Tapping Into Chinese Healthcare Reform Profits with Neostem (AMEX:NBS)

Many of today's investors, I'd venture to say a vast majority of them, don't take the time to read through the public filings of some of their favorite companies. As such, they often fall prey to misinformation or rumors that spread on investor message boards.  Worse yet, they fail to recognize great investment opportunities as they are presented in "the most accountable form" with the federal government.

Monday's less than overwhelming reaction to the news from NeoStem (NYSE Amex: NBS) that its new pharmaceutical subsidiary (Suzhou Erye) received approval from the State Food and Drug Administration (SFDA) in China to manufacture more penicillin at their new facility may be due in part to that lack of perspective and research.

But no discussion about the topic is complete without first touching on the evolution of the company, which was discussed at length in previous articles. If the message wasn't clear enough then, let me put it this way: The way I see it, NBS has created what amounts to a printing press for future revenues by acquiring that pharmaceutical subsidiary in China. The fact that they were able to do it for pennies on the dollar is icing on the cake for their investors.

In addition, it is pure genius that the stem cell innovator now has such a big presence in China because it also helps them grow their original business focus (clinical stem cell research) even faster.

I'll be the first to admit that I was very intimidated, even confused when I saw the company's Securities Registration Statement filing (Form Type: S-1/A) late last month. It made very little sense to me. How could a company trading at those volume levels and prices propose to raise money and use proceeds from this offering to grow their operations in China?

A little research into the boom that has become China biotech and healthcare eased those fears almost immediately as it became very clear that this company is thinking big. Size of China big.

Stop for a second to consider that China has announced a $124 billion budget to improve it's healthcare system. That project began in 2009 and will continue until 2011. The goals of the program are to provide universal medical service to China’s 1.3 billion population. The government also wants to launch a new Rural & Urban Cooperative Medical Insurance System which will cover at least 90% of China's population by 2011.

Are you U.S. healthcare reform advocates taking notes?

The Chinese government has approved the construction of 30,000 new hospitals, clinics and healthcare centers.

That type of growth has the Chinese pharmaceutical market forecast to reach $30 billion by 2013 and it positions China to become third largest drug market (behind U.S. and Japan).

When Neostem completed the acquisition of China Biopharmaceuticals Holdings, Inc. they became a player in that very lucrative Chinese pharmaceutical market. The fact that in the process, they acquired a 51% controlling interest in Erye- the pharmaceutical subsidiary whose revenue has nearly doubled since 2007- as part of that deal instantly puts money in Neostem's coffers for years to come.

Before yesterday's announcement, Erye manufactured over 100 drugs on seven GMP lines, including small molecule drugs. They have been in business for more than 50 years and are highly respected for quality, service and reliability. One of the staples of their business, antibiotics, just got a major boost according to yesterday's announcement. The antibiotics market was responsible for $8+ billion in 2007 and it provided a 24% annual average growth rate for the previous three years. But wait.. there's more.

Under China's new healthcare reform, certain antibiotics and pain relievers are on the list of essential medicines to be sold at cost. This is in addition to the fact that 60% of the company's current drug portfolio covered by insurance and according to those who know the company that figure is expected to grow.

Now Neostem's need for additional capital makes sense. In order to make the most of these timely opportunities, the company is focused on growing the production and distribution capacity of their new company. You need money to make money.

Again, the old facility sits on 11 acres while the new facility is over double the size and capicity is estimated to double with additional future cGNP lines and buildings which can be developed for further expansion. They need to expand if they are going to simply keep up with the increasing demand and capture those significant revenue increases.

Additionally fund will be needed for new manufacturing and distribution equipment. The company has to stay ahead of the quality standards imposed by China's SFDA.

There will no doubt be enhanced research and development activities between Neostem's China and U.S. teams and the addition and experience of NBS' management, led by Dr. Robin L. Smith M.D., MBA and their board of directors to these activities should accelerate the value of the business by bringing Erye new drugs that they may not have had access to in the past. Already we saw an announcement of one such drug  (omeprazole 20mg capsules) approved to be manufactured and distributed by the company last week and there is a pipeline of at least six more drugs – three pending SFDA approval and three in clinical trials- to come.

Each time we see news of another development or approval for one of these drugs it should sound like a cash register ringing up more revenue for the company and it's investors.

That's the biggest difference between NBS and the vast majority of it's stem cell sector competitors. They're in the money.

For those of you keeping track at home, that makes two stem cell sector companies, both led by two of the sharpest female CEO's in the country, that are now green in profits. The other is Cryo-Cell International Inc. (CCEL.OB) which is helmed by Mercedes Walton.

Oprah Winfrey, are you listening? The biotech sector has two great leaders ready to drop some IQ with your viewers. Call them up!