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Expert Financial Analysis and Reporting

Neuralstem: Evidence Increasingly Suggests its Neural Stem Cells are Effective in ALS (CUR, $2.57)

Thoughts on the Stock Price
I have been recommending Neuralstem (CUR) since my initiation report of November 5, 2012 at a price of $0.92. The stock has appreciated significantly over the past year and has been extremely strong in the month of September as the price increased from $1.60 on the 4th to a close of $2.68 on the 17th.

This recent price movement has all of the characteristics of a short squeeze, but there are other factors that could have accounted for the price movement or contributed to the short squeeze. On September 5th the company raised $4 million in a registered direct offering that gives it about 18 months of cash; it doesn’t have to come back to the market for a while. The announcement that the first patient had been dosed in the phase II study on September 10th was an important event. There were many investors and even some physicians specializing in ALS who were convinced that the FDA would never allow a phase II trial to take place. This all comes on top of growing evidence that NSI-566 neural stem cells have produced strong signals of efficacy in phase I trials, which is what this report is all about.

There are some important near term catalysts in regard to NSI-566. Final updated results on the phase I trial could be published in a peer reviewed journal in 4Q, 2013 and could bring significant focus to the stock. Also, because of the rapid progression seen in ALS, we might see some preliminary signs of efficacy in phase II patients in 1H, 2014. There could also likely to be news on clinical trial of NSI-566 starting in China and an update on phase I results for the small molecule drug, NSI-189 before the end of 2013.

I am a little uncertain on the stock price in the near term because of the sharp price run-up. Stocks usually don’t go up 70% in a month without some kind of retracement. However, this should not be taken as a sign that my enthusiasm has cooled. I have not sold and will not sell any stock in the foreseeable future and will likely add to my position at some point.

Most Investors Are Cautious on Neuralstem
Only a few other analysts have stepped up on the stock. This is understandable as Neuralstem is a complicated, controversial and high risk/ high reward investment. Its technology base is unproven in drug development. The Company first isolates human neural stem cells that occur throughout the brain and spinal cord from the tissues of aborted fetuses (this is done in strict accordance with FDA guidelines). Then it expands the population of specific cells from just a few to billions. These cells are then implanted into the brain or spinal column of patients where they differentiate into mature, physiologically relevant human neurons and glia. This is obviously an extreme cutting edge technology with which investors have almost no experience and comfort.

Adding further to the caution is that the first disease target that Neuralstem has gone after with its neural stem cells is amyotrophic lateral sclerosis (ALS), more commonly known as Lou Gehrig’s disease. This is a horrible degenerative disease. It usually, but not always, starts in the lower or lumbar region of the spine and destroys neurons that control movement in the legs and eventually forces patients into wheel chairs. The disease next progresses to the cervical or upper region of the spine. Neurons in that region control breathing, eating and speech and patients usually die of asphyxiation when the muscles controlling breathing are destroyed. Death usually occurs two to five years after diagnosis. ALS has all the characteristics of an auto-immune disease but attempts to treat the disease with drugs used in the treatment of other auto-immune diseases have all failed. Scientists don’t know what causes ALS.

It is not surprising that numerous attempts to develop drugs for ALS have failed since it is rapidly progressing and there is little understanding of the underlying causes of the disease. The most recent blowup was Biogen (BIIB) with dexpramipexole. There is only one drug approved for ALS, Rilutek (riluzole), which was approved over 20 years ago and has modest efficacy. It doesn’t take much imagination to understand why investors might be skeptical about Neuralstem. It is a tiny company using an unproven technology being used to treat an intractable and poorly understood disease in which companies with much larger resources have failed repeatedly in their drug development efforts; of course they were using small molecule drugs and not neural stem cells.

There is still another issue that quite understandably leads to investor caution. The Company has only completed a phase I trial in which 18 transplantations were performed in 15 patients; three patients received two surgeries. The first six patients treated were advanced, wheel chair bound patients who were transplanted with small amounts of cells in the lumbar region. Results in these patients can only be looked at from the standpoint of safety; there was no hope that a signal of efficacy could be seen. There was also one patient who died of heart disease shortly after transplantation and contributed no results to the study. Hence, we are left with results in eight patients about whom we reasonably can discuss the possibility that the cells have an effect.

Reasons to Be Positive on Neuralstem
So, I have opened this report with a list of reasons why most of the large institutional investors regard this company as a science project. Let me now tell you why I developed an interest in the Company that has caused me to recommend the stock as an asymmetric investment.

I actually first called on Neuralstem over ten years ago when I was a Wall Street analyst. I have watched the company deal with unbelievable financial and scientific challenges. I think that this company could have failed many times without the resolve of the management team. I give them significant credit for this. Also, while this is a new technology for most investors, it is not new for Neuralstem. The Company’s scientific founder began his work on neural stem cells over 15 years ago. The technology that has spawned NSI-566 has been in development for that period of time.

I expected no signals of efficacy when the phase I trial began on January 21, 2010. I think that the investigators running the trial and the FDA probably felt the same and were only looking for this trial to determine if the implanted cells and the complex surgery used to implant the cells in the gray matter of the spine were safe. However, as the trial progressed, I think that there was growing evidence that the cells were producing an unexpected therapeutic effect.

ALS is a disease in which the physical functioning of patients declines almost linearly. There is a validated scale called the ALSFRS-r that measures the functioning of 12 different bodily functions. Each of these 12 is scored and equally weighted on a scale of 0 to 4 and a normal person would register 48. Newly diagnosed ALS patients usually have scores of 35 to 38 and death usually occurs at a score of 15 to 18. ALS investigators tell me that ALS patients show a linear decrease and lose about 0.5 to 0.8 points on the ALSFRS-r scale each month. They say that seeing stabilization for even a month or two is unusual and that spontaneous improvements just don’t occur.

About two years into the trial, the investigators leading the study began to see signs of efficacy. The first six patients transplanted were very advanced and were given sub-therapeutic numbers of cells only in the lumbar region: there was no expectation that a drug benefit might be seen and there wasn’t one. Then six less advanced ALS patients entered the trial. One quickly died of heart disease which the investigators determined was not related to the drug or the disease. These patients also were given injections of very low numbers of cells and only in the lumbar region.

Surprisingly, these five patients appeared to benefit from the therapy. One of these patients was Ted Harada who is an avid blogger. Mr. Harada’s condition actually improved and remained improved over two and one-half years. Before he received the cells, he needed help in walking. In a few weeks, he plans to walk a 10-K. Investigators were so surprised by this improvement that they retested him to confirm that he indeed had ALS.

There are atypical ALS patients who live with ALS for many years beyond the three to five years of survival post diagnosis that is expected for most patients. Steven Hawkins, the renowned British physicist, is a well-known example. However, atypicals do not show improvement in their disease. It is possible to argue that Mr. Harada is an extremely rare atypical ALS patient who has reversed the course of the disease. I don’t believe that a patient could spontaneously generate new neurons in the spine that could result in such an improvement, but because we don’t have much of an understanding of the disease, this argument can’t be ruled out.

Like most investors, I was gripped by Mr. Harada’s story, but this alone would not have caused me to recommend the stock. What got my attention was the improvement in four other patients who were treated at the same time as Mr. Harada. Each appeared to be stabilized by the surgeries or experienced only slight declines in function. One of these patients did almost as well as Mr. Harada. He did not appear to have improved as Mr. Harada did but two and one-half years after surgery he has remained stable. He has just left with his wife on a European vacation.

I just don’t think that these five positive patient experiences occurred by chance. It seems to me that the Neuralstem cells are doing something. I am also encouraged that the investigators report that the cells and surgeries are safe and that transplantations are replicable. I am also encouraged by the FDA approving the start of a phase II trial in ALS; the first patient was just dosed. Also, there are several other phase I trials that are about to begin or are in the planning stage in which the same neural stem cells will be transplanted. These are a US trial in chronic spinal cord injury, a Chinese trial in stroke, a Mexican trial in ALS and a South Korean trial in acute spinal cord injury.

Investigators Who Ran the Phase I Trial Believe That There are Strong Signals of Efficacy
I am very aware of the limitations of an outside observer like myself to fully understand complex technologies and clinical trials. I put great emphasis on what investigators in a trial are saying about any drug. I gained increased confidence in the potential for the drug as I followed the comments of Dr. Eva Feldman, the principal investigator on the trial, and Dr. Jonathan Glass, the principal site investigator at Emory University.

Dr. Feldman is the current President of the American Neurological Association having served in this position since 2011. She is the Director of the A. Alfred Taubman Medical Research Institute and the Director of Research of the ALS Clinic at the University of Michigan Health System. Dr. Glass is Professor of Neurology and Pathology at Emory University School of Medicine and Director of the Emory ALS Center.

As I followed Dr. Feldman’s and Dr. Glass’ comments in press releases put out by Neuralstem, it became apparent to me that they initially were just looking to see evidence that the cells and surgeries were safe, which was the primary objective of the trial. However, as the trial progressed both began to see unexpected signals of efficacy. Here is what they said and when they said it.

April 12, 2011 Dr. Feldman presented interim safety data on the first nine patients at the American Academy of Neurology Annual Meeting. She reported that all nine ALS patients remained alive and that there were no unresolved serious adverse reactions related to surgery. Of the three ambulatory patients who were treated, all remained ambulatory with no serious adverse events secondary to surgery.

The patients were all male and ranged in age from 37 to 66. The average time from diagnosis of disease at the time of surgery ranged from 1 to 12 years. These patients had received cells 4 to 15 months prior to her presentation. She concluded that the trial was proceeding smoothly and there were no troubling side effects.

September 27, 2011 Dr. Feldman presented primary and secondary endpoint data on the first 12 patients at the American Neurological Association's annual meeting. She said that all assessments had proven the procedure to be safe with no serious adverse events related to either the surgical procedure or the cells in the first 12 subjects.

She said that the primary and secondary endpoint data from the first 12 ALS patients demonstrated the feasibility and safety of transplanting neural stem cells in the lumbar region of the spinal cord.

August 27, 2012 The enrollment and treatment patients in phase I is completed. Dr. Feldman said that the procedure is extremely safe. She also said that in some patients, it appears that the disease is no longer progressing, but it is too early to know if the result from a small number of patients is meaningful.

November 9, 2012 Dr. Feldman, said she believes we are seeing evidence of a treatment effect in some Phase I patients over a sustained period of time. At the October meeting of the American Neurological Association she called the transplantations "a paradigm shift in the treatment of ALS" and presented interim results on all 18 procedures in 15 patients.

December 10, 2012 Dr. Glass presented data at the at the International Symposium on ALS/MND in Chicago, sponsored by the Motor Neuron Disease Association in a paper called “Results of Phase I Trial of Spinal Cord Transplantation of Neural Progenitor Cells in ALS. " The paper concluded that researchers were able to establish the long-term survival of transplanted spinal cord stem cells in autopsied patients who had received the cells in phase I, through a technology called DNA fingerprinting.

The paper reported that there was evidence of survival of Neuralstem’s stem cells in all of the patients in the trial and were autopsied. This included the first patient who died 30 months after transplantation. Dr. Glass said that this was a major finding as there is currently no way to confirm the survival of the cells in patients while they are alive. Levels of functional recovery, or a slowdown in the progression of the disease in various patients, had given reason to believe the cells had survived. This hypothesis of cell survival was demonstrated by this definitive evidence.

There were six patients autopsied of whom five died from ALS and one of unrelated heart failure. The time from transplantation until death ranged from 196 to 921 days. Five of these patients had discontinued all immune suppression medications for 57 to 638 days prior to death, but showed the stem cell DNA content in the range of 0.67% - 5.4% of total DNA in some spots of the spinal cord treated with the stem cells.

There was no correlation of DNA content to survival period without immune suppression medication. These data suggested that long-term immunosuppression of patients might not be required for long-term survival of the cells so that only transient immune suppression might be needed in future trials.

March 15, 2013 Dr. Feldman presented interim results on all 18 procedures in 15 patients, and said, "...we are exploring a paradigm shift in the treatment of ALS. ...Although this phase of the trial was not powered to demonstrate efficacy, we appear to have interrupted the progression of the disease in one subgroup of patients.”

May 20, 2013 Dr. Feldman presented updated Phase I trial results at the Romanian Neurological Society Congress held in Bucharest, Romania, on May 17th. The talk was called "Recent Therapeutic Advances in Stem Cell Therapy." She presented detailed data on all 15 patients and 18 surgeries in the trial including the clinically validated ALSFRS-r ratings scale, which is used to assess disability in ALS patients.

Dr. Feldman reported that six study patients had a stable, very slowly progressing or improved disease course at more than 700 to approximately 850 days after surgery. Two of the patients showing stabilization or improvement were among the three who received transplants in both the lumbar and cervical regions.

She stated that these patients have two common clinical characteristics. The first was that they had no bulbar features, a form of ALS that destroys motor neurons in the corticobulbar area of the brainstem in the early stages and that typically progresses faster than the limb-onset ALS. Secondly, these patients all received stem cell transplantation early in the course of their disease, on average 2 years and 1 month after the onset of symptoms.

There were three other subjects who were atypical patients who had a long disease course of 5.6, 11.6 and 12.7 years of known disease), at the time of their transplantation. All had little change in the trajectory of their disease. Six of the 15 trial patients died of their disease within 7 to 30 months of surgery.

She concluded that intraspinal stem cell transplantation of ALS subjects with no bulbar symptoms early in the course of their disease, could slow disease progression and even allow for functional improvement.

June 10, 2013 Dr. Feldman addressed the Canadian Neurological Sciences Federation Annual Congress, in Montreal, Canada, on Thursday, June 13th as a grand plenary speaker. She presented final data on the phase I trial adding new data from the patient cohorts treated in the cervical region.

Tracking the Progress of the Phase I Trial
I think that a review of the chronology of the phase I trial of NSI-566 provides additional insight. The IND for the trial was filed on December 18, 2008, approved by the FDA on September 21, 2009 and the first ALS patient was treated on January 21, 2009. The trial closed in April, 2013. The Company has subsequently dosed the first patient in its phase II trial.

This trial began with a lot of questions to be answered. The primary endpoint of the trial was to determine if the cells and the complex surgery used to implant these cells in the gray matter of the spine were safe and that the surgeries could be reliably replicated in patient after patient. The level of cells transplanted per patient in the first 12 patients was a very small number ranging from 500,000 cells to 1,000,000 in twelve patients and 1,500,000 in the other three; Neuralstem believes based on animal studies that the ultimate human dose will be 16 million cells.

The doses were deliberately dosed at what are believed to be sub-therapeutic levels because the FDA was extremely worried about safety. A particular concern was that the stem cells might uncontrollably differentiate into cancer or some other aberrant, dangerous cell types as had been seen in other stem cell trials. A further effort in maximizing the safety of the trial was that the first six patients in the trial were paraplegics who received injections in the lumbar or lower region of the spine. These patients had almost no functional neurons remaining in that region of the spine and were presumably at less risk of side effects.

The mode of action of the NSC-566 stem cells is hypothesized to be integration into the gray matter of the spinal cord where they then release neurotrophic factors that stimulate and nurture both damaged and normal neurons in the spinal cord. With no neurons remaining, there was virtually no hope of having any therapeutic effect in the first six patients. Again, the overriding goal was to show that the cells and surgery were safe.

Satisfied with the safety of these results, the FDA allowed the Company to dose six new patients. These were all ambulatory patients and had less advanced disease than the first six. They were also given small amounts of cells up to 1,000,000 and the injections were all in the lumbar region. It was not expected that there would be much of a therapeutic effect, because there were no injections in the cervical region.

The next phase of the trial went on to give injections in the cervical region only. The plan was to give the first three patients five unilateral injections of 100,000 cells and the next three patients, ten bilateral injections. However, the protocol was amended from having six new patients to having three new patients and to bringing back three patients who had previously received lumbar injections.

The detailed chronology of the conduct of the trial is as follows:

December 18, 2008 The IND was filed.

September 21, 2009 The IND was approved.

January 21, 2010 The first ALS patient was treated with NSI-566 cells. He was the first of six patients in cohort A that included patients 1, 2, 3, 4, 5, and 6. These patients were in an advanced stage of the disease. All were paraplegic and three were on mechanical ventilators.

Patients 1, 2 and 3 were given five unilateral (on one side of the spine) injections of 100,000 cells in the lumbar (lower section) of the spine. Just to put this in perspective, it is hypothesized that the ultimate human dose will be 20 bilateral (on both sides of the spine) injections in the lumbar region and 20 bilateral injections in the cervical (upper) region and that each injection will have 400,000 cells for a total of 16 million cells. These first three patients received 500,000 cells far below the hypothesized effective human dose of 16 million cells. They were also implanted only in the lumbar region whereas, if commercialized, NSI-566 injections will occur in both the lumbar and cervical regions.

With these six patients, the FDA was totally focused on safety. As they were paraplegic, it was likely that all neurons in the lumbar region had been destroyed. While this meant that there was unlikely to be any efficacy, there was also likely to be less risk of side effects. Remember, this is a new frontier of drug development. The FDA wanted to determine that these cells did not differentiate into some dangerous cell and also that the surgical procedure was safe.

May 24, 2010 The first three patients (1, 2 and 3) of cohort A completed their surgeries in the January to March 2010 time frame. The Safety Monitoring Board (SMB) responsible for monitoring patients then unanimously approved transplantation of patients 4, 5 and 6 of cohort A. These patients were given ten bilateral injections of 100,000 cells in the lumbar region for a total of 1 million cells. They were transplanted in the July to September 2010 time frame.

October 18, 2010 After reviewing the safety data from the first six patients of cohort A, the SMB unanimously approved moving to the next group of ALS patients, all of whom were ambulatory. The first three patients (7, 8 and 9) received five unilateral injections of 100,000 cells in the lumbar region for a total of 500,000 cells.

At the time there was only faint hope that these cells might provide some signal of efficacy. Remember that the mode of action of the NSC-566 stem cells is that they graft into the gray matter of the spine and secrete neurotrophic factors that nurture surrounding cells that may be damaged by the disease. Because the injections were in the lumbar region, it was expected that any effect would be on limb motion and not on muscles that control breathing, eating and speech that are controlled by neurons in the cervical region.

February 11, 2011 The surgeries on patients 7, 8 and 9 were completed and the SMB unanimously approved transplanting patients 10, 11 and 12. They received ten unilateral injections of 100,000 cells in the lumbar region for a total of 1,000,000 cells. Ted Harada was patient 11. The other patient who did very well was patient 10.

May 10, 2011 Patients 10, 11 and 12 completed their surgeries with the last one occurring in mid-April.

June 14, 2011 The SMB unanimously approved advancing the trial by treating six new patients with cervical injections. These were all to be ambulatory patients.

November 18, 2011 The first patient to receive stem cells in the cervical region of the spine was treated. This was patient 13 in cohort D which was made up of patients 13, 14 and 15. They were to receive five unilateral injections of 100,000 cells. These surgeries were completed in April 2012.

May 8, 2012 The FDA approved an amendment to the trial protocol that allowed the return of patients 10, 11 and 12 to the trial to receive cervical injections. Originally, the trial had planned to enroll six new patients for the cervical injection phase of trial.

Cohort E was made up of the previously treated patients 10, 11 and 12. They had earlier received 10 bilateral injections of 100,000 cells in the lumbar region of the spine in the December 2010 to February 2011 time frame. They were then given five cervical injections of 100,000 cells for a total of 1.5 million cells.

The return of these patients to the trial for second treatments was a strong validation of safety. Typically, Phase I trials do not bring study subjects back, as that could increase their exposure to potentially harmful treatments. Treating patients who had already received injections in one part of their spine allowed investigators to both increase the overall dosage for each patient as well as transplant them in regions of the spine where they had not been treated.

June 19, 2012 The first patient in cohort E was treated with cervical injections. The last patient was treated in September 2012.

Phase II Trial in ALS Is Now Underway
The FDA approved the phase II protocol for NSI-566 in ALS in April 2013. The first patient was treated at Emory University. This Phase II dose escalation and safety trial, will take place at Emory, the site of the phase I trial, and at the University of Michigan Health System. It is designed to treat up to 15 patients in five different dosing cohorts of three patients. All of the patients will be ambulatory.

The first 12 patients will receive injections in the cervical region of the spinal cord only, where the stem cells could help preserve breathing function. The final three patients will receive both cervical and lumbar injections. The dose will also increase in both number of injections and cells per injection throughout the trial. In Phase I, the trial progressed to a maximum of 15 injections of 100,000 cells each. The maximum dose received by any patient was 1.5 million cells. The dose will be adjusted upward according to a schedule so that the final cohort might be given as many as 40 injections and up to 400,000 cells per injection for a total of 16 million cells.

The primary goal of phase II trial is identify the maximum, safe tolerated dose. The Company hopes to transplant all of the patients in the trial by the completion of the second quarter of 2014. The trial is focused on cervical injections, which is the region of the spine that controls the breathing function, and which can have the strongest influence on the patients' quality of life and longevity.



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