount of approximately $3.6 million as of December 31, 2011.
The Mountain View facility is also a licensed cell therapy manufacturing facility, encompassing 25,024 square feet within a single building, of which 17,425 square feet is developed. The developed space is presently used for manufacturing client products. Mountain View is equipped with ISO Class 7, Class 10,000 manufacturing suites, quality control, research and development laboratories and support facilities. We expect to further develop space for cell therapy manufacturing within the facility on an as needed basis. The Mountain View facility is subject to a lease agreement, as amended to date, having a current term that extends through June 2017. The base monthly rent is currently $46,294. Commencing July 1, 2012, the base monthly rent will be $41,289.60, subject to adjustments as of July 1, 2013 and each annual anniversary thereafter during the term to reflect any changes in the cost of living; provided, however, that each such annual rental adjustment will not be less than 3% or more than 7% of the rent payable for the calendar month immediately preceding the applicable rental anniversary date. PCT is permitted to make certain improvements, additions and alterations to the premises subject to the terms of the lease with the lessor providing an Improvement Allowance equal to the lesser of $500,000 or the aggregate amount of Reimbursable Costs, as defined in the July 2011 amendment to the lease. In connection with the July 2011 amendment to the lease, the lessor required that NeoStem, as sole member of PCT, execute a Guaranty of Lease.
Because of the specialized nature of these cell processing facilities and the time required to conceptualize, design, build, and obtain certification and operating authority, it takes approximately nine months to go from concept to operations once space has been qualified.
These properties are used in the Companys Cell Therapy United States reportable segment.
Effective April 1, 2009, we leased executive offices at 420 Lexington Avenue, New York, NY 10170, which serve as our headquarters. The lease has a current term that extends through June 2013 and is believed to be sufficient space for the near future. The base monthly rent, which includes storage space, is currently approximately $22,000 per month. This property is used as our corporate headquarters.
In September 2009, we leased office and laboratory space at 840 Memorial Drive, Cambridge, Massachusetts for approximately three years. The Cambridge space is being used for general office, research and development, and laboratory space. The base rent under the Cambridge lease is currently $30,750 per month. In May 2011, the Company sublet a portion of the Cambridge facility to another life science company. The Company is assessing its need for the Cambridge facility going forward given the acquisition of PCT with its Allendale, NJ and Mountain View, CA facilities. This property was used in the Companys Cell Therapy United States reportable segment.
NeoStem (China) is a party to a lease originally entered into in May 2009, with Beijing Zhong-guan-cun Life Science Park Development Corp., Ltd. pursuant to which NeoStem (China) is leasing laboratory, office and storage space in Beijing for the aggregate monthly amount of approximately $25,377. Lease payments are due quarterly in advance. The term of the lease is through May 2012. The Beijing Facility was built to provide comprehensive adult stem cell collection, processing and storage capabilities, and a laboratory to provide cell therapy process, development and manufacturing. In order to implement the establishment of the Beijing Facility, as of December 31, 2009, our Company, NeoStem (China) and PCT, entered into an agreement, whereby NeoStem and NeoStem (China) engaged PCT to perform the services necessary (1) to construct the Beijing Facility and (2) to effect the installation of quality control systems which comply with cGMP standards and regulatory standards that would be applicable in the United States under GTP standards, as well as all regulatory requirements applicable to the program under the laws of the PRC. The project commenced on April 1, 2010 and Phase 1 of the project was completed at year-end 2010. The Beijing Facility is located at the Life Science Innovation Center, Life Science Park, Zhongguancum, Beijing. This property is used in the Companys Regenerative Medicine China reportable segment. With the upcoming expiration of this lease, the Company is considering its options with respect to extending the lease to allow for manufacturing of cell therapies, which will depend in part upon guidance from the PRC Ministry of Health with respect to regulations applicable to stem cell clinical research and applications.
Quingdao Neo Bio-Technology had been leasing office space since August 2009. The most recent lease was effective through September 2011 at a monthly rent of approximately $1,300. Qingdao Neo Bio-Technologys operations have moved to Tianjin to take advantage of tax and other concessions that are being made available and in May 2011 the Qingdao lease was terminated. In connection therewith, Tianjin Neo Bio-Technology entered into a one-year lease for office space in Tianjin at a monthly rent of approximately $5,000. This property is used as corporate offices.
In 2005, Erye acquired land use rights to approximately 27 acres in the Xiangcheng District of Suzhou for approximately $2.0 million and, in 2007, commenced the construction of a new, state-of-the-art production facility. This new campus-style facility includes 16 buildings containing a total of approximately 53,186 square meters. Erye has substantially completed the construction of its new manufacturing facility. Erye began transferring its operations to its new manufacturing facility in January 2010. The relocation and new production lines have been completed and received cGMP certification.
The estimated total cost of the new facility is approximately $39 million. Construction has been self-funded by Erye and EET, the holder of the minority joint venture interest in Erye. We agreed during the three-year period commencing on the first day of the first fiscal quarter after the Joint Venture Agreement became effective to reinvest in Erye approximately 90% of the net earnings we would be entitled to receive under the Joint Venture Agreement by reason of our 51% interest in Erye.
These properties are used in the Companys Pharmaceutical Manufacturing China reportable segment.
Xiangbei Welman Pharmaceutical Co., Ltd. v Suzhou Erye Pharmaceutical Co., Ltd. and Hunan Weichu Pharmacy Co., Ltd. involves a patent infringement dispute with respect to a particular antibiotics complex manufactured by Erye (the Product). The Changsha Intermediate Court ruled initially in Welmans favor and Erye appealed that judgment to the Hunan High Court. The Supreme Court of PRC recently rendered a final ruling that Welman is not entitled to the disputed patent right, and on January 16, 2012 the Hunan High Court rejected Welmans suit against Erye on that claimed patent infringement. The initial judgment was rendered on May 13, 2010 in the amount of approximately 5 million RMB (approximately $778,500), which was fully accrued for at September 30, 2011 and reversed in the fourth quarter of 2011 based on these subsequent rulings.
In 2009, Welman brought a copyright infringement lawsuit against Erye claiming the package inserts with respect to the Product infringed their copyright. Erye was enjoined from copying and using the package inserts on the Product and from selling the Product with the package inserts and Welman was awarded RMB 50,000. Erye has filed application for a retrial of the previous lawsuit brought by Welman to the Hunan High Court, which application filing was accepted by the court.
In July 2011, a new copyright infringement lawsuit was brought by Welman against Erye claiming that Erye was not complying with the earlier judgment enjoining them from copying and using the package inserts for the Product. The Changsha Intermediate Court was applied to for property preservation and issued a civil decision freezing Eryes bank deposit of up to RMB 50 million (approximately US $7.9 million), or to seal up or detain Eryes other properties of equal value. As of December 31, 2011, approximately 15,656,000 RMB (approximately US $2,460,000) of cash had been frozen in six Erye bank accounts. Erye has contended that jurisdiction is not proper, and the case is now in review of the Hunan High Court.
A similar copyright infringement lawsuit was recently instituted by Welman against Erye in the Guangzhou Intermediate Court to (i) enjoin Erye from copying and using the package inserts from the Product and selling the drugs with the aforesaid package inserts; and (ii) award Welman economic losses of approximately RMB 2,000,000 (approximately US $320,000) against Erye. That case is being reviewed by the Court. Welman made an application for preliminary injunction to prohibit Erye from copying and using the package inserts from the Product and selling the drugs with the aforesaid package inserts and Welman's application was denied by the Court on September 6, 2011. Welman subsequently obtained a preliminary injunction from a lower court Guangzhou Haizhu District Court on September 14, 2011. But on October 28, 2011, upon the appeal by Erye, the Haizhu District Court issued a decision withdrawing the preliminary injunction.
Additionally, we are subject to litigation in the ordinary course.
Our Common Stock trades on the NYSE-Amex under the symbol NBS. The following table sets forth the high and low sales prices of our Common Stock for each quarterly period presented, as reported by the NYSE-Amex.
As of March 9, 2012, there were approximately 1,356 stockholders of record of our Common Stock (which does not include beneficial owners for whom Cede & Co. or others act as nominees).
We have not paid cash dividends on our Common Stock during the periods set forth in the stock price table that appears above. The holders of our Common Stock are each entitled to receive dividends when and if declared by the board of directors out of funds legally available therefor, subject to the terms of any outstanding series of preferred stock (as further described below). Other than payments that are required pursuant to the terms of our Series E 7% Senior Convertible Preferred Stock (the Series E Preferred Stock), we intend to retain any future earnings to fund the development and growth of our business, and therefore we do not anticipate paying any cash dividends on our Common Stock in the foreseeable future.
So long as any shares of our Series E Preferred Stock are outstanding, no dividends can be paid on our Common Stock without the consent of the holders of a majority of the outstanding shares of Series E Preferred Stock, and the holders of the Series E Preferred Stock, as well as the holders of the warrants issued to the purchasers of the Series E Preferred Stock, have the right to participate in any payment of dividends or other distributions made to the holders of our Common Stock to the same extent as if they had converted the Series E Preferred Stock or exercised the warrants.
Furthermore, for so long as we own an interest in Erye and the VIE structure is in place, we expect to rely on dividend payments from our subsidiaries, NeoStem (China) and China Biopharmaceuticals Holdings, Inc. (which is the holder of our 51% interest in Erye), which may, from time to time, be subject to certain additional restrictions on their ability to make distributions or other payments to us, including PRC law governing liquidation. PRC accounting standards and regulations currently permit payment of dividends only
out of accumulated profits, a portion of which must be set aside to fund certain reserve funds. Our inability to receive all of the revenues from NeoStem (China) and China Biopharmaceuticals Holdings, Inc. may in turn provide an additional obstacle to our ability to pay dividends on our common stock in the future. Additionally, because the PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC, shortages in the availability of foreign currency may occur, which could restrict our ability to remit sufficient foreign currency to pay dividends.
Finally, any distributions we may receive by reason of our ownership of a 51% interest in Erye will be subject to the provisions of the Joint Venture Agreement, which presently provides that, for 2010 and for a period of approximately two years thereafter, we will receive annual distributions of only six percent of Eryes net profit.
As previously disclosed, and as follows:
The Company has agreed to issue equity to certain consultants for services. Effective November 1, 2011, pursuant to a two month agreement for consulting services in financial and public relations and other specified related matters, the Company agreed to issue 50,000 shares of Restricted Common Stock, vesting as to 25,000 shares on November 1, 2011 and 25,000 shares on December 1, 2011. Effective December 1, 2011, pursuant to a six month agreement for consulting services in corporate finance, investor communications and public relations, the Company agreed to issue 250,000 shares of Restricted Common Stock, vesting ratably over the term of the agreement on a monthly basis. Effective December 15, 2011, pursuant to a three month agreement for specified investor relations and other services, the Company agreed to issue 150,000 shares of Restricted Common Stock, vesting as to one-third on each of the first, second and third one-month anniversaries of the effective date. Also on December 15, 2011, pursuant to a four month agreement for financial advisory services, the Company agreed to issue a total of 100,000 shares of Restricted Common Stock, at the rate of 25,000 shares per month. Effective December 20, 2011, the Company agreed to issue a five year warrant to a PRC regulatory and clinical trial consultant to purchase 100,000 shares of Restricted Common Stock at $0.56 per share, vesting as to 50,000 shares on each of the six month and one year anniversaries of the commencement date. Effective February 22, 2012, pursuant to a one year agreement for consulting services related to the healthcare industry, government affairs and public policy, the Company agreed to issue a five year warrant to purchase 125,000 shares of Restricted Common Stock at $0.63 per share, vesting as to 25, 000 shares on the commencement date and as to 50,000 shares on each of the six month and one year anniversaries of the commencement date. The issuance of all such securities is or was subject to the approval of the NYSE Amex.
On February 17, 2012, we consummated a private placement pursuant to which three persons and entities acquired an aggregate of 3,465,404 shares of Common Stock for an aggregate consideration of $2,250,000 (as to which 1,449,275 shares had a purchase price of $0.69 per share and 2,016,129 shares had a purchase price of $0.62 per share).
The offer and sale by the Company of the securities described above were made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), for transactions by an issuer not involving a public offering. The offer and sale of such securities were made without general solicitation or advertising to accredited investors as such term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act and/or pursuant to Regulation D or Regulation S, each promulgated under the Securities Act and may not be resold in the United States or to U.S. persons unless registered under the Securities Act or pursuant to an exemption from registration under the Securities Act.
There were no repurchases of equity securities by or on behalf of the Company or any affiliated purchaser during the fourth quarter of the fiscal year ended December 31, 2011 as to which information is required to be furnished.
The following Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Cautionary Note Regarding Forward-Looking Statements and under Risk Factors and elsewhere in this annual report. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included in Item 8 of this annual report.
NeoStem, Inc. is an international biopharmaceutical company. In 2011, we operated our business in three reportable segments: (i) Cell Therapy United States; (ii) Regenerative Medicine China; and (iii) Pharmaceutical Manufacturing China. We are pursuing the divestiture of the majority of our China operations and anticipate they will have been exited by the close of 2012.
Through the Cell Therapy United States segment, we are focused on the development of proprietary cellular therapies in cardiovascular disease, immunology and regenerative medicine and becoming a single source for collection, storage, manufacturing, therapeutic development and transportation of cells for cell based medicine and regenerative science. Within this segment, we also are a provider of adult stem cell collection, processing and storage services in the U.S., enabling healthy individuals to donate and store their stem cells for personal therapeutic use. In addition, the Company collects and stores cord blood cells of newborns which help to ensure a supply of autologous stem cells for the child should they be needed for future medical treatment.
The Company strengthened its expertise in cellular therapies, for its Cell Therapy United States segment, with its January 19, 2011 acquisition of Progenitor Cell Therapy, LLC, a Delaware limited liability company (PCT). PCT is engaged in a wide range of services in the cell therapy market for the treatment of human disease, including, but not limited to contract manufacturing, product and process development, regulatory consulting, product characterization and comparability, and storage, distribution, manufacturing and transportation of cell therapy products. PCTs legacy business relationships also afford NeoStem introductions to innovative therapeutic programs.
In March 2011 PCTs wholly owned subsidiary, Athelos, Inc. (Athelos), acquired rights and technology for a T-cell based immunomodulatory therapeutic in exchange for an approximate 20% interest in Athelos.
The Company further strengthened its breadth in cellular therapies through its October 17, 2011 acquisition of Amorcyte, Inc. Amorcyte is a development stage cell therapy company focusing on novel treatments for cardiovascular disease. Amorcytes lead product candidate is AMR-001. In January 2012, Amorcyte enrolled its first patient in our PreSERVE Phase 2 trial to investigate AMR-001s ability to preserve heart function after a heart attack.
The Company views the PCT and Amorcyte acquisitions as fundamental to building a foundation in achieving its strategic mission of capturing the paradigm shift to cell therapy.
Through our Regenerative Medicine China segment, in 2009, we began several China-based, Regenerative Medicine initiatives including: (i) constructing a stem cell research and development laboratory and processing facility in Beijing, (ii) establishing relationships with hospitals to provide cell-based therapies, and (iii) obtaining product licenses covering several adult stem cell therapeutics focused on regenerative medicine. As a result of certain changes in the PRC regulatory environment, the Company has determined to take steps to restrict, and expects to ultimately eliminate, its Regenerative Medicine business in the PRC.
We acquired our Pharmaceutical Manufacturing China segment when on October 30, 2009, China Biopharmaceuticals Holdings, Inc. (CBH) merged with a wholly-owned subsidiary of NeoStem (the Erye Merger). As a result of the Erye Merger, NeoStem acquired CBHs 51% ownership interest in Erye, a Sino-foreign joint venture with limited liability organized under the laws of the PRC. Erye was
founded more than 50 years ago and represents an established, vertically-integrated pharmaceutical business. Historically, Erye has concentrated its efforts on the manufacturing and distribution of generic antibiotic products. In 2010, Erye began transferring its operations to its newly constructed manufacturing facility, as to which construction is now substantially completed. The relocation and the new production lines have been completed and received cGMP certification. As part of its plan to focus its business on capturing the paradigm shift to cell therapies following the January 2011 acquisition of PCT, the Company is pursuing strategic alternatives with respect to its interest in Erye.
To support our liquidity needs, the Company raised an aggregate of approximately $21.2 million through the issuance of common stock and warrants through private placements and a public offering in 2011. In February 2012, the Company raised an aggregate of approximately $2.25 million in a private placement of common stock.
For the year ended December 31, 2011, total revenues were approximately $73,718,000 compared to $69,821,300 for the year ended December 31, 2010. Revenues for 2011 and 2010 were comprised of the following (in thousands):
|Years Ended December 31,|
|Pharmaceutical Manufacturing China||$||63,393.6||$||69,584.3|
|Cell Therapy United States||10,050.1||181.1|
|Regenerative Medicine China||274.3||55.9|
|||Revenues for our Pharmaceutical Manufacturing China reporting segment were approximately $63,393,600 for the year ended December 31, 2011 compared to $69,584,300 for the year ended December 31, 2010, representing a decrease of approximately $6,190,700 or 9%. The decrease was primarily due to a strategic decision to adjust the product mix, decreasing sales of certain low margin pharmaceutical intermediates to other pharmaceutical manufacturers in order to create capacity for higher margin products in the future, which resulted in 10% reduction in overall sales. As an example, in Q1 2011 Erye introduced two new products, omeprazole and cloxacillin which are expected to contribute to higher margins than the discontinued pharmaceutical intermediates, and we have several other products under development that may be introduced over the next three to four years. Revenues from sales of antibiotics, cephalosporins and other therapeutic products declined approximately 3% compared to the same period for 2010 primarily from the impact of specific policies on volume control for certain drugs, including ongoing restriction on antibiotics, and the average price of antibiotics and cephalosporins, which were offset by increased revenues resulting from changes in foreign exchange rates between the Chinese RMB and United States dollar by approximately 5%. We recognize that there will be continuous price pressure on Erye as over 70% of Eryes manufactured drugs are on Chinas essential drug list. There has been evidence of such price pressure i.e., on March 2, 2011 the National Development and Reform Commission issued price cuts for medical insurance drugs which substantially impacts two of Eryes drugs. We anticipate that Piperacillin Sodium and Sulbactam Sodium will experience as much as a 50% price decline while the price of Ligustrazine Phosphate may be reduced by approximately 75%. During 2011, the price reduction experienced by Erye on these products was approximately 24%. During 2011, Piperacillin Sodium and Sulbactum Sodium accounted for approximately 5% of sales and Ligustrazine Phosphate accounted for approximately 1% of sales. Recently, the Ministry of Health issued, for public comment, a draft policy Administrative Measures on Clinical Use of Antibiotics to curb their overuse. The proposed guidelines set forth three categories of antibiotics, which include 1) restricted, 2) non-restricted, and 3) special-use only. According to the October 12, 2011 China Healthcare report published by Deutsche Bank, AG (the China Healthcare report), it has been|
|projected that the limitation of antibiotic usage in China will reduce the historical compound annual growth rate which has been approximately 20%. According to the China Healthcare report, it has been estimated that Chinas population consumes about ten times the global per capita average of antibiotics. These regulations have not been finalized but issuance of the draft policy has created uncertainty on the part of distributors and has reduced purchases by distributors and in part has contributed to sales reductions in 2011.|
|||Revenues for our Cell Therapy United States reporting segment were approximately $10,050,100 for the year ended December 31, 2011 compared to $181,100 for the year ended December 31, 2010. The increase was primarily due to revenues generated by PCT which was acquired in January 2011, and whose revenues totaled approximately $9,685,400.|
|||The cost of revenue was approximately $55,974,100 representing an increase of approximately $6,305,800 compared with 2010. The cost of revenue in the Pharmaceutical Manufacturing China reporting segment was approximately $47,186,800 and decreased 5% over 2010. The strategic decision to discontinue manufacturing low margin pharmaceutical intermediates in order to free up capacity for higher margin products in the future decreased the cost of manufacturing by 10%. This reduction in cost was offset by increases in the cost of manufacturing of antibiotics and cephalosporins and other therapeutic products of approximately 5% due to the impact of the increased costs associated with the new plant and an increase in amortization expense associated with intangible assets acquired in the Erye Merger. This increase in manufacturing costs is expected to continue to have a negative impact until an increase in sales of higher margin products is realized. Increases in the exchange rate between the Chinese RMB and the United States dollar increased cost of revenue by 5%.|
|||The cost of revenue for Cell Therapy United States reporting segment was $8,701,300 an increase of approximately $8,672,400 principally related to the cost of revenue for PCT.|
For the year ended December 31, 2011 operating expenses totaled $72,281,000 compared to $39,031,300 for the year ended December 31, 2010, representing an increase of $33,249,700 or 85%.
Historically, to minimize our use of cash, we have used a variety of equity and equity-linked instruments to pay for services and to incentivize employees, consultants and other service providers. The use of these instruments has resulted in significant charges to the results of operations. In general, these equity and equity-linked instruments were used to pay for employee and consultant compensation, director fees, marketing services, investor relations and other activities. For the year ended December 31, 2011 the use of equity and equity-linked instruments to pay for such expenses resulted in charges to selling, general, and administrative, and research and development expenses totaling $9,812,900 representing an increase of $2,501,500 from the year ended December 31, 2010.
For the year ended December 31, 2011, our selling, general, and administrative expenses were approximately $41,845,300 compared to approximately $30,788,600 for the year ended December 31, 2010, representing an increase of approximately $11,056,700 or 36%. Equity-based compensation included in selling, general and administrative expenses for the year ended December 31, 2011 was approximately $8,945,200, compared to approximately $6,387,900 for the year ended December 31, 2010. Overall, the increase in selling, general and administrative expenses was primarily due to the following:
|||An increase of approximately $8,882,200 in the Cell Therapy United States reporting segment, comprised of (i) an increase of approximately $2,557,300 related to employee, director and consultant equity compensation, including approximately $722,900 related to the modification of stock option awards to our CEO in April 2011; (ii) an increase of approximately $4,469,100 related to new operating expenses as a result of our acquisition of PCT; (iii) an increase of approximately $1,813,700 in legal, accounting, and other professional fees, including expenses relating to the Companys strategic shift towards cell therapy initiatives; (iv) an increase of approximately $607,400 due to a one-time contribution paid in equity during the three months ended March 31, 2011 to a foundation for which our CEO is President and Trustee, General Counsel is Secretary and Trustee|
|and CFO is Treasurer; and (v) an increase of approximately $1,662,300 related to other administrative activities. These increases were partially offset by a decrease of approximately $2,227,500 in selling and marketing expenses in connection with our adult stem cell collection efforts.|
|||An increase of approximately $1,163,200 in our Pharmaceutical Manufacturing China reporting segment, comprised of (i) a $1,186,100 increase in taxes related to withholding taxes paid on two dividends declared (in January, 2011 and April, 2011) that were retained in the business, (ii) an increase of approximately $828,000 in selling and marketing expenses, and (iii) a decrease of approximately $850,900 related to administrative activities.|
|||An increase of approximately $1,011,200 in our Regenerative Medicine China reporting segment, comprised primarily of an increase in administrative activities.|
For the year ended December 31, 2011, our research and development expenses were $11,003,100 compared to $7,684,500 for the year ended December 31, 2010, representing an increase of approximately $3,318,600 or 43%. Equity-based compensation included in research and development expenses for the year ended December 31, 2011 was approximately $867,800, compared to approximately $923,500 for the year ended December 31, 2010. Overall, the increase in research and development expenses was primarily due to the following:
|||An increase of approximately $1,712,400 in our Cell Therapy United States reporting segment, comprised primarily of an in-process research and development charge of approximately $1,150,000 related to the acquisition of certain intellectual properties in the area of T-Cell regulation from Becton, Dickinson and Company in March 2011.|
|||An increase of approximately $1,340,200 in our Pharmaceutical Manufacturing China reporting segment as a result of increased clinical development efforts on products under development.|
|||An increase of approximately $266,000 in our Regenerative Medicine China reporting segment due to costs associated with operating the Beijing laboratory.|
For the year ended December 31, 2011, as part of our annual impairment review, we recognized an impairment charge of $19,432,700 associated with our Pharmaceutical Manufacturing China reporting segment, due to lower than expected revenue and operating income growth. For the year ended December 31, 2010, as part of our annual impairment review, we recognized an impairment charge of $558,200 associated with our Cell Therapy United States reporting segment.
As part of our plan to focus on capturing the paradigm shift to cell therapies following our January 2011 acquisition of PCT, we are pursuing strategic alternatives with respect to our 51% interest in Erye and anticipate we will have monetized our interests in Erye by the close of 2012. Additionally, due to changes in the regulatory environment in the PRC, we also plan to close our Regenerative Medicine business providing autologous orthopedic therapy in China in 2012. In connection with closing our Regenerative Medicine business, we do not expect the exit costs to be material.
For the year ended December 31, 2011 interest expense was $3,991,200 compared with $480,900 for the year ended December 31, 2010, an increase of $3,510,300. The increase was due to (i) an increase in amortization of debt discount related to the Series E Preferred Stock of $2,440,200, (ii) an increase of $876,700 in interest expense accrued on loans from related parties, and (iii) interest related to a mortgage on PCTs Allendale facility of $193,400.
Other income (expense), net for the year ended December 31, 2011 totaled approximately $2,338,300 of other income. Other income and expense in 2011 was primarily related to the revaluation of derivative liabilities of $2,096,900 of other income that have been established in connection with the Convertible Redeemable Series E Preferred Stock.
Other income (expense), net for the year ended December 31, 2010 totaled approximately $513,100 of other income. Included in other income and expense in 2010 was other income of $656,300 due to a
settlement agreement reached with a business partner involved in the development of the platform research organization in China, whereby the business partner relinquished rights to certain shares of our common stock. The Company valued the shares at their fair market value on the day the shares were relinquished. Also included in other income and expense in 2010 was $138,300 in expense for fair value adjustments on derivative liabilities related to the Companys Series E Preferred Stock issuance in November 2010 and other outstanding warrants. Included in interest expense in 2010 was $281,200 in amortization of preferred stock discount and issuance costs related to the Companys Series E Preferred Stock.
The income tax provision for the years ended December 31, 2011 and 2010, were $392,800 and $550,900, respectively, and were related to foreign taxes for our operations in China.
The provision for income taxes and the realization of deferred tax liability for Pharmaceutical Manufacturing China is based on, for the year ended December 31, 2011, a statutory rate of 25% and, for the year ended December 31, 2010, a statutory rate of 12.5%.
In connection with accounting for the Companys 51% interest in Erye, we account for the 49% minority shareholder share of Eryes net income or loss with a charge to Noncontrolling Interests. For the year ended December 31, 2011 Eryes minority shareholders share of net loss totaled approximately $9,148,600. For the year ended December 31, 2010, Eryes minority shareholders share of net income totaled approximately $3,908,700. In addition, the Company acquired rights to use patents under licenses from Becton, Dickinson and Company in March 2011, in exchange for an approximately 20% interest in PCTs Athelos subsidiary. Noncontrolling interest also reflects Bectons share of losses incurred by Athelos during the year ended December 301 2011 of approximately $299,800.
The Convertible Redeemable Series E Preferred Stock calls for annual dividends of 7% based on the stated value of the preferred stock and for the year ended December 31, 2011 we recorded dividends of approximately $639,800. In the year ended December 31, 2010 the Company recorded dividends of approximately $238,000, including $153,500 on the Convertible Redeemable Series C Preferred Stock which called for an annual dividend of 5% based on the stated value of the preferred stock. The Convertible Redeemable Series C Preferred Stock was converted into NeoStem Common Stock in May 2010.
At December 31, 2011 we had a cash balance of approximately $12,745,400, working capital of approximately $2,164,900, and shareholders equity of approximately $62,025,600.
During the year ended December 31, 2011, we met our immediate cash requirements through existing cash balances, private placements and a public offering of our common stock and warrants, which in total, raised an aggregate of approximately $21,152,700, the issuance of notes payable and bank loans providing $2,160,000 net, for our operations in China and the use of equity and equity-linked instruments to pay for services and compensation.
We incurred a net loss of approximately $56,582,900 for the year ended December 31, 2011. The following chart represents the net funds provided by or used in operating, financing and investing activities for each period indicated (in thousands):
|Years Ended December 31,|
|Net cash used in operating activities||$||(20,928.0||)||$||(8,476.7||)|
|Net cash used in investing activities||$||(2,054.6||)||$||(17,105.8||)|
|Net cash provided by financing activities||$||20,069.4||$||33,855.5|
Our cash used for operating activities in the year ended December 31, 2011 totaled approximately $20,928,000, which is the sum of (i) our net loss, adjusted for non-cash expenses totaling $16,209,500 (which includes adjustments for common stock, common stock options and common stock purchase warrants issued for services rendered and charitable contribution in the aggregate amount of approximately $10,266,000, depreciation and amortization of approximately $8,978,300, goodwill impairments charges of $19,432,700, the write-off of in process research and development of approximately $1,150,000, amortization of Preferred Stock discount and issuance cost of approximately $2,440,200), and (ii) changes in operating assets and liabilities of approximately $4,718,500.
During the years ended December 31, 2011 and 2010, we spent approximately $5,910,300 and $16,377,700, respectively, for property and equipment principally related to the construction of Eryes new manufacturing facility.
The Company raised an aggregate of approximately $6.3 million in a series of private placements consummated from March 2011 to July 2011 pursuant to which 18 persons and entities acquired an aggregate of 4,938,125 shares of Common Stock (purchase price of $1.28 per share). The investors included Steven. S. Myers (one of the Companys directors) (who purchased 390,625 shares) and Dr. Andrew L. Pecora (the Chief Medical Officer of the Companys subsidiary PCT, who is now the Chief Medical Officer and a director of NeoStem, and the Chief Scientific Officer of Amorcyte) (who purchased 78,125 shares).
On July 22, 2011, the Company completed an underwritten offering of 13,750,000 units at a purchase price of $1.20 per unit, with each unit consisting of one share of Common Stock and a five year warrant to purchase 0.75 of a share of Common Stock at an exercise price of $1.45 per share (the Offering). The Company sold securities in the Offering under the Companys previously filed shelf registration statement on Form S-3 (333-173855), which was declared effective by the Securities and Exchange Commission on June 13, 2011. Lazard Capital Markets LLC (Lazard) and JMP Securities LLC (JMP) acted as representatives of the underwriters named in an Underwriting Agreement, dated as of July 19, 2011. The Company received gross proceeds of $16,500,000, prior to deducting underwriting discounts and offering expenses payable by the Company, for net proceeds of approximately $14,847,000.
For the twelve months ended December 31, 2011, the Companys Erye subsidiary issued approximately $10,800,900 in notes payable, and repaid approximately $20,606,800 over the same period. Notes are payable to the banks who issue bank notes to Eryes creditors. Notes payable are interest free and usually mature after a three to six month period.
For the twelve months ended December 31, 2011, the Companys Erye subsidiary borrowed approximately $20,261,900 in bank loans, repaid approximately $7,829,400.
Pursuant to the PCT Merger Agreement, NeoStem paid off PCTs credit line with Northern New Jersey Cancer Associates (NNJCA), in an amount of $3,000,000, shortly after the closing of the PCT Merger in January 2011. Dr. Andrew Pecora, who was PCTs Chairman and CEO prior to the PCT Merger, and who became PCTs Chief Medical Officer on January 19, 2011 has served as Managing Partner of NNJCA since 1996.
With our prior acquisition of a controlling interest in Erye and our other activities in China, and our recent acquisitions of PCT and Amorcyte, we operated our business in three distinct segments: (i) Cell Therapy United States; (ii) Regenerative Medicine China; and (iii) Pharmaceutical Manufacturing China. The following is an overview of our collective liquidity and capital requirements.
We are pursuing the divestiture of the majority of our China Operations and anticipate they will have been exited by the close of 2012. For so long as we own an interest in Erye, we expect to rely partly on dividends under the Joint Venture Agreement attributable to our 51% ownership interest in Erye, to meet some of our future cash needs with respect to continued operations in China. In addition, pursuant to the Joint Venture Agreement that governs the ownership and management of Erye, for 2011 and approximately the next year: 45% of the net profit after tax due to the Company, in the form of dividends, will be provided to Erye as part of the new facility construction fund, which will be characterized as additional paid-in capital for our 51% interest in Erye; and only 6% of the net profit will be distributed to us directly. To date, we have been paid from the 2010 distribution the amount of approximately $140,400.
Erye has substantially completed the construction of its new pharmaceutical manufacturing facility. Erye began transferring its operations to its new manufacturing facility in January 2010. The relocation and new production lines have been completed and have received cGMP certification. It was contemplated by the Joint Venture Agreement that the construction would continue for three years. As such, 45% of the dividend we would be entitled to by reason of our 51% ownership would remain in Erye through 2012 to complete the construction while EET would loan back their dividend during the same period at a prevailing bank interest rate. Upon a liquidity event of Erye, as contemplated in the joint venture agreement, the Company will be entitled to the return of its dividend reinvestments to the extent of the proceeds generated by the liquidity event. Repayment of such loans from EET would occur gradually after the construction is completed.
The payment of dividends by entities organized under PRC law to non-PRC entities is subject to limitations. Regulations in the PRC currently permit payment of dividends by our WFOE and Erye only out of accumulated distributable earnings, if any, as determined in accordance with accounting standards and regulations in China. Moreover, our WFOE and Erye are required to appropriate from PRC GAAP profit after tax to other non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits (i.e., 50% of the registered capital of the relevant company), the general reserve fund requires annual appropriation at 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end); the appropriation to the other funds are at the discretion of WFOE and Erye. In addition, if Erye incurs debt on its own behalf in the future, the instruments governing the debt may restrict Eryes or the joint ventures ability to pay dividends or make other distributions to us. This may diminish the cash flow we receive from Eryes operations, which would have a material adverse effect on our business, operating results and financial condition.
Our interests in China are subject to Chinas rules and regulations on currency conversion. In particular, the initial capitalization and operating expenses of the VIEs are funded by our WFOE. In China, the State Administration for Foreign Exchange, or the SAFE, regulates the conversion of the Chinese Renminbi into foreign currencies. Currently, foreign investment enterprises are required to apply to the SAFE for Foreign Exchange Registration Certificates, or IC Cards of Enterprises with Foreign Investment. Foreign investment enterprises holding such registration certificates, which must be renewed annually, are allowed to open foreign currency accounts including a basic account and capital account. Currency translation within the scope of the basic account, such as remittance of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion of currency in the capital account, including capital items such as direct investments, loans, and securities, require approval of the SAFE. According to the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues Concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises promulgated on August 29, 2008, or the SAFE Notice 142, to apply to a bank for settlement of foreign currency capital, a foreign invested enterprise shall submit the documents certifying the uses of the RMB funds from the settlement of foreign
currency capital and a detailed checklist on use of the RMB funds from the last settlement of foreign currency capital. It is stipulated that only if the funds for the settlement of foreign currency capital are of an amount not more than $50,000 and are to be used for enterprise reserve, the above documents may be exempted by the bank. This SAFE Notice 142, along with the recent practice of Chinese banks of restricting foreign currency conversion for fear of hot money going into China, limits and may continue to limit our ability to channel funds to the VIE entities for their operation.
Neither Erye nor our other activities in China are expected to generate sufficient excess cash flow to support our activities in China in the near term.