GMDA - Athersys: Is Big Pharma Sleeping At The Wheel?

Summary

• Due to an extended downtrend in Athersys stock price due largely to a declining cash position, Athersys currently trades at a market cap near $24 million.
• The current valuation is miniscule when compared to valuations of other stem cell companies, especially when considering the strong IP portfolio of Athersys.
• Recent restructuring and cost-cutting, that included a 70% workforce reduction, will significantly reduce cash burn that previously approximated $20 million per quarter.
• The future of the company depends on an ability to fund the business through completion of the Masters 2, phase 3 trial for ischemic stroke.

Few investors are ready to scoop up shares of Athersys ( ATHX ) stock after it has lost over 95% of its value over the last 52 weeks. However, with a deep stem cell IP portfolio, Athersys represents a huge opportunity with a reasonable chance of success that is not fully understood in the market.

If you ask veteran biotech investors to provide names of leading stem cell companies, they may likely first point out that stem cell investing has been a high-risk, losing proposition for most investors. In any event, there are multiple companies that fit the general description of stem cell companies that are losing money and are under-financed in a difficult market for high-risk biotech. Compared to recent market volatility, the charts below illustrate mostly a downward trend over the last 52 weeks for 12 stem cell companies that could be compared to Athersys.

Beyond the charts, the table below provides some key financial data on stem cell companies that are characterized by little or no revenue, ongoing losses, and cash burn. To get an understanding of Athersys’s position in the stem cell sector, a comparison of some of the company’s peers may provide perspective.

Of the above, Fate Therapeutics ( FATE ) has the largest market cap at $2.84 billion. Although Fate has revenue of $68 million, it is a clinical stage company that is developing therapies for cancer. Fate Therapeutics has seven cell products in development and, in addition, partnerships with Janssen Pharmaceuticals and Ono Pharma. Fate has an impressive pipeline of targets in their portfolio. However, all of their programs are in preclinical up to phase 1 development ( source: Form 10K), which indicates a long development cycle ahead. Also noted in Table 1 above, cash burn from operations was $226.4 million in calendar year 2021 as the company raised $411 million from the sale of stock. Collaboration revenue in 2021 was $55.8 million. Fate utilizes pluripotent stem cells (embryonic) in a proprietary process to clone and expand cells for potential manufacture of an off-the-shelf cell product. For more information on Fate Therapeutics there are two interesting articles on Seeking Alpha published in June and August 2022.

With a market cap of $911 million, Sangamo Therapeutics has several diverse platforms that go beyond the stem cell category under discussion, encompassing gene therapy, cell therapy, genome editing, and genome regulation. The Sangamo pipeline consists of one phase 3 program (Hemophilia A), three phase 1-2 programs, and 14 preclinical programs. Sangamo has been successful in collaborating with major partners in preclinical programs including Biogen, Kite, Novartis, Pfizer, and Takeda, and raising over $900 million in funds. While the company generated revenue or $114 million in the last 12 months, cash burn totaled $225 million in the same period.

Third by market cap in the table illustration above, Century Therapeutics is developing cell therapies for cancer. Century utilizes genetically engineered CAR-T and CAR-NK therapies in combination with protein engineering, gene editing, and advanced proprietary manufacturing to target both solid tumor and hematological malignancies. Like Fate Therapeutics, Century utilizes induced pluripotent stem cells (iPSCs) in a proprietary process to maximize cell performance against malignancies. Century further states that the company has also developed capabilities to prevent rejection of its cell products in host immune systems. The company currently has five development programs, all in the discovery and preclinical stages ( source: Form 10K ). Unlike some of its peers in early-stage development, Century is establishing manufacturing capabilities in two facilities in 53,000 square feet of available space. In January 2022, Century entered into a collaboration agreement with Bristol-Myers Squibb (BMY) in two development programs.

bluebird bio ( BLUE ), fourth by market cap, has been around since 1992, the longest of the group. bluebird’s pipeline includes product candidates for severe genetic diseases, betibeglogene autotemcel for the treatment of transfusion-dependent ß-thalassemia; lovotibeglogene autotemcel for the treatment of sickle cell disease, and elivaldogene autotemcel to treat cerebral adrenoleukodystrophy. bluebird gained two FDA approvals in 2022. Zenteglo, a gene therapy for the treatment of the blood disorder ?-thalassemia, was approved in August. Priced at $2.8 million per dose, Zenteglo was cited in the media as the most expensive drug worldwide. As an orphan drug, Zenteglo targets about 800 patients in the U.S. Although approved earlier in Europe, it has not been approved by insurance payors. On September 16, bluebird announced the approval of Skysona for a rare degenerative disease called cerebral adrenoleukodystrophy that affects boys ages 4-17. The retail price of the new therapy will be $3 million per dose. In spite of the foregoing, Bluebird expects to burn about $340 million in cash in 2022, as reported October 4 in the Wall Street Journal “Heard on the Street” column. With $218 million in cash at the end of Q2, it is apparent the company will need to raise cash. As quoted in the WSJ, “bluebird needs to raise money, and fast”. bluebird has collaboration agreements with Orchard Therapeutics Ltd, Forty-Seven, Inc., and Magenta Therapeutics.

Of the companies in the comparison, Mesoblast ( MESO ) most closely resembles the product profile of Athersys, with one major distinction. Mesoblast product candidates are derived from mesenchymal stem cells, termed MSC, while Athersys utilizes multipotent adult progenitor cells (MAPC). According to scientists associated with Athersys, MAPC cells have a capacity to differentiate into diverse cell types that can be expanded much more rapidly in manufacturing than MSCs. MESO has two product candidates, Remestemcel-L and Rexlemestrocel-L, for four indications in phases 2-3 development, which includes one completed, but failed, a phase 3 trial of Remestemcel-L for the treatment of acute respiratory distress syndrome, abbreviated ARDS. Phase 3 results for Remestemcel-L were announced May 31 in which patients under age 65 (123 individuals) met trial endpoints, which were not met by patients 65 and older. MESO is currently awaiting feedback from the FDA on how to proceed in the ARDS indication.

Meanwhile, MESO has three additional indications in phase 3 development nearing and/or reaching completion, and one phase 2 program. The most advanced program, that addresses Acute Graft Verses Host Disease (GVHD), has recently been submitted to the FDA for approval (source: various posts on the Mesoblast website). While Mesoblast has had some success in moving its programs forward, the company has not fared as well in collaborations. In December of 2021, the company announced that its key collaborative partner, Novartis, was terminating their partnership agreement with the company.

In the comparison, there are obviously huge difference between the companies, including IP, indications, therapies, stage of development, and financial resources. Notably, current valuations are aligned with financial conditions rather than addressable markets. However, arguably, Athersys has the greatest addressable market with stroke that afflicts over 7 million people worldwide each year, as well as ARDS, and trauma indications currently in the clinical stage, as well as multiple preclinical indications, but with the lowest market cap of the group. It should also be noted that, when comparing the companies in Table 1, Athersys stands alone in targeting stroke and trauma, along with ARDS (that is also listed for Mesoblast).

In addition, there are huge differences in the near-term cash requirements noted in the comparison. While Athersys was burning cash at a rate of about$20 million per quarter before restructuring, cash requirements will be decreased in the future. With the clinical trials for stroke and ARDS well underway, the company is approaching the finish line when viewing the long journey in the rearview mirror. As a bonus, a phase 2 trial for trauma, Matrics, is underway at little cost to the company as discussed below.

Recapping recent developments, Athersys has two phase 3 trials running for stroke and ARDS. The ARDS trial has been temporarily suspended due to a current deficiency of funds. A phase 2 trial named Matrics for the treatment of trauma, funded mostly by the U.S. Department of Defense (MTEC) and UTHealth, continues to run at UT Health in Houston. Accordingly, Athersys has one of the most robust pipelines of all stem cell companies in terms of addressable market, as illustrated below:

In August Athersys scientists, Dr. Robert Mays and Dr. Sarah Busch, presented an overview of Athersys preclinical programs in a presentation titled “Rebalancing the Immune System: The MultiStem® Cellular Platform for Treating Disease and Injury” linked here . For current and future investors, time would be well-spent in listening to the one-hour presentation in evaluating the prospects for Multistem in areas beyond current trials including traumatic brain injury, spinal cord injury, hypoxic ischemic injury, multiple sclerosis, Parkinson’s disease, and others. The presentation covers an overview of evidence from animal studies that provide indication that Multistem cells work.

As documented in the presentation, there have been 23 cellular therapies approved by FDA as of April 19, 2022, which include: autologous therapies (All CAR T variations) viral therapies (1 of which has since been placed on hold) fibroblast/collagen scaffolds for dermal treatments, allogeneic cord blood products, allogeneic product (thymus cells) for treating athymic children It should be noted in the foregoing that existing cell therapies are overwhelmingly autologous or allogeneic, meaning that they are either taken from a patient’s own cells or transplanted from a donor.

While the cell therapies are tremendous benefits to the patients that receive them, they are difficult to scale. On the other hand, Athersys cell product Multistem can be scaled to hundreds-of-thousands doses from a single 100 mg bone marrow donation. The resultant cell product can be stored and dispensed as needed.

In addition to proving the ability to expand stem cells robustly, Athersys management announced that the company had received FDA approval to manufacture Multistem in next-generation bioreactors for use in the Macovia ( ARDS ) and Matrics (trauma) clinical trials. This accomplishment puts the company well ahead of many of its peers.

So, a lingering question for the value of the Athersys IP portfolio is efficacy of Multistem, as will be discussed below.

The negatives

The failure of the Healios Japanese Treasure trial for stroke to meet the primary endpoint announced May 20 was the main driver of the downward spiral of ATHX stock that was later accelerated with a deteriorating cash position at the company. The foregoing ultimately resulted in an approximately 70% workforce reduction at Athersys and an expense reduction plan that resulted in cutting back on trial programs. Further, extreme difficulty in raising capital continues to plague the business, which is documented in Q2 results, Form 10Q , pages 14-16. As of the report, the company had accounts payable of $27.7 million, that included about $20 million due to its current supplier of Multistem. In addition, while the company has no long-term debt, Athersys had only $13. 4 million in cash on the balance sheet as of the Q2 Form 10Q which raises serious questions about the company’s ability to fund operations and complete its phase 3 trials. Accordingly, the phase 3 trial for ARDS, Macovia, was later suspended, as announced on the Q2 earnings conference call.

The events described above creates a dire perception of the company in the minds of some investors, which pushed the market cap to current low levels.

The positives

With a 70% workforce reduction and no long-term debt, $27 million in payables should not be a long-term deterrent to the fulfillment of the company’s mission to address ischemic stroke that affects 7.6 million people worldwide annually. When viewing Table 1 above, it becomes apparent that other companies are not pursuing therapies for stroke and trauma, huge unmet medical needs that have little hope for improvement otherwise. While some investors perceive reduced hope for Multistem after the Treasure trial results, there is compelling evidence of benefit for Multistem in treating ischemic stroke.

As documented by Athersys in the May 20 report, the Treasure trial did not meet statistical significance of “excellent outcome” after one year of treatment with Multistem. However, Japanese patients treated in the study had a median age of 78 years, compared to a median age of 63 in the Masters 1, phase 2 trial in the U.S. completed by Athersys. Accordingly, it can be assumed that a measured number of the 206 patients were well into their 90s. Due to evidence of benefit for younger patients, the Treasure trial may offer a path to approval for Multistem in Japan where is has been given priority review status (Sakigake).

Following the release of the Treasure data, Athersys hosted a panel discussion that featured six independent scientists who offered perspectives on the Treasure results and the potential of Multistem. While the participants have been associated with clinical trials for Multistem, they are independent scientists (shown below) who are focused solely on helping patients.

An important takeaway from the panel discussion was strong evidence of benefit and positive trends for Multistem treatment of ischemic stroke, comparing it to what is currently available to treat patients. As several of the participants pointed out, little has changed in stroke therapy since 1996 when tPA (tissue Plasminogen Activator marketed by Genentech as Activase) was approved by the FDA. tPA is administered as a liquid to break up clots in stroke patients within a 4 ½ hour timeframe after the occurrence of stroke, with a result that only 10-15% of patients receive treatment. Then in 2008 mechanical thrombectomy was approved to physically remove clots within 6 hours of treatment. Both of the approved therapies have significant levels of risk for patients, including bleeding in the brain with tPA.

Some of the participants expressed a belief that Multistem has the potential for a “seminal” event comparable to when tPA was approved in 1996, but with a much greater impact to treat many more patients. The first trial for tPA failed but later data from NINDS (National Institute of Neurological Disorders), was perceived to offer benefit, which lead to approval. Since the original jubilation over tPA, its use has been much less than anticipated.

Summarizing some of the key points in full event, the participants were highly upbeat on the Treasure trial top line data and the prospects for Multistem. While pointing out the inadequacy of the Treasure trial primary endpoint of excellent outcome, they expressed the view that what is now needed is a successful trial in Masters 2 to convince naysayers. The full panel discussion can be accessed on a YouTube presentation.

Further, going back to results for the Masters 1, phase 2 study for ischemic stroke reported in 2016, significant proof of benefit was achieved as illustrated in the graphic below.

As can be seen in the above, Multistem improved outcomes significantly in all three measures. In addition, Multistem has indicated no evidence of safety concerns in all studies, both completed and underway. Meanwhile, in Japan Healios is awaiting a response from the PMDA (Pharmaceutical and Medical Device Agency) in regard to the company’s completion the One Bridge phase 3 trial for ARDS. While the trial enrolled only 30 patients, the results were excellent with significant improvements and no deaths in the Multistem treated cohort. Richard Kincaid, CFO of Healios, recently reported in a Q2 corporate update that they are making progress in discussions with the PMDA and they expect that “it won’t take much longer to get through these discussions”.

Beyond what is stated in the foregoing, Multistem has a huge advantage over the therapies indicated with the companies documented in Table 1 above. Multistem greatly expands cells donated from a single donor to hundreds-of- thousands of doses. As such, Athersys stands above the group with scalability to treat all affected patients globally with readily dispensed cell therapies.

Risks

There is obviously a great deal of risk investing in Athersys, not the least of which is declining financials and an urgent need for cash. And there is always a risk that none of the programs discussed above will come to fruition. Accordingly, Athersys stock should not be purchased without a realization that an investment in the company could go to zero. In addition to the foregoing, potential investors should know all of the risks associated with the company as detailed in Form 10K, beginning on page 22.

Conclusion

After being a long-term investor in Athersys and not writing an article on the company since May, the author decided to do a deep dive on the business fundamentals and prospects for the future before writing and commenting further. From the author’s perspective, future prospects for Athersys remain intact--at a fraction of the cost to investors historically. At the same time, the author believes that investors who are risk-averse and lack the stomach for extreme volatility, should avoid Athersys stock.

On the other hand, the prospects and financials for the company are very manageable with total obligations under $30 million and four phase 3 trials in play. When comparing the total addressable market for stroke and ARDS with four phase 3 programs in play (Athersys and Healios), Athersys stands out in the comparison with other stem cell companies that largely addressing indications that may be a better fit into pharmaceutical portfolios. Furthermore, at least for the ischemic stroke and ARDS indications, the costs to bring the programs to completion is miniscule in terms of the number of lives affected globally and the human and financial IP investments that have been made over the last 20 years. The relatively manageable financials, compared to other biotech/stem cell companies, is a positive for the company that has been largely misunderstood by investors and potential big pharma partners who may not get past the headline that the Treasure trial failed. There is likely much more to the story.

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