Expert Financial Analysis and Reporting

Investment Background

Neuralstem has been absolutely pummeled this year as the price has declined from a closing of $2.72 on December 31, 2014 to a current price of $1.38. The catalyst for this poor performance was the announcement of topline results for the phase 2 trial of the NSI-566 stem cells in ALS on March 12, 2015; this trial treated 15 ambulatory ALS patients. In contrast to the action of the stock which suggests the trial was a disappointment, I think that as the full data set becomes available (in late September at ANA) the trial will be viewed as positive and encouraging. The Company and key opinion leaders involved in the trial have described the results as encouraging and supportive of a next stage pivotal trial which should start in 2H, 2015.

Three of the top ALS specialists in the US were involved in the phase 2 trial. They were:

• Eva Feldman MD, PhD, past President of the American Neurological Association (ANA), Director of the A. Alfred Taubman Medical Research Institute and Director of Research of the ALS Clinic at the University of Michigan Health System, and an unpaid consultant to Neuralstem,
• Jonathan D. Glass, MD, Director of the Emory ALS Center (one of the largest ALS centers in the US) where most of the surgeries have taken place, and
• Merit Cudkowicz, MD, Chief of Neurology, Massachusetts General Hospital (another of the largest ALS centers) and Co-Chair of the Northeast ALS Consortium (NEALS).

Here is what they had to say about the study.

Dr. Feldman was the lead investigator on the study. She said "We believe the top-line data are encouraging. We were able to dose up to 16 million cells in 40 injections, which we believe to be the maximum tolerated dose. As in the first trial, the top-line data show disease stabilization in a subgroup of patients (my comment: all other ALS trials have been aimed at slowing progression of the disease, not stabilizing it). Perhaps equally as important, we believe the top-line data may support a method of differentiating responders from non-responders, which we believe will support our efforts as we move into the next, larger controlled trial expected to begin this summer."

Dr. Glass said "The top-line data look very positive and encouraging. If this proportion of patients doing well after treatment can be corroborated in future therapeutic trials, it will be better than any response seen in any previous ALS trials. Elucidating which factors define a patient who may have a therapeutic response to the stem cell treatment will be the next key challenge. We are hopeful that a set of predictive algorithms can be established to help pre-select the responders in our future trials."

Dr. Cudkowicz said "We were very excited to participate as a site in this clinical trial. We are hopeful with respect to the top-line results and we need to move swiftly and safely forward to confirm the responder effect and identify people who might benefit from this treatment approach."

One would think that the above comments of three prominent ALS specialists and their endorsement for doing a pivotal trial in ALS would have been a big boost to the stock. Indeed after the release of topline results, the initial reaction briefly was positive as the stock traded up from the previous night’s close of $3.67 to $3.70. Then the stock was hit with an avalanche of short selling as 11 million shares traded on March 12 (this compares to 1 million shares per day generally traded in January and February). The stock closed at a price of $2.37 on March 12, down 35%. I believe that this was an orchestrated short selling attack on the stock as so often happens with emerging biotechnology stocks. See my article “Illegal Naked Short Selling Appears to Lie at the Heart of an Extensive Stock Manipulation Scheme” to see how short sellers can blatantly manipulate stocks.

My initial take on the phase 2 results was described in a March 12 report called Neuralstem: “Initial Take on Top Line Results of Phase 2 ALS Trial of NSI-566 Neural Stem Cells”. I followed this up with a second report on March 16, 2015 called Neuralstem: A Closer Look at Encouraging Phase 2 Results for NSI-566 Neural Stem Cells in Treating ALS. I would urge you to read both of these reports for an in-depth discussion of the trial.

The short sellers seized upon unexpected and unexplained data in the trial which seemed to indicate that the non-responders actually did worse than would have been expected suggesting that in some patients the NSI-566 stem cells actually accelerated the course of the disease. Neuralstem was not able to respond to this concern because in a potentially important study such as the phase 2 trial, it is accepted practice that only topline results are initially released by the Company. Discussion by the lead investigator of the full data set comes later in either a peer reviewed journal or at a major medical conference. This is so that investigators can be given credit and recognized for their work.

Neuralstem has suggested that it is not the case that NSI-566 accelerated the progression of disease in non-responders. However, until Dr. Feldman presents the full data from the phase 2 trial, the company has been handcuffed in discussing data that might have clarified the effect seen in non-responders. The shorts mobilized the usual group of bloggers to attack the trial results to create fear, uncertainty and doubt. This was combined with a coordinated program of hedge fund traders to walk the stock down. This modus operandi is frequently seen when questions arise on an emerging biotechnology company.

Investment Opinion

I see two major catalysts in the near term that can change the perception of investors to the view expressed by the key opinion leaders that the trial was encouraging. The 2015 and 140^th annual meeting of the American Neurological Association is scheduled to take place September 27-29 in Chicago. Given Dr. Feldman’s involvement in ANA (she is a past president), I believe that she will make an oral presentation at ANA. I think that she may positively respond to the questions and uncertainty about the non-responders in the phase 2 trial and may also give an insight into a method of differentiating responders from non-responders.

I think that the second catalyst could be the start of a pivotal phase 2/3 trial in ALS in 2H, 2015. Neuralstem has been discussing the design of a pivotal trial with the FDA since March of this year. My original expectation was that the trial design could be approved by the FDA and the trial started in the summer. The Company has not said, but I sense that the discussion with the FDA has taken a little longer than expected; I expect the trial to begin in 2H, 2015. If the results in this trial are outstanding in a sub-set of patients who can be identified before treatment, the NSI-566 stem cells could be approved for ALS on the basis of this one trial. In the next section, I go into more detail on the upcoming trial in somewhat more detail and I urge you to read that section carefully.

In the meltdown of the stock this year, investors lost sight of the broad pipeline of the Company. Its NSI-566 stem cells are in early stage phase 1 in chronic spinal cord injury which could report data in the first four patients in early 2016. It has completed a phase 1 and will be starting phase 2 in motor deficit due to ischemic stroke in China. A partner will be starting a phase 1 trial in South Korea in acute spinal cord injury later this year. And finally, Neuralstem will be starting a phase 2 proof of concept study in major depressive disorder later this year with its small molecule drug NSI-189.

In looking at Neuralstem, I am reminded of the Star Trek lead in that proclaimed that “the spaceship Enterprise is daring to go where no man has gone before”. Indeed, Neuralstem is daring to go where no biopharma company has gone before. The NSI-566 stem cells and the NSI-189 small molecule are unique and potentially paradigm changing, high risk/ high reward approaches in an industry that likes to focus on low risk/ moderate reward drug research. We have seen signals of activity in the phase 2 trial of NSI-566 in ALS and NSI-189 in major depressive disorder, but this has not risen to the level of proof of concept. Over the next year, trials of these drugs will establish proof of concept. This is an intriguing asymmetric investment. Click on My Approach to Investing in Emerging Biotechnology stocks at this link for an explanation of asymmetric investing.

Upcoming Pivotal Phase 2/3 Trial of NSI-566 in ALS

In the 10-Q for the first quarter of 2015, Neuralstem said that it was planning to conduct another trial in ALS that would be registrational. They did not indicate when the trial would start, but I inferred that it would be in 2015 and perhaps sooner rather than later (Dr. Feldman said in March that the trial would start in the summer of 2015), but management has not been definitive. In the 10-Q for the second quarter of 2015, the Company said that it plans to proceed to a larger Phase 2 controlled study to demonstrate the safety of the cells and the surgical route of administration in a larger population, and to confirm a meaningful clinical benefit to patients in the first “non-open label” trial of its stem cell therapy.

FDA regulations usually require the conduct of two well controlled trials so that it may be the case that Neuralstem will have to follow the upcoming pivotal trial with another pivotal trial However, there is the possibility that NSI-566 could be approved on the basis of just one well controlled trial. If the results in the upcoming trial were judged to be extraordinarily good and if the FDA has reasonable certainty that the group of patients who would most benefit can be identified and the correct dosage has been identified, the NSI-566 stem cells could be designated as a breakthrough therapy. The drug could be approved and made available to patients after the first pivotal trial and as the second confirmatory trial is underway. It all depends on the data. However, based on the results that I have seen so far in a limited number of patients, it appears that perhaps 50% of the patients did get an extraordinary benefit. The question is if these responders can be identified beforehand.

The inclusion in the 2Q, 2015 10-Q of the language that this new trial will be the first “non-open label” trial of NSI-566 is important. Because the transplantation of NSI-566 involves a complex surgery, it had been my expectation that the control group for the study would be matched controls or historical controls. However, the “non-open label” language in the 2Q, 2015 10-K seems to rule this out. A true control group would require a sham surgery. This is controversial for all parties involved, but it is the only true control. If I am correct, discussion on this issue has delayed the trial somewhat. However, the use of an active control would lend much greater validity to the data if is positive.

Pipeline Update

NSI-189 Small Molecule Program for Major Depressive Disorder

NSI-189 is a small molecule that was screened using an assay based on neural stem cells. This allowed the Company to screen for unique molecules that could structurally rebuild the hippocampal region of the brain. This has produced an entirely new and unique class of drugs that are proprietary to Neuralstem. The vast majority of central nervous system drugs primarily aim to modulate neural transmitters. NSI-189 is a completely new approach and if successful would represent a paradigm shift in treating mental disease. The results of the phase 1 trial of NSI-189 are discussed in the report called Neuralstem: Phase 1b Results for NSI-189 are Very Encouraging but It Is Early Days.

Neuralstem plans to start a phase 2 trial in major depressive disease in 2H, 2015. The study will enroll approximately 200 patients. Major depressive disorder is characterized by episodes of all-encompassing low mood, low self-esteem and loss of interest or pleasure in normally enjoyable activities. NSI-189 may provide an effective treatment for patients suffering from MDD by structurally rebuilding the hippocampus.

CUR has expanded the NSI-189 program to include a second indication for the treatment of cognitive deficit in schizophrenia. Cognitive deficit is a prominent characteristic of schizophrenia that is correlated with the occurrence of hippocampal atrophy in this patient population. This study is expected to start a Phase 1b trial in 2016.

NSI-566 Stem Cells for the Treatment of Chronic Spinal Cord Injury (cSCI)

The same NSI-566 stem cells used in the ALS trial are also being developed for the treatment of chronic spinal cord injury. The first trial is a four patient phase 1 safety study. The last patient was dosed in July, 2015 and there will be a six month post-transplant observation period. While the primary goal is to establish safety, investigators will be looking at any signal of restored activity of nerve cells below the site of injury. Stem Cells is also doing a study using its similar stem cells in this type of patient and has indicated that it is seeing some signals of activity. The results of the NSI-566 study should be reported in 1Q, 2016.

NSI-566 Stem Cells for the Treatment of Motor Deficit Impairment Caused by Ischemic Stroke

The same NSI-566 stem cells are also being studied in ischemic stroke. This trial is being run in China. This was planned as a phase 1/2 trial with the phase 1 part intended to establish safety. The trial will now proceed to the phase 2 portion in 2H, 2015.

NSI-566 Stem Cells for the Treatment of Acute Spinal Cord Injury (cSCI)

A partner is expected to start a phase 1 trial of NSI-566 stem cells in acute spinal cord injury in 2015 in South Korea. The difference between acute and chronic is that acute treatment is initiated immediately after the spinal cord injury has occurred while chronic takes place many months later after the patient has stabilized.

Finance

Neuralstem had cash equivalents of about $24 million at the end of 2Q, 2015. The operating cash burn in the second quarter was $4.5 million in 1Q, 2015 and $5.0 million in 2Q, 2015. At a quarterly cash burn rate of $5 million, it has cash to last until 4Q, 2016.