Expert Financial Analysis and Reporting

Introduction

The final results of the phase 1 trial of Neuralstem’s (CUR) NSI-566 spinal cord stem cells in the treatment of amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease) were just published in the peer-reviewed journal, Annals of Neurology. The market has responded very positively to the data with the stock up about 15% to $4.48. I alerted investors that this publication was likely in an article I published on January 28, 2014. The link is:

http://smithonstocks.com/neuralstem-sizing-up-potential-key-events-of-2014/?co=neuralstem.

Neuralstem has been a standing recommendation of SmithOnStocks as I initiated coverage on November 5, 2012 at a price of $0.92.

Investment Thesis

The sharp run-up in the stock today could create some profit taking in the near term. However, I continue with my buy recommendation. There are a number of catalysts that could support the stock in 2014 as explained in my January 28 report.

At the current price of $4.48 and using a highly conservative estimate of share count of 119 million (assumes every outstanding option and warrant is exercised), the market capitalization is $533 million. This is not out of line with other companies with products in late stage phase 2 or phase 3 trial development. Importantly, I see the commercial opportunity for the NSI-566 spinal cord stem cells as being extraordinary if they are successful in phase 3 trials.

Now let me add a few sobering thoughts on the Company and the stock to balance the investment outlook. ALS is a particularly devastating disease that has seen failure after failure in attempts to develop an effective drug. Scientists are not really sure what causes ALS and the approach that Neuralstem is taking is based on a hypothesis rather than a well understood biological mechanism of action. Also therapies based on the use of living cells such as NSI-566 are still in their infancy and it could take decades to develop effective therapies based on experiences that we have seen with other paradigm changing biotechnologies. Neuralstem is taking on a disease that has frustrated drug development by many, many companies, almost all of which have greater resources and it is doing this with an unproven technology.

Highlights from the Article in Annals of Neurology

Reading the article takes a great deal of time and effort and even after going through it twice, I am sure that there is much I have missed. However, I will give you my salient takeaway points.

The article suggests that the cells are behaving as Neuralstem has hypothesized. They are engrafting into the grey matter of the spine and producing a lasting therapeutic effect. Once engrafted, they appear to improve the functioning of surrounding cells probably through the secretion of growth factors and they may also be nurturing damaged cells back to health. The limited data, so far, also supports the CUR hypothesis that increasing the number of surgically implanted cells increases the therapeutic effect. This is a key hypothesis which is being tested in the now ongoing phase 2 trial.

There is so much focus on efficacy results that investors sometimes forget that the demonstration that these cells can be safely surgically implanted in the spine is as important. This is a complex and totally new type of surgery so that demonstrating that this operation can be safely performed in severely ill ALS patients is critically important. The surgery was safely done for a second time in three patients suggesting that it may be able to be repeated if the ALS progresses after an initial surgery.

This was a phase 1 trial in which the primary intention was to show safety. However, there are three patients from Cohort C/E (later in this report, I explain cohorts A, B, C, D and E in phase 1) who first received 10 injections of cells in the lumbar region and then in a second surgery received five injections in the cervical region. It is in these three patients that we have seen extremely encouraging and unprecedented efficacy signals.

In these three patients, the therapeutic effect was long lasting. Remember that ALSFRS-r, which is the primary measure of the status of ALS patients, shows a steady deterioration of about 0.9 points per month on a 48 point scale. These three patients at 2 ½ to 3 years post the initial of two surgeries are showing stability or only modest declines; in actuality, Ted Harrada who is one of these patients appears to showing improvement. The number of patients is small but the therapeutic effect is extremely impressive.

The Phase 2 Trial is in Progress

Last year, the Company began a phase 2 trial in ALS to see if the results seen in the three patients just described could be replicated a trial involving more appropriate patients given more surgical injections and cells per injection. This trial is divided into five cohorts of three patients each.

The third cohort completed surgeries in February. The fourth cohort was scheduled to complete in March, but bad weather in Atlanta delayed two surgeries slightly. All of these surgeries in the first four cohorts involve cervical injections while phase 1 was more focused on lumbar injections. A final group of three will be brought back and given lumbar injections and this will complete the enrollment. There is a six month follow-up on all patients so the topline results are probable for very late 4Q, 2014 or early 2015. Assuming success, the phase 3 trial could start in 1H, 2015.

Explaining the Design of Phase 1 Trial

The FDA was concerned in phase 1 about safety for both the neural stem cells and the surgery used to implant the cells and required the trial to progress very slowly. The first cohort (cohort A) was three non-ambulatory patients who were given five unilateral (on one side of the spine) injections in the lumbar region of the spine. As in all injections in this trial, there were 100,000 cells in each injection. This was followed by the next cohort (cohort B) of three non-ambulatory patients who were given ten bilateral lumbar injections, five on each side of the spine.

Five of these six patients in cohorts A and B died and there was no evidence that the neural stem cells had any therapeutic effect. One patient treated was an atypical patient who entered the study while on a mechanical ventilator and continues to live with the disease; his condition is stable, but there is no evidence of benefit from the transplanted neural stem cells. The main conclusion that can be drawn from this phase of the trial is that the cells are safe and the surgical procedure used to implant them is safe. There is no evidence of benefit in these groups, but this is not surprising in these patients with advanced disease.

In the next three patients treated (cohort C) were six ambulatory patients. The first three were given five unilateral injections in the lumbar region of the spine. The next three received ten lumbar injections and all three have gone on to receive a second surgery. One of the first three patients treated in cohort C died from a heart attack that the investigator concluded was unrelated to the disease or the treatment. No conclusion about safety or efficacy can be drawn from the experience of this patient. Another of these first three patients was an atypical patient, who remained stable, but there is no clear evidence that the surgery produced benefit in this patient.

Of the first twelve patients treated, only four ambulatory patients from cohort C had any reasonable chance of getting any benefit from the therapy. Encouragingly, the three patients who received ten lumbar injections have had what can only be called spectacular results in which the disease condition was stable, declined modestly or improved over periods ranging from 700 to 850 days. This is something that investigators with whom I spoke believe is an extraordinary signal of efficacy. The two atypical patients among the first twelve patients treated also remain stable, but it is not clear if the neural stem cells helped them.

The next stage of the phase 1 trial involved giving five unilateral injections in the cervical region of the spine. It is the cervical region of the spine that controls breathing, eating and speech. The first three patients treated were ambulatory patients whose ALS first presented with bulbar symptoms. Bulbar symptoms are related to deterioration in nerves in the cervical regions of the spine and control functions such as breathing, eating and speech. ALS symptoms usually start with deterioration of nerves in the lumbar region that then progress over time to the cervical region.

Of these three initial patients in Cohort E, one was atypical and as was discussed previously it is difficult to judge if there was a benefit. The other two patients had bulbar symptoms and results were disappointing. Bulbar symptoms are related to deterioration in nerves in the cervical regions of the spine and control functions such as breathing, eating and speech. ALS symptoms usually start with deterioration of nerves in the lumbar region that then progress over time to the cervical region. The lead investigator on the study, Dr. Eva Feldman, is pessimistic that the treatment will be effective in ALS that presents with bulbar symptoms.

The next three patients treated in Cohort E were ambulatory patients who had previously received ten lumbar injections (Cohort C). These three patients are those in which dramatic control of the disease has been achieved after the first surgery and continued through the second surgery.