Athersys — Update 3 March 2016

Athersys recently released new data on the outcomes of patients a year after MultiStem treatment for ischemic stroke. The company was able to follow all of the 126 patients who received MultiStem or placebo in its Phase II trial for an assessment 365 days after their initial strokes. The analysis compared the number of patients with “excellent outcomes” (mRS 0-1, NIHSS 0-1 and BI ≥95) between placebo patients, patients receiving MultiStem and those receiving MultiStem in the first 36 hours after stroke (for more information on the different metrics, see our outlook report published on 14 December 2015). The subgroup analysis of patients treated less than 36 hours is consistent with previous analyses of the Phase II data, which identified that a number of effects of the treatment were more pronounced in this population.

The data show that the number of excellent outcomes increased over the year for all patients as they recovered from their strokes. However, the improvement in outcomes over the year was significantly larger for patients that received MultiStem (14.9% more excellent outcomes over placebo) and the largest for patients treated in the first 36 hours (20.8% over placebo). Both of these populations showed a higher proportion of excellent outcomes at 365 days compared to the 90 days originally reported in the trial results. These data are the first indication of a statistically significant change in stroke severity metrics for the intent-to-treat (ITT) population of the trial. Although data from the trial at 90 days trended towards improvement in the number of excellent outcomes, it was only significant using a post-hoc analysis of patients receiving early MultiStem treatment who did not also receive both tissue plasminogen activator (t-PA) and mechanical reperfusion (MR).

Additionally, the follow-up report provided detail on the improvement of a key quality of life metric, the Barthel Index, which measures the ability of patients to perform daily tasks and live independently. The number of patients with “excellent” Barthel Index scores (greater than 95 out of 100) increased in patients who received MultiStem, whereas there was no change from 90 days to 365 days in patients who received placebo.

There are several potential explanations for these results. First, one would expect patients to have improved outcomes the more time has progressed since stroke as individuals heal and recover, regardless of the type of treatment. MultiStem could be improving the healing process through a number of different mechanisms. It is unlikely that the cells administered during the treatment persist for the full year of recovery, but the initial treatment could affect the microstructure of the brain or the recruitment of other cells shortly following stroke such that lasting improvements in healing are achieved. An alternative explanation is that MultiStem prevents a greater degree of the damage following stroke, but that this effect is occluded by acute symptoms. It should be noted that all the metrics presented in this report are based on qualitative assessments of patient function, which can be particularly susceptible to placebo effects. Having said that, these results are in line with numerous other analyses that indicate a treatment effect for MultiStem, and contribute significantly to the increasing body of evidence.

There was a degree of uncertainty as to the future of Athersys’s program in Japan, as well as the prospects of the MultiStem program for ischemic stroke as a whole following the October decision of Chugai and Athersys to terminate the deal to develop the program in Japan after the two companies were unable to reach an agreement on modifications to the financial terms of their license.

However, the recent deal with Healios has brought some much needed validation to the MultiStem program as Healios demonstrated a willingness to pay even more than Chugai’s initial offer for the stroke program ($230m compared to $205m, see Exhibit 2). Additionally, Healios has the option to pay $10m to license the development of MultiStem for acute respiratory distress syndrome (ARDS) and an undisclosed orthopedic application if the forthcoming Phase II ARDS trial is successful. Finally, included in the expansion agreement are the rights to license MultiStem to be used in Healios’s own regenerative medicine platform, so-called organ buds.

We see a number of advantages over Chugai beyond simple economics in pairing with Healios. Healios is an earlier-stage company focused primarily on internal development of regenerative medicine products, including a number of different programs using induced pluripotent stem cells in ophthalmology. The company has some experience launching a product as it previously developed a small molecule drug for ophthalmologic surgery, which is available in Europe. Chugai, on the other hand, lacks an internal cell therapy program and generally in-licenses already vetted products from large pharmaceutical companies like Roche. It is understandable in this context why, following the Phase II results, Chugai would be reluctant to pursue the partnership under the original agreement, considering it was somewhat out of character to begin with. We suspect that Healios will be more sympathetic to the remaining development hurdles for MultiStem, and there will be more opportunities for synergy, as evidenced by the license to integrate MultiStem into the organ bud program.

Having said that, Healios is a substantially smaller company, with the associated capital risks. The company’s June 2015 IPO left it with $81m in cash at the end of September 2015, and although burn rates have historically been low at $1.4m in Q315, these are likely to increase as the company advances both the MultiStem clinical program and its own internal stem cell programs.

The successful licensing of MultiStem in Japan is of critical importance for a number of reasons. The Japanese Pharmaceutical and Medical Devices Agency (PDMA) has instituted some of the most progressive policies in the world with regard to regenerative medicine. In an effort to incentivize and accelerate the development of regenerative medicine for Japan’s ageing population, in 2014 the PDMA introduced a policy that allows for the market approval of products with demonstrated safety, but with a lower bar of a “signal of effectiveness.”

In September 2015, the first regenerative stem cell therapy was approved under the new program: Temcell from Mesoblast with Japanese partner JCR Pharmaceutical. Temcell is a mesenchymal stem cell therapy for acute graft vs host disease (aGvHD). The approval of Temcell gives a first window into the PDMA’s decision process for this program. Temcell (at the time under the name Prochymal and in development by Osiris) underwent a Phase III trial in which it failed to show any statistical significance in the steroid refractory aGvHD patients (35% vs 30% response rate, p values not released) and trended towards no effect as a first-line treatment (45% vs 46%, p values not released). However, a post-hoc analysis revealed that the steroid refractory per-protocol population approached significance (76% vs 47%, p=0.087) and the gastrointestinal (GI) subgroup showed significance (88% vs 64%, p=0.018). These data were supported for Japanese approval with a 25-person, open-label study of Japanese steroid refractory GvHD patients showing a 60% response rate. Based on this evidence, Temcell received complete market approval in Japan for aGvHD. Although we cannot easily extrapolate these results to the different trial design and indication for which MultiStem is seeking approval, it serves as an example of the “signal of effectiveness” the PDMA expects for approval, which is encouraging for the prospects of other therapies in this class.

The relaxation of approval standards is similar to the FDA’s lowered bar of efficacy for Humanitarian Use Devices (HUDs), but unlike HUDs the Japanese program allows for aggressive reimbursement. For instance, reimbursement for Temcell was recently set at $113,000-170,000. This event gives us confidence that the Japanese regulatory authorities intend to support the regenerative medicine initiative on all levels. The regulatory success of Temcell very likely affected Athersys’s partnership discussions, and we believe that the speed at which it was able to sign a new deal reflects the increasingly favorable environment for regenerative medicine in Japan. We are increasing our chance of success for the program from 25% to 30% in our model to reflect this.

The Japanese stroke market is also significant. The lifetime risk for stroke in Japan is 18-20% among 55 year olds, which is comparable to the US.1,2 However, unlike in the US, stroke is the most common cardiovascular disease, outpaces coronary heart disease by approximately two to one, and is one of the leading causes of morbidity.3 Japanese stroke sufferers are more likely to have complications such as intracranial hemorrhaging than western populations by a factor of three to four, as well as increased risk of infarction in deep brain structures.4 Although rates of stroke are dropping on an age-adjusted basis, they are increasing as the age of the general population of Japan increases. Therefore, there remains a significant unmet medical need for innovative treatments like MultiStem.

A paper was recently published in the Journal of Neuroinflammation5 detailing a study performed at Maastricht University and Máxima Medical Center Veldhoven in the Netherlands, in which MultiStem was used following the induction of a global HI crisis in preterm sheep. The study was designed to replicate the conditions that are experienced by a number of term and preterm complications in which blood flow to the fetal brain is interrupted (Exhibit 3). The damage caused by HI typically occurs in two discrete steps. First, the initial interruption of blood flow results in cerebral edema, DNA damage to brain cells and cell death. This is followed in six to 48 hours by the secondary phase, characterized by oxidative stress and inflammation, leading to much more extensive damage to the brain. MultiStem was examined as a therapy for HI because multipotent progenitor cells like those used in MultiStem have significant anti-inflammatory and regenerative properties that could protect the fetal brain from damage that occurs during the secondary phase of damage following HI. The authors found that MultiStem reduced inflammation systemically and in the brain, as well as prevented brain damage and seizures.

In the study, 32 preterm fetuses approximately two-thirds through gestation were randomized and then subjected to either 25 minutes of umbilical cord blood flow restriction or a sham procedure. The umbilical cord occlusion (UCO) was used to induce global HI in the fetus by depriving it of placental blood. Fetuses were then injected with MultiStem cells or saline one hour after UCO and at four days. The fetuses were monitored for one week, after which they were sacrificed and analyzed for inflammation and brain damage.

The fetuses in the MultiStem arm showed improved outcomes in a number of histological dimensions. MultiStem reduced the expression of markers of inflammation and injury in the subcortical white matter, a site important for cognition in the brain. However, the treatment was unable to prevent inflammation in the hippocampus, the primary site of memory in the brain (the authors did not report the status of injury to the hippocampus). Additionally, a number of markers of systemic inflammation (splenic weight, IL-10 expression, TNFα expression) were reduced to levels of the sham insult following administration of MultiStem.

However, perhaps most dramatic is the reduction in seizure burden as a result of MultiStem treatment (Exhibit 4). Both the number of seizures and the total duration of seizures experienced by the fetus were significantly reduced two days after UCO, and seizures were largely eliminated by three days. In the fetuses treated with saline, seizures had not completely resolved by the end of the experiment at seven days, which may indicate that the authors would have observed additional damage to cortical structures in this subgroup if the experiment had progressed.

The data in this study show the effect of MultiStem following a severe neurological insult and provide support that the anti-inflammatory and regenerative properties of MultiStem can improve the prognosis in such cases. The data show a correlation between a cerebral and systemic inflammation, cellular damage and neurologic function effected by the administration of MultiStem shortly after neurological damage and are consistent with the model that prevention of the secondary inflammatory response can improve outcomes. This model is consistent with data observed in the company’s Phase II stroke study, which demonstrated in the post-hoc analysis that patients treated more quickly following stroke more frequently demonstrated an “excellent outcome” (improvement in all metrics, 18.5% vs 1.9%, p=0.03), whereas patients treated more than 36 hours post stroke did not see a meaningful benefit. These observations will likely guide future trial plans to define the optimal therapeutic window for MultiStem to improve outcomes. However, a note of caution must be made when extrapolating the results of this preclinical study to other neurologic indications such as stroke, because of the vastly different regenerative capacity between a prenatal brain and that of an adult, let alone a typical geriatric stroke patient’s brain.

The results also pose the potential of developing MultiStem as a treatment for neonatal hypoxic-ischemic encephalopathy (NHIE). NHIE occurs in 2.5 per 1,000 live births, or approximately 10,000 cases per year in the US. It is associated with a number of neurological defects: cerebral palsy (36%), epilepsy (16%), hearing (10%) and visual impairment (13%).6 Further studies will have to be performed to determine whether the results in this study are supportive of a treatment for NHIE (and we are not including it in our model yet as the company has not commented on its future development plans for the indication), but this study does indicate MultiStem’s capacity to treat neurological damage in the developing brain.

At its recent investor day, the company presented a series of new analyses of the MultiStem ischemic stroke data. The analyses continue to support the use of MultiStem in patients during the critical first 36 hours following stroke and in patients that do not receive multiple interventional treatments (excluding patients that received both t-PA and MR). This conclusion was supported by a statistical analysis of the shift in disease severity measured by the modified Rankin Scale (mRS) over the first 90 days following treatment (Exhibits 5 and 6). These data demonstrate that the population of patients receiving MultiStem in the first 36 hours after stroke exhibits a distribution shift towards more favorable outcomes (lower mRS) and improvement is evident on average significantly more quickly than patients treated with placebo. Of particular importance is that this trend was maintained with statistical significance out to 90 days in patients that did not receive both t-PA and MR. This is the first analysis that has demonstrated statistical significance using a single quality-of-life metric. Previous analyses presented by the company only examined patients with an mRS score of less than 2 at 90 days, and significant improvement in quality of life was only demonstrated when multiple metrics were combined (Exhibit 5).

The company also presented a subgroup analysis of the stroke data by age. The new data showed improvement in patients over 65 years old across all the metrics examined in the study (Exhibit 7). Interestingly, this improvement was seen regardless of whether patients were treated in the first 36 hours after stroke or not. The population was not sufficiently powered to provide statistical significance, but the unidirectional shift in all metrics is a strong indicator of efficacy. This finding is significant because people over the age of 65 present the highest risk for stroke and therefore represent both the largest patient population on which to draw for future trials as well as the largest target market. The strong suggestion of efficacy in this population is reassuring considering the multiple complicating factors that are present in this population.

We have increased our valuation of Athersys to $373m or $4.48 per basic share (from $340m or $4.08) both because of the increased cash flows from the new deal with Healios and because we see the deal being signed quickly as indicative of an increased chance of MultiStem’s success in Japan (from 25% to 30%), especially in light of Temcell approval and its generous reimbursement. We have included the $30m in clinical milestones and $100m of the $185m in commercial milestones, adjusted for risk, for a discounted contribution of approximately $30m to the company’s valuation. The increased probability of success in Japan from 25% to 30% is partially offset as we have reduced the royalty rate in Japan from 20% to 18%. The original Chugai press release mentioned double-digit royalties, which we estimated to be around 20%, while the Healios press release specifically mentions a high-teens cap. So, while it looks like the actual economics of the deal are similar, we are adjusting our estimated royalty rate due to the additional information in the Healios press release.

We have amended our financial model to reflect the new licensing deal. The Chugai upfront payment of $10m is recognized in its entirety as Q415 revenue, as indicated by the company. The upfront fee for the Healios deal while already received is amortized over the useful patent life of MultiStem in Japan (until 2028). As a result, our FY16 revenue forecast decreased from $4.2m previously to $2.7m and PBT loss increased slightly from $26.5m to $27.9m.

Athersys ended Q315 with $28.3m in cash and equivalents. The new licensing deal only marginally affects our predicted financing schedule in the near term because we had previously included a hypothetical 2016 upfront payment of $10m ($2.5m after risk adjustment). We forecast $20m in financing in 2016 and $30m in 2017 to fund the increase in burn rates associated with advancing the MultiStem program ($150m total before profitability in 2020). Financing is recorded as illustrative debt in our model, but may be in the form of future licensing agreements or equity raises with potentially significant dilution.