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NEOSTEM,
INC.
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2009
LETTER TO SHAREHOLDERS
April
2010
Dear
Shareholders:
2009 was
a truly transformational year for NeoStem, Inc. With the establishment of our
adult stem cell business platform in China and the acquisition of Suzhou Erye, a
profitable and growing China-based pharmaceutical operation, NeoStem has emerged
as a sophisticated international biopharmaceutical company with multiple
commercial revenue streams. I am excited to share with you several of our key
2009 milestones and 2010 plans to accelerate growth.
Our
mission is to advance the potentially vast therapeutic and diagnostic
applications of adult stem cells, and help individuals to collect and store
their own cells for medical use. I believe we have taken important steps to
accomplish that mission and are well positioned to become a global leader in
providing advanced adult stem cell banking and therapeutic
services.
Accelerating
Stem Cell Operations in China through Strategic Partnerships
With the
signing of a number of strategic partnerships with leading hospitals and
research organizations, we made significant strides last year in advancing our
innovative stem cell business platform in China to take advantage of what we
view as the country’s receptive market for advanced therapeutics. We are
leveraging these important relationships to more quickly launch our commercial
and clinical stem cell application programs in China, and are well positioned to
begin recognizing the first commercial stem cell revenue in 2010. In the long
run, we plan to transfer the technology, know-how and data to accelerate the
development of similar programs in the U.S. Additionally, by leveraging the more
progressive stem cell environment in China and bringing our unique stem cell
technologies and deep expertise in China, we hope to provide a valuable
alternative to traditional therapies to Chinese consumers and international
visitors seeking advanced therapeutics that are unavailable in their own
countries.
We are
establishing a network of hospitals to offer orthopedic-related stem cell-based
treatments in China. The first of these collaborations was established last year
with Shandong Wendeng Orthopedic Hospital to treat patients and conduct clinical
research regarding the application of autologous adult stem cells for a variety
of orthopedic conditions. Wendeng Hospital is one of the leading specialty
orthopedic hospitals in China, with close to 90% of its inpatient capacity
dedicated to orthopedic cases. Physician and laboratory personnel at Wendeng
have completed training and launched operations in the first quarter of
2010.
We have a
collaborative agreement with Enhance BioMedical Holdings Limited for the
development of an adult stem cell collection and treatment network in Taiwan and
Shanghai, as well as the Chinese provinces of Jiangsu, Zhejiang, Fujian, Anhui
and Jiangxi. Based on its extensive relationships with leading healthcare
providers at numerous hospitals in these regions, Enhance BioMedical will offer
stem cell therapies that leverage our portfolio of advanced technologies and
techniques. In addition, Enhance BioMedical is launching adult stem cell
collection and storage services and stem cell-based anti-aging applications at
its Anti-Aging and Prevention Medical Center in Taiwan. Through its beneficial
ownership of approximately 16.7% of our common stock, we believe that Enhance
BioMedical’s strategic interest is closely aligned with ours to advance stem
cell applications for anti-aging and cosmetic uses throughout China in the
coming years.
We
continue to pursue new collaborative partnerships to rapidly and broadly apply
our portfolio of advanced stem cell technologies.
Accessing
China’s Rapidly Growing Pharmaceutical Market through Erye
Acquisition
We made a
significant step in expanding our global footprint with our October 2009
acquisition of China-based integrated biopharmaceutical company, China
Biopharmaceuticals Holdings, Inc. (CBH) last year. As a result, NeoStem acquired
a 51% controlling interest in Suzhou Eyre, CBH’s primary operating subsidiary.
Erye is a profitable and fast growing antibiotic producer in one of the fastest
growing pharmaceutical markets in the world. With its more than 50 years of
history, Erye currently manufactures over 100 drugs on seven GMP lines and has a
pipeline of seven new product opportunities, including two that have been
approved by the SFDA and are pending launch in the summer of 2010. Since 2007,
Erye’s revenues have nearly doubled to $61.0 million (unaudited) in 2009,
representing year-over-year growth of 22.6%.
IMS
Health estimates that China’s pharmaceutical market will reach $78 billion by
2013 with the country poised to become the third largest drug market in the
world, only behind the U.S. and Japan. Erye is well positioned in the rapidly
growing Chinese pharmaceutical market and should benefit from China’s $124
billion healthcare reform budget to improve the healthcare system in 2009-11.
One key purpose of the healthcare reform is to provide universal medical service
to China’s 1.3 billion population, including insurance coverage for at least 90%
of the population by 2011. The new healthcare insurance system will also cover
many antibiotic drugs as “essential medicines” and provide patients 100% payment
coverage. We expect these significant new opportunities to boost demand for
lower cost and more commonly used drugs, including Erye’s large portfolio of
generic antibiotic products.
To meet
the anticipated ramp up in volume, Erye has begun significant expansion of its
manufacturing capacity with the construction of a new 12-building campus style
facility completed in 2009. Relocation of the operations is well underway with
SFDA’s approval of the first two GMP production lines at the new plant to
manufacture solvent crystallization sterile penicillin and freeze dried raw
sterile penicillin. The two new lines provide 50% and 100% greater manufacturing
capacity, respectively, than those at the existing facility. Historically, these
two lines have accounted for approximately 20% of Erye's sales. We are
supporting the efforts to complete the production transfer to the new plant by
2011 and remain confident that, with the significant boost in capacity, Erye
will be well positioned to become one of the largest antibiotic producers in
Eastern China.
Overall,
we believe that Erye will not only diversify our business opportunities in the
near and long term, but also enhance our growing presence in China’s
biopharmaceutical industry and potentially provide a clearer path to corporate
profitability over time.
Gaining
Access to Diverse Group of Innovative Stem Cell Technologies
In 2009,
we expanded our portfolio of advanced stem cell technologies through several
license agreements. With a diverse group of stem cell application platforms,
including an exclusive worldwide license to VSELTM
technology, we are well positioned to deploy a range of innovative stem cell
applications that could ultimately shift the treatment landscape for a variety
of conditions in orthopedic, wound healing, anti-aging and cardiovascular areas.
NeoStem is committed to continuing to expand our technology and intellectual
property portfolio to gain a competitive leading edge in the field of adult stem
cell therapies.
We
obtained exclusive worldwide rights to innovative stem cell technology and
applications for cosmetic facial and body procedures and skin rejuvenation. The
licensed technology was developed by Dr. Vincent C. Giampapa, a Board-certified
plastic reconstructive surgeon and Assistant Clinical Professor of Plastic and
Reconstructive Surgery at the University of Medicine and Dentistry of New
Jersey. Dr. Giampapa, one of the first certified anti-aging medical physicians
in the world and a member of our Scientific Advisory Board, has demonstrated
some of his skin rejuvenation techniques using autologous adult stem cells at
the 2009 International Stem Cell Technology and Applications Summit in Qingdao,
China. His presentation has attracted wide public and professional interest from
leading stem cell practitioners around the world and we are responding to this
growing interest with the launch of this stem cell application throughout China,
through our collaborative relationship with Enhance BioMedical.
We also
gained an exclusive license to an innovative product, Primcel, a mesenchymal
stem cell product and procedure using autologous bone marrow-derived stem cells
to promote the healing of chronic wounds developed by Vincent Falanga, M.D.,
Chairman of the Department of Dermatology and Skin Surgery at Roger Williams
Medical Center, Providence, R.I. Early clinical studies indicate that Primcel
can be used to accelerate healing of chronic wounds and Dr. Falanga's work seeks
to develop a prepackaged product, ready for physician use in a clinical setting.
We look to leverage the Primcel application, with a commitment from the
Department of Defense in 2008, to use stem cells to treat wounds suffered by
members of the U.S. military and first responders, and believe this effort can
lead to groundbreaking medical findings that ultimately save troops from
amputations and immobilization from injuries sustained while fighting for our
country.
We
acquired an exclusive license for Asia to use an innovative process that expands
a patient’s own adult stem cells to treat a variety of musculoskeletal diseases.
The licensed procedure, RegenexxTM,
developed by Regenerative Sciences, Inc. (RSI), uses autologous mesenchymal stem
cells extracted from bone marrow for the treatment of various orthopedic
conditions, including osteoarthritis, meniscus tears of the knee, and bulging
lumbar discs. RSI is providing us with consulting services for the Asia market,
including the training of our partners in China, such as Wendeng, to prepare to
commercially launch the procedure. We believe that the integration of our adult
stem cell collection and storage capabilities into the RegenexxTM
procedure will enhance its marketability in China and the U.S.
Enhancing
Shareholder Value and Corporate Governance
In
addition to our significant business progress, we took additional steps to
enhance our corporate governance and shareholder value during 2009. To that end,
we expanded our board of directors to include Drew Bernstein, CPA and Managing
Partner of Bernstein & Pinchuk LLP, as the Chairman of our board’s Audit
Committee. As a co-founder of accounting firm Bernstein & Pinchuk LLP, a
member of the BDO Seidman Alliance, Mr. Berstein brings with him diverse
international business experience and financial expertise, which is especially
important as we grow our multi-pronged operations in the U.S. and China. We have
continued to enhance our corporate governance in 2010 with the appointment of
Deloitte and Touche as our independent registered public accountant and the
addition of Eric Wei, Managing Partner of RimAsia Capital Partners, a principle
shareholder, to our board of directors.
Additionally,
we were certified by the State of New York as a Qualified Emerging Technology
Company for the year ended December 31, 2009. As a result of this designation,
certain of our investors may have been eligible for up to a 20% tax credit from
the State of New York relating to their direct investment in
NeoStem.
Other
Important Developments
We were
awarded a grant of $108,746 from the National Institutes of Health to study the
repair of bone defects by human stem cells, specifically investigating the
potential of very small embryonic-like stem cells to regenerate bone in an
animal model. The project is being led by Dr. Russell Taichman at the University
of Michigan School of Dentistry and helps to advance our effort to broaden the
application of VSELTM
technology as an autologous adult stem cell-based therapy for osteoporosis and
other bone diseases.
Dr.
Mariusz Ratajczak, world renowned investigator in the field of adult stem cells
and co-inventor of the VSELTM
technology, and his team gave five posters and two oral presentations at the
American Society of Hematology Annual Meeting in December 2009. These sessions
highlighted the basic cellular mechanisms of very small embryonic-like stem
cells and their potentially significant role in tissue regeneration. In March
2010, Dr. Ratajczak formally joined our Scientific Advisory Board to help us
advance the application of VSELTM
technology to fulfill our goal of leveraging its important role as a new
generation of stem cell therapies and diagnostics.
What’s
in store for 2010
In 2010,
we are focused on growing our Erye pharmaceutical platform, expanding our U.S.
stem cell collection network, and implementing and advancing our adult stem cell
initiatives in China. In the first few months of the year, we have already made
solid progress in each of these endeavors and I believe we are well underway to
execute our growth plan for 2010.
So far in
2010, Erye received approval for the first two manufacturing lines at its new
facility and approval to manufacture sterile active pharmaceutical ingredient of
the anti-infective generic cloxacillin sodium. In the U.S., we have already
opened two new stem cell collection centers, in Austin, TX and Cambridge, MA,
and are well on track to achieve our goal of 10 centers by year-end. In China,
Wendeng Hospital launched orthopedic-related stem cell services in the first
quarter and we anticipate commercial revenue generation starting in the second
quarter of 2010. Additionally, we have already established several new
collaborative relationships in China in 2010 – including those with Peking
University Diabetes Center and Beijing Institute of Geriatrics, to enable future
stem cell application launches. In the U.S., we recently launched our stem cell
R&D laboratory at the 8,000 square foot facility at the Riverside Technology
Center in Cambridge, MA, which will also support the planned development of our
technologies.
In
summary, I am very proud of the significant strides we made last year and so far
in 2010, and want to thank all of our hard working employees for their dedicated
efforts. We remain committed to continuing the execution of our strategy and
delivering value to all of our stakeholders in the years ahead. On behalf of the
entire NeoStem management team, thank you for your continued support of our
mission.
Sincerely
yours,
/s/ Robin
L. Smith, MD, MBA
Robin L.
Smith, MD, MBA
Chairman
and CEO
NeoStem,
Inc.