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Expert Financial Analysis and Reporting

Neuralstem: Sizing Up Potential Key Events of 2014 (CUR, $3.42)

Investment Thesis and Overview
Neuralstem’s clinical trial programs and accompanying results for its two key drugs, the neural stem cell product NSI-566 (its lead drug) and its small molecule drug NSI-189, are picking up a good deal of momentum. This year holds the promise for several events that could continue to drive the stock. The purpose of this report is to highlight potential key events of 2014.

Results from the clinical trials of NSI-566 in ALS are the most important near term drivers of the stock. I believe that a paper summarizing the complete results of NSI-566 in its phase I trial could be published in a peer reviewed journal by the lead investigator on the trial, Dr. Eva Feldman. She is 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. She is also the past President (2013) of the American Neurological Association.

Because of her credentials and the great interest in this program by the neurological community, this paper could lead to much greater awareness of the promising signals of activity seen in phase I, to the benefit of the stock. In regard to the phase I trial Dr. Feldman has said "Collectively, these preliminary results suggest 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."

A phase II trial in ALS has now begun enrollment and because this is an unblinded study, we may see interim results on patients. One of the early participants in the phase II trial has a blog called April’s Blog in which she has tracked her progress from diagnosis of ALS to her surgery in October 2013 and now in the aftermath of the surgery. The recent strength in the stock may be due in part to a January 4, 2014 blog in which she suggested that her breathing had improved post-surgery.

Neuralstem has applied for breakthrough drug status for NSI-566 from the FDA. If this is approved it could provide significant validation of the use of NSI-566 in ALS. I don’t know whether FDA will give NSI-566 this designation or the timing of when this might occur, but we should know one way or another in 2014.

The phase Ib trial of the small molecule drug NSI-189 has finished and the trial is being unblinded. Because this dose escalating trial was done in patients with major depressive disorder, there is the possibility of a signal of efficacy. In animal studies, NSI-189 was shown to increase the size of the hippocampal region of the brain by as much as 20%. This is beleived to result from increasing the number of synapses or nerve connections in the brain. This is one of the most novel small molecule drugs in development in biotechnology and I am anxious to see the results of phase Ib which should be available in 1Q, 2014.

The Company is about to start a phase I trial in the US using NSI-566 cells in the treatment of chronic spinal cord injury. It is also starting a phase I trial using NSI-566 cells in China in ischemic stroke patients. Both of these trials could start in 1Q, 2014 and we could see some data in late 2014 or 2015. The primary takeaway message at this point is that there is significant interest in Neuralstem’s neural stem cells in the scientific community in multiple neurological disorders.

The Company has just completed a financing in which it sold 6.8 million shares at a price of $2.91. In addition, each share was accompanied by 0.5 warrants exercisable for five years at a price of $3.64. Net proceeds from this offering were $18.8 million so that yearend cash was $33.0 million by my estimates. The recent burn rate has been about $2.5 to $3.0 million per quarter and at this rate this cash would fund the Company into 2016. However, I think that the burn rate may accelerate if the Company moves into later stage and more expensive trials.

There are lots of events that can move the stock in 2014 and my base case is that this will create a great deal of interest and excitement. I estimate that there are 79.7 million share issued and outstanding, 23.2 million warrants and 16.3 million options. Under GAAP accounting the outstanding share count is 79.7 million. However, I prefer to assume that all warrants and options will be exercised and this would bring the potential share count to 119.2 million. The exercise of all options and warrants would bring in approximately $82 million. Based on fully diluted shares of 119.2 million and the current price of $3.30, the current market capitalization is $393 million. I think that there is room for expansion if the news flow is positive as I think it will be.

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.

The results in ALS that have interested me in Neuralstem were essentially based on results in just four patients. Ordinarily, I would ignore results based on this small a number of patients, but this is ALS. In this condition, we see in most patients an inexorable decline in neurological function and ultimately death. These four patients have shown stability or just a gradual decline in their disease over a period of 800 to 950 days and this is extraordinary for the general ALS population. However, there is the risk that there are factors which no one yet understands that make these patients outliers and that the broad base of ALS patients may not see benefit.

NSI-189 is an exciting small molecule drug concept, but we have not yet seen any human data that could be interpreted as a signal of efficacy. The trials of NSI-566 in ischemic stroke and chronic spinal cord injury mirror the risk of the ALS trials. There has been failure after failure in attempts to develop effective drugs so that these are extremely high risk drug development efforts. And of course, there is no human data that has provided a signal of efficacy.

It is often the case in drug development that there are setbacks in clinical trials. Sometimes, these can be overcome with redesigning the trial. We have seen recent examples of this with Acadia (ACAD) and Neurocrine (NBIX). However, this often leads to considerable pressure on the stocks and the need to finance at depressed valuations to continue the trials. Neuralstem is thinly capitalized so that any setback, even if it ultimately could be overcome, could be devastating to the stock. In a worst case scenario, it could threaten the existence of the Company.

I am recommending this stock as an asymmetric investment opportunity in which I think that the upside in the event of success is so great that it warrants undertaking the risk of losing all or most of your investment. Unless you are willing to accept this reward risk equation, you should not invest in Neuralstem. This report only deals with key events that I am watching for in 2014; it is not a comprehensive report. If you are new to this stock and are interested in doing more due diligence, I would refer you to part reports that are available on my website.

Potential Updates on Phase I Trial of NSI-566
The first and most important program to focus on is the NSI-566 clinical trial program in ALS. The phase I trial began in January of 2010 and completed in August of 2012. Altogether, there were 18 surgical procedures in 15 patients. The first six patients transplanted were very advanced, non-ambulatory patients and were injected in the lumbar region of the spine with sub-therapeutic numbers of cells (based on extrapolation from animal studies). There was no expectation that a drug benefit might be seen in these six patients and there wasn’t. The purpose was to determine safety of the injected cells and the surgical procedure.

In the next phase of the trial, six less advanced, ambulatory ALS patients were enrolled. These patients also were given injections of very low numbers of cells and only in the lumbar region. One quickly died of heart disease which the investigators determined was not related to the drug or the disease. Another patient was an atypical patient who was already experiencing much greater longevity than is normally expected. He remained stable but there may not be that much more to learn from this patient’s experience.

Of the first twelve patients treated, this left only four ambulatory patients who had any chance of getting any benefit from the therapy. Encouragingly, these four patients had what can only be called spectacular results in which the disease condition was stable, declined modestly or improved over periods ranging from 800 to 950 days. This is something that investigators with whom I spoke believe is an extraordinary signal of efficacy. Two atypical patients among the first twelve patients treated also remain stable, but it is not clear if the neural stem cells helped them.

One of the four patients who benefitted was Ted Harada who is an avid blogger so that investors have closely tracked his progress. Before he received the cells, he needed help in walking; after surgery, he was able to walk a 5-K course. Mr. Harada’s condition actually improved and has remained improved over the last three years. Mr. Harada and two other patients were subsequently brought back for a second surgery that implanted cells in the cervical region and according to his blog; he continues to do quite well. Another less publicized patient also did well. Almost three years after surgery he has remained stable and last year he and his wife went on a European vacation.

This initial treatment of 12 patients with lumbar injections was followed by a new cohort of three patients who were given cervical injections. Two of these patients were bulbar patients who showed no benefit from the injections. The third was an atypical patient. There is probably no information to be gained from this cohort other than that the neural stem cells will probably not work in bulbar ALS patients.

This was then followed by a final cohort of three of the four patients who had benefitted from lumbar injections; they were given cervical injections. Ted Harrada was one of these patients. We haven’t had an update on the others.

The phase I trial was an unblinded trial so that data was released along the way as patients were treated. I went over these interim reports in my September 2013 report. Dr. Eva Feldman whose credential I previously described is the lead investigatory on the trial. Her initial interim reports were cautious as she stated that the purpose of the trial was to determine safety of the cells and made no comment on potential efficacy. However, I was struck by later interim reports from Dr. Feldman which indicated that she was seeing signs of biological effect and efficacy.

She said "Collectively, these preliminary results suggest 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," Dr. Feldman is 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. She was also the 2013 President of the American Neurological Association.

We have not yet seen a comprehensive report on the phase I trial; rather the results have been reported on a fragmented and irregular basis. I understand that Dr. Feldman has prepared a paper on the phase I results and submitted them for publication in a peer reviewed journal. I have no information on which journal it is. Given her standing within the neurological community and the extreme interest in Neuralstem’s trial in ALS, I would guess that the paper might be published in the Annals of the American Neurological Association, but I have no direct knowledge.

This paper could be a significant positive for the stock. First of all, it will provide the first comprehensive presentation of the results of the trial instead of the fragmented reports we have seen so far. Also results have tended to improve for responding patients at each of the interim looks in the phase I trial. It is my hope that we will see disease stability and durable effects in the four patients who have responded. It will also be interesting to see how the three patients, who were first given lumbar injections and later cervical injections, subsequently responded. From a stock standpoint, it is possible that these results could be picked up and dramatized by the major television networks. This might lead to a meaningful upside move for the stock.

Phase II Trial in ALS Is Now Underway
Neuralstem is now conducting a phase II trial that builds on the phase I trial. The FDA approved the phase II protocol for NSI-566 in ALS in April 2013. The first patient was treated at Emory University in October 2013. This is a dose escalation and safety trial, will take place at Emory, the site of the phase I trial, at the University of Michigan Health System and possibly other sites. 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, where it is hoped that 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 in phase II might be given as many as 40 injections and up to 400,000 cells per injection for a total of 16 million cells; this is 11 times the maximum dose used in phase I. In animal studies it was suggested that 16 million cells may be the optimal dose for humans.

The primary goal of phase II trial is to 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.

Because this is an open label study, it is probable that there will be interim results on these patients as the trial is underway and indeed there has been one report. There is a heart rending blog called April’s Blog that traces the history of a middle aged woman from diagnosis of ALS to her participation in this phase II trial and resultant surgery in October 2013. She received only cervical injections. Remember, it is the cervical region of the spine that controls respiratory function and most patients with ALS die from respiratory issues. I would urge investors to read her blog. It is an extremely moving history.

She is only about three months past surgery, but in her January blog she published an encouraging comment. She wrote “Now for the news on my breathing. I haven’t used a mask in weeks. I’m very grateful for the Sip and Puff because I do still use it as needed. I have no doubt my ability to move air in and out has improved though.” To put this comment in context, one has to follow her whole history with breathing assistance which she describes in detail in her blogs. She is cognizant that it is still very early post-surgery, but she seems to believe that her breathing function has improved. I would note that Ted Harrada also showed improvement not long after surgery.

April’s Blog will be a continuing focus of investors not only to judge whether NSI-566 is effective, but also to follow the moving story of this courageous woman. We all hope that this therapy will help her.

As a final note, Neuralstem has asked the FDA to designate NSI-566 as a breakthrough therapy. I can’t project if or when the FDA will act on this, but receiving this designation would be a strong upward catalyst for the stock.

Neuralstem’s Second Drug, NSI-189, is a Small Molecule
Neuralstem has capitalized on its ability to grow hippocampal cells in a culture dish to develop a novel new small molecule drug. The hippocampus is the area of the brain that is associated with psychiatric and cognitive disorders; these diseases appear to cause atrophy of the hippocampus. The hippocampus is virtually unique in its ability to grow new neurons so that Neuralstem focused on finding a drug that could stimulate the growth of new neurons. They selected for development a small molecule that has been shown to increase hippocampal volume by up to 20% in animal models. It is believed to do this through increasing the number of synapses and may be the first drug in the world that can do this.

Neuralstem had a major advantage in the development of this drug. Other drug developers must decide on a molecular target in the brain and develop a drug that will interact with the target, which may or may not have a therapeutic effect. Neuralstem can take a different approach by screening drugs against hippocampal cells in a culture dish; they are the only company with the ability to grow hippocampal cells. They can be agnostic about the precise target and just look for a molecule that can cause neurogenesis.

The objective of the screening program was to develop a small molecule drug that can increase neurons in the hippocampus and enlarge its size. Hippocampal atrophy is implicated in major psychiatric and cognitive disorders. This drug may actually regrow the hippocampus, inducing up to a 20% increase in hippocampal volume. Neuralstem believes that this is due to synaptogenesis (the creation of new synapses or nerve connections in the brain). This is the world’s first truly neurogenic drug that is designed to specifically increase the number of synapses in the hippocampus.

The genesis for this program was the US Army which wanted a compound like this to treat brain injuries and post-traumatic stress syndrome for the War Fighter of the Future program. Neuralstem received $2.5 million from the army and $0.5 million from NIH to help in development. The result was a discovery of a new class of drugs which have been the subject of new patents covering both the class of drugs and individual molecules; the lead compound is NSI-189.

Neuralstem has just completed a phase Ib dose escalating trial of NSI-189 to treat major depressive disorder or MDD (also known as recurrent depressive disorder, clinical depression, major depression, unipolar depression, or unipolar disorder). This is a mental disorder characterized by episodes of all-encompassing low mood accompanied by low self-esteem and loss of interest or pleasure in normally enjoyable activities.

Phase Ib was a dose escalating trial that enrolled patients in three cohorts. After dosing, patients came back for MRIs to detect any change in the size of the hippocampus. The hope is that there will be an increase in size as was seen in animal studies and that this will translate into therapeutic benefits. Because the trial was conducted in patients actually suffering from MDD, there is the potential to see a signal of efficacy. This trial is now unblinding and results could be announced in 1Q, 2014. This is one of the most novel small molecule drugs in development in biotechnology and I am anxious to see the results of phase Ib.

If these results are encouraging, a phase II trial could begin in 2H, 2014. The original plan was to partner NSC-189 after phase Ib due to limited resources and discussions are ongoing with a number of potential partners. However, the recent equity raise provides cash balance of $33 million and allows the Company to move into phase II on its own. Going into phase II on its own could greatly enhance the potential value of NSI-189 to shareholders.

Phase I Trial in Chronic Spinal Cord Injury with NSI-566
Neuralstem has received FDA approval to begin a phase I trial of NSI-566 in chronic spinal cord patients. The trial will begin following IRB approvals from participating hospitals and is expected to begin in 1Q, 2014. These are patients who have suffered an injury to the spine some time ago and in which their condition has been stabilized. They have lost all neurological function in the area below the site of their injury.

The hope of Neuralstem is that NSI-566 may provide an effective treatment for chronic spinal cord Injury by “bridging the gap” in the spinal cord created in traumatic spinal cord injury and providing new cells to help transmit the signal from the brain to points at or below the point of injury. As in the ALS trial, the first surgeries will take place in the lumbar region and later cohorts may receive cervical injections. Determining safety of the procedure is a key goal, but based on the ALS phase I trial this is not likely to be an issue.

This is an open label trial and as in the case of the ALS trial, we may see results on a patient by patient basis. The enrollment of patients for the lumbar section of the trial could complete by mid-year. It is difficult to project if this trial will produce any meaningful clinical results in 2014. However, the start of enrollment is a significant achievement on its own right and this will eventually, say in late 2014 or 2015, produce significant data (hopefully positive).

In ALS, neurons are dying throughout the spinal cord causing the neuronal circuitry to dysfunction. In the case of spinal cord injury, there is no neuronal signal below the site of injury. The intent is to bridge the gap at the site of injury and restore neuronal function below that site. Neuralstem will start with ASIA patients who have complete paralysis below the site of injury meaning they have no sensory or motor function. The FDA is requiring that they start with injections in the lower lumbar region. They will start with 100,000 cells per injection and then dose escalate to 200,000. They will start in the lumbar region and later move to the cervical region.

This trial will be easy to recruit. Readers may recall that Geron was only able to recruit two patients in three years into their spinal cord injury trial because it was an acute spinal cord injury trial. However, the patient had to be treated immediately after their accident so that unless the accident occurred near an investigational site and they were brought there for stabilization, they were not eligible for the trial. Neuralstem will be treating patients who have been stabilized. They can be transported over some distance to the four to five centers participating in the trial.

Ischemic Stroke Trial Begins in China
Ischemic strokes occur as a result of blockage of blood vessels in the brain and are the most common cause of stroke. The hope is to restore new circuitry in the area of injury and through repairing and or nurturing diseased cells to improve function in patients and restore motor deficits. In September of 2012, Neuralstem China received approval to treat motor deficits due to ischemic stroke. The trial will be conducted at the BaYi Brain Hospital in Beijing and will use the same neural stem cells NSI-566 as were used in the US trial of ALS.

The trial approval combined the design of phase I/II and III and will enroll up to 118 patients in phase I and II. The first 18 patients will be enrolled in cohorts of 3 with the purpose of determining the maximum tolerated dose. Interim data from these first 18 patients is expected by early 2014 and will be primarily related to safety. Under Chinese regulatory practice, a phase II trial could start almost immediately after this, so that it could begin in mid- 2014. This could involve 100 patients suffering from neurological damage due to ischemic stroke. Surgeries will begin after the patients have been stabilized for at least four months and will be combined with physical therapy.

There will be a control group that receives only physical therapy, but will not be given sham surgery. Stroke has been extensively studied in clinical trials and there are a number of well validated scales that evaluate functional recovery. Evaluations of these two groups will be made by investigators who are blinded to the treatment received by the patient. The initial results could be reported in as soon as one year so that results may be available in 2H, 2015. Success in the phase II trial in an optimistic case could lead to approval in China in 2H, 2016 and subsequent commercialization.

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