Athersys — Update 13 December 2015

Athersys was established in 1995 and listed in 2007 through a reverse-merger, immediately raising $65m through the sale of 13m shares at $5.00. At 30 September 2015, Athersys had an accumulated deficit of $306m. The company is based in Cleveland, Ohio (with additional facilities in Leuven, Belgium), has 57 full-time employees, and is focused on developing its MultiStem product (allogeneic stem cells from adult bone marrow donors) for multiple indications, including ischemic stroke, AMI and ARDS.

We believe that Athersys will initiate a Phase IIb trial in ischemic stroke next year to confirm the signal seen in the initial Phase II data, as it did not meet the pre-defined primary endpoint on an intent-to-treat basis. With an annual incidence of >2.2m in the US, EU and Japan and only one FDA-approved treatment, tissue plasminogen activator (t-PA), which needs to be administered within 3-4.5 hours of a stroke, there is a large unmet medical need. Due to a projected 36-hour dosing window, MultiStem could potentially be a major improvement over the current standard of care as the vast majority of patients (≥95% according to the company) are admitted to the hospital by this time point. Enrollment in AMI is ongoing with Phase II data expected late next year. A Phase IIa trial of MultiStem for the treatment of ARDS is in the process of being initiated.

We have increased our fair value to $340m (vs $256m) or $4.08 per share (vs $3.09) as we modestly increased our pricing assumptions due to extremely lucrative reimbursement decisions for recently approved cell-based products in Japan. This was somewhat mitigated by pushing back the expected launch dates for the stroke and AMI programs by a year. The bulk of the value of the company (~60%) comes from the stroke program, which could have peak sales of $3.6bn worldwide (which is higher than our previous estimate of $2.8bn due to higher pricing assumptions). Further data from the stroke trial as well as the potential for partnerships in the stroke program could help serve as catalysts for shares.

Athersys is subject to the risks typically associated with biotech company drug development, including the possibility of unfavorable outcomes in clinical trials and regulatory reviews, success of competitors and commercial decisions by partners or potential partners. While the MultiStem Phase II data in stroke had strong trends across multiple endpoints, much of the positive data came via a post-hoc analysis. Plus, as this was a small trial, the data still need to be validated with further clinical study. The track record of R&D in stroke is extremely poor so this is a particularly high-risk indication, although MultiStem’s mechanism and dosing in a wider therapeutic window than conventional drugs could address prior challenges. AMI and ARDS are also high-risk programs as we have little/no data related to MultiStem’s efficacy in those areas.

Athersys held $28.5m in cash at the end of Q315 and based on the current cash burn rate (~$6-7m per quarter) it faces a fresh financing requirement by mid-2016. We currently expect the company to raise $20m in 2016 and $30m in 2017 ($150m total prior to profitability in 2020); however, these requirements, as well as subsequent dilution, may be lessened through partnerships for MultiStem in Japan and elsewhere. Currently we are showing this funding requirement as illustrative long-term debt in the model. If these become equity raises, there would be significant dilution, especially at current levels.

Athersys is focused on developing its MultiStem product (allogeneic stem cells from adult bone marrow donors) for multiple indications, including ischemic stroke, AMI and ARDS (see Exhibit 1). We currently believe that the company will initiate a Phase IIb trial in ischemic stroke sometime next year to confirm the signal seen in the initial Phase II data. Enrollment in AMI is ongoing with Phase II data expected late next year. The ARDS program is expected to enter the clinic shortly.

Stem cell research and the potential translational application of adult stem cells have advanced significantly in recent years. Numerous clinical studies have been conducted to investigate the efficacy of various types of stem cells to treat a range of indications, such as immune disorders, neurodegenerative and cardiovascular disease, bone and cartilage repair, and Type 1 diabetes. The development of MSCs, multipotent stromal cells that can differentiate into a variety of cell types, has been the most successful so far, thanks to the approval of Prochymal, an MSC-based product, in various geographies, most recently Japan.

Athersys has developed an MSC-like early progenitor stem cell type referred to as MAPCs. These are bone-marrow-derived, non-hematopoietic adherent cells, developed using a technology acquired from the University of Minnesota in 2003. Derived from bone marrow tissue extracted from healthy, consenting adult donors, MAPCs are manufactured according to proprietary isolation and expansion protocols.1 One of the key features of MAPCs is their proliferative capacity, such that cells can undergo extensive expansion in vitro, with more than 60 population doublings before senescence. This allows the creation of a master and working cell banks as production intermediates. The current manufacturing process is based on clinical doses generated at about PD28 (master cell bank) or PD38 (working cell bank) that enables the production of millions of clinical doses from a single donor. So far, this production capacity is significantly higher than has been achieved with other stem cell products, and could become an important factor when considering the commercial viability of stem cells. These cells can also be cryogenically preserved and the current validated shelf life is at least seven years.

The end result is an allogeneic (off-the-shelf) product without the need for tissue matching or immune suppression, allowing the product to be used at the time of need (important for urgent medical need indications such as ischemic stroke). The consistency, quality and non-immunogenic nature of these MAPCs allows for significantly higher doses than most MSCs; for example, in the Phase II stroke study, up to 1.2bn cells can be administered in a single IV infusion, whereas the maximum MSC doses are around 400m cells. Yet even at these high doses, the cells do not appear to become a permanent transplant and are cleared from the body over time. Aside from IV infusion, MAPCs can also be administered locally, through a catheter, injection, matrix or implant. MAPCs also appear to be more effective at inducing blood vessel formation in certain models.

Although MAPCs and MSCs are similar in terms of certain immunosuppression mechanisms,2 particularly in T-cell suppression, MAPCs display some important differences. MAPCs tend to be smaller and more uniform than MSCs and appear to be trapped less in the lungs, a key obstacle for stem cell delivery.3 MAPCs have been shown to suppress pro‐inflammatory cytokines (TNFα, IFNγ), while up-regulating certain anti‐inflammatory cytokines (IL‐10, TGFβ, IL‐4). A number of animal model experiments, using TNFα stimulation, show that MAPCs inhibit up‐regulation of key receptors (eg cell surface adhesion molecules, ICAM, VCAM, E‐selectin) on human aortic endothelial cells (HAECs), while MSCs have limited to no effect.

Ischemic stroke occurs as a result of an obstruction in a blood vessel supplying blood to the brain. It accounts for approximately 87% of all stroke cases, estimated at over 2.2m cases in the US, EU and Japan, according to Datamonitor. In terms of prevalence, 6.6m (2.6% of the adult population) people in the US have had a stroke though the true number may be much higher year.4 In the REGARDS study of 18,462 persons, 17.8% of those >45 years of age reported having had symptoms of a stroke.5 Diabetes, cigarette smoking, prior atrial fibrillation and prior cardiovascular disease are key risk factors for stroke (see Exhibit 2). The mortality rate is estimated at 16-27% though certain regions seem to be more affected than others (Exhibit 3) and it is likely higher for more severe strokes. Also, a very high percentage of people have permanent disability post-stroke (eg 35-40%6 of elderly patients become dependent on other people to function) leading to significant physical, occupational and rehabilitative therapy costs. Acute treatment is currently limited to the use of thrombolytic agents, particularly tissue plasminogen activators (t-PAs), which need to be administered within three to four hours of the stroke. This restricts the use of t-PAs to just 5-8% of treatable patients.

Alteplase gained FDA approval in 1996 and subsequent attempts by multiple large pharma and biotech companies to develop new treatments for stroke have been unsuccessful. As such, stroke is widely regarded as a high-risk area of development.

There are quite a few measures that are used to judge the severity of stroke and the efficacy of therapy. Hence, to interpret the results of the MultiStem (or any) stroke trial, it is important to know what each of the different measures mean. One of the key measures of neurological impairment is the National Institutes of Health Stroke Scale (NIHSS), which has been shown to be a strong predictor of patient outcomes post-stroke (see Exhibit 4). It measures 11 items (eg level of consciousness/awareness, body movement issues) and the output is a score between 0-42 (higher integers signify a more severe stroke).

Another measure is the modified Rankin Scale (mRS), which is more of an overall disability score ranging from 0-6. It is not terribly sensitive and there are big differences between the different scores (see Exhibit 5), but it is used regularly in clinical trials to judge functional outcomes.

The Barthel Index is also a widely-used scale that judges the ability of patients to function in activities of daily living through questions on bowel/bladder control, grooming, feeding, bathing etc. In total, 10 items are scored with each item scored in five-point increments for a total potential score of 100, which signifies no disability at all (see Exhibit 6).

As the various scales measure different items, it is common in stroke trials to look at multiple scales to determine a therapy’s efficacy. Hence, in the trials run by Athersys for MultiStem in stroke, a 'global recovery' at day 90 was judged as occurring if the mRS was less than or equal to two, there was a greater than or equal to 75% improvement in the NIHSS and the Barthel Index was greater than or equal to 95. An 'excellent outcome' was judged to occur with a mRS of one or less, NIHSS of one or less and a Barthel Index of 95 or more – a very high hurdle requiring almost no disability or signs of stroke to be achieved.

The Phase II study with MultiStem in the semi-acute treatment of ischemic stroke (within the first 48 hours post-stroke) was a randomized, double-blind, placebo-controlled trial conducted mostly in the US (27 clinical sites), with some recruitment in the UK (six sites). After an initial safety/dose selection (400-1,200m cells) phase involving 16 patients, the main efficacy phase included 118 patients; the full evaluable patient population reached 126 after including eight patients from the first cohort; 65 patients received high-dose (1,200m cells) MultiStem IV infusion and 61 patients were given a placebo infusion instead.

In April, the company disclosed that the Phase II study failed to reach its primary endpoint, but that in patients who had been dosed with MultiStem within 36 hours of their stroke there were strong trends and statistical significance across a number of endpoints (as a reminder, the current standard of care, tPA, must be administered in a 3-4.5-hour window post-stroke, limiting its use to 5-8% of stroke patients). Originally, the inclusion criteria stipulated that only those who were treated within 36 hours of their stroke could be included and anyone who received both tPA and mechanical reperfusion therapy would be excluded. However, to accelerate enrolment (which was partially slowed as a result of hospital logistical issues, which we discuss later), Athersys allowed patients to be treated up to 48 hours post-stroke and allowed patients who received both tPA and mechanical reperfusion into the trial.

In its Q215 earnings release, Athersys provided additional data regarding MultiStem on an intent-to-treat basis, as well as a review of MultiStem’s efficacy with those patients who would have met the original inclusion criteria (see Exhibit 7).

On an intent-to-treat basis there was a 6.2% absolute improvement in the global recovery statistic after 90 days (20 out of 65 patients [30.8%] responded in the MultiStem arm vs 15 out of 61 in the placebo arm [24.6%]), expanding to 27.1% (12 out of 27 patients [44.4%] responded in the MultiStem arm vs nine out of 52 [17.3%] in the placebo arm with a significant p-value of p<0.01) in the analysis, which only includes those who qualified under the original inclusion criteria. This is important because the global recovery statistic requires good or excellent recovery in all three clinical rating scales: NIHSS, mRS and Barthel Index. Patients, clinicians and third-party payors want to see an improvement in all three rating scales. Secondary endpoints such as those with excellent outcomes and hospital days also went from a non-significant p-value to statistical significance.

In terms of pharmacoeconomic benefits (which will likely be used by the company to justify a premium price, if approved), a 35% decrease in the number of days in hospital and a 37.5% decrease in expensive intensive care unit hospitalization (1.8 days, p=0.09) is quite meaningful. It is also important to take into account the fact that a very high percentage of people have permanent disability post-stroke (eg 35-40%7 of elderly patients become dependent on other people to function) leading to significant physical, occupational and rehabilitative therapy costs. The estimated lifetime cost of a stroke is $226,0008 per patient with 692,000 Americans a year having an ischemic stroke, so any savings by improving functional outcomes add up quickly.

There are, of course, a few caveats. First, the numbers of patients involved is very small with a handful of patients essentially driving the results in a post-hoc analysis, especially in the global recovery and excellent outcome endpoints. Also, while the demographics for the trial as a whole appear to be balanced (see Exhibit 9), small differences in the subsets could affect the results. One additional point of NIHSS decreases the outcome of an excellent outcome by 17% at day 90.9

There is also the question of why the company changed the inclusion criteria in the first place. Enrollment was simply slower than expected, not because the patients could not be found or physicians did not want to enroll them, but because the product needed to be processed by bone marrow and cell processing units that were participating in the study. Typically, these are not open 24/7 like a hospital formulary and are more likely to have 9-5, Monday-to-Friday operation. The company was missing a very large number of patients simply because they were showing up too late in the day or at the weekend. To compensate for these missing patients, Athersys amended the inclusion criteria as noted above. Since then, the company has developed a process that is very simple, takes just a few minutes and can be handled by the hospital pharmacy, which operates at all hours. This will enable Athersys to start a new trial with criteria that includes only those treated within 36 hours of a stroke and excludes those who receive both tPA and mechanical reperfusion. We expect clarity on the future clinical development plan in the coming months.

If approved, MultiStem will revolutionize the treatment of stroke as the treatment window will be greatly expanded. It is extremely difficult for patients to arrive within the 3-4.5 hour window of tPA as first the stroke has to be noticed (which may be difficult for someone who has just had a stroke and is living at home alone), then the patient has to drive to the hospital, which may be a far drive if the patient is outside major cities. Based on registry data (see Exhibit 10), only between 25-36% of patients are admitted into the emergency department within three hours of a stroke. As hospital procedures are not instantaneous, these patients may still miss the window for tPA, as demonstrated by the fact that only about 5-8% of stroke patients actually receive the therapy. The situation changes drastically when looking at those patients who arrive in the hospital within 24 hours of a stroke as between 68-92% of patients are admitted by then. Also, the company estimates that >95% of stroke patients reach the hospital within 36 hours of the stroke. Hence, MultiStem has the potential to provide much needed therapy to a large group of stroke victims who currently have few or no options.

In October, Athersys announced that the agreement between the company and Chugai to develop and commercialize MultiStem in Japan had ended following the failure of negotiations to modify the financial terms of the agreement and to decide on a development strategy.

While terminating major pharmaceutical partnership agreements is generally not positive, this may be an exception as Athersys already has a letter of intent with another Japanese company to re-partner the product. In addition, this new potential partnership will likely be broader as it would encompass multiple areas, not just ischemic stroke, also making it potentially more lucrative. We have removed our forecast for a $7m milestone from Chugai this year but now expect a $10m upfront payment from a new Japanese partner in 2016.

Japan remains an important potential market as the Pharmaceutical and Medical Devices Agency’s (PMDA) new framework for the approval of regenerative medicine products may allow MultiStem to be approved in the country on an accelerated basis, with only a small Japanese development program required. JCR Pharmaceuticals received full approval in Japan in September for its mesenchymal stem-cell treatment (Temcell) for acute graft-versus-host disease on the basis of a 25-patient Japanese trial. Given the attractive safety profile for MultiStem as well as the efficacy signal we have seen, MultiStem seems like it could be a good candidate for accelerated development/approval in Japan.

We estimate that MultiStem will be able to achieve peak market share of 10% of those patients who are able to arrive at the hospital within 24 hours and costs $30,000 (up from $25,000 previously) in the US, $25,000 (up from $20,000) in Japan and $25,000 (up from $15,000) in the EU. The reason for the increase is that recently announced reimbursement in Japan for two cell-based therapies (the stem cell therapy for acute graft-versus-host disease called Temcell and a cell sheet therapy for severe heart disease) was extremely favorable, greater than $100,000 in both cases, indicating that reimbursement authorities are willing to pay a premium for truly innovative medicines. Also, the estimated lifetime cost of a stroke is $226,00010 per patient, so a premium price can be justified if MultiStem is able to show a significant decrease in disability.

In terms of timing, we believe a Phase IIb will be necessary for approval in the US and EU, so we are moving back our expected year of launch to 2021 in those regions as a 2020 launch would be quite aggressive. In Japan, we now expect launch in 2019 as the need to find a new partner has delayed MultiStem’s development in that region. Our US peak sales estimate is now $1.8bn and $533m in Japan, while our EU estimate is $1,298m ($3.6bn worldwide compared to $2.8bn previously, due mainly to the increased pricing assumptions).

According to the American Heart Association, 735,000 Americans have an acute myocardial infarction (AMI) every year. For patients suffering from AMI, generally referred to as a heart attack, percutaneous coronary intervention (PCI) is the treatment of choice if it can be performed in a timely manner. In PCI, a catheter is inserted through the femoral artery or radial artery and to the site of blockage, where a balloon device is inflated to open the artery, and a stent is often put in place to permanently open the artery. The administration of stem cells in the per-infarct period, after blood flow has been restored by PCI, has been studied for some time, although predominantly with autologous stem cells. However, the logistical and biological limitations of using autologous stem cells in this setting, coupled with the apparent sub-optimal delivery by intracoronary infusion down the infarct-related vessel (failure to penetrate the myocardium), suggests an off-the-shelf stem cell product and a more targeted delivery mechanism would hold potential.

Athersys conducted a Phase I study in 25 patients (19 treated with MultiStem in three dose groups – 20m, 50m and 100m cells – and six in a registry control group) with first-time ST-elevation-myocardial infraction (STEMI). All patients underwent PCI and MultiStem was administered two to five days after AMI. MultiStem was delivered using a microneedle catheter to inject the cells into the wall of the infarct-related vessel. The results showed that MultiStem was well tolerated, with no serious adverse events deemed relevant to the product. In terms of efficacy, the delivery of 50m cells resulted in significant improvements in heart function, as measured by increases in ejection fraction (EF) and left ventricular stroke volume, assessed after four months (see Exhibits 11 and 12, respectively).11

Needless to say, the Phase I data are very early and in a very small number of patients, and will have to be validated in a Phase II.

Athersys secured a $2.8m small business innovation research (SBIR) grant from the National Heart, Lung and Blood Institute of the National Institutes of Health (NIH), to support a Phase II study and is currently enrolling a 90-patient study. This study has two primary outcome measures: the incidence and severity of adverse events at the 30-day time point and an assessment of the effects of MultiStem therapy on cardiac function 120 days after treatment using cardiac MRI. There will also be secondary outcome endpoints that will measure both of the above metrics at 12 months and also assess the incidence of major adverse cardiovascular events (MACE) over the same period. The company has guided for data in the latter part of the year and we believe it will come in Q416.

We estimate that MultiStem will be able to achieve peak market share of 12.5% at a cost of $30,000 (up from $20,000) per treatment. We increased the pricing assumptions to bring them in line with the assumptions in stroke, which were raised due to extremely favorable reimbursement decisions for cell-based therapies in Japan. Our peak estimate is now $2.1bn, up from $1.4bn previously due to the increase in pricing.

Acute respiratory distress syndrome (ARDS) is a life-threatening condition characterized by widespread inflammation in the lungs and can be triggered by a number of conditions, including pneumonia, trauma and sepsis (see Exhibit 13). The inflammation affects the oxygen transfer to multiple organ systems and affects their ability to function. Incidence estimates vary widely as there is differing criteria to define ARDS, but it appears there are around 200,000-250,000 cases in the US.12 Around 40% of those with ARDS do not survive, though much of that mortality rate is due to the underlying illness and not the ARDS itself.

Athersys was awarded approximately £2m (~$3m) to conduct a Phase IIa trial to treat ARDS by Innovate UK and is currently preparing to launch the trial, which should occur shortly. ARDS will be an especially difficult indication as it has multiple causes and there is usually a serious underlying condition causing it.

We estimate 15% peak market share for the market and a $27,500 (up from $17,500) average price in the US and EU. Our pricing assumption is a blend of our new estimates for the US and EU in the stroke indication. We project $1.3bn in peak sales compared to $615 previously with a 2024 launch. The main reason for the rise is the increase in pricing, as well as our belief that the addressable population is likely to be higher than we previously thought, as MultiStem, if approved, will likely be given even to those with a very poor prognosis due to its relatively safe profile.

Athersys is subject to the risks typically associated with biotech company drug development, including the possibility of unfavorable outcomes in clinical trials and regulatory reviews, success of competitors and commercial decisions by partners or potential partners. While the MultiStem Phase II data in stroke had strong trends across multiple endpoints, it was still a relatively small trial where a handful of patients could have driven results, so this needs to be validated with further clinical study. The track record of R&D in stroke is extremely poor so this is a particularly high-risk indication, although MultiStem’s mechanism and dosing in a wider therapeutic window than conventional drugs could address prior challenges.

There was a small Phase I trial of Multi-Stem in AMI but otherwise there is little data to go on in this indication. ARDS will also likely be challenging as ARDS has multiple causes and patients often have severe underlying conditions that triggered the ARDS in the first place. Even if MultiStem does have efficacy in these patients it may be difficult to prove given the high mortality rate and heterogeneity of the patient population.

As losses are expected until 2020, there is likely to be a significant financing risk associated with Athersys. We currently believe it will need to raise additional capital around the middle of next year, barring a large upfront payment from a partnership. If it is unable to raise the necessary funds (we currently model a $20m raise in 2016), this could materially slow down the development of MultiStem.

We have increased our fair value to $340m (vs $256m) or $4.08 per share (vs $3.09) as we modestly increased our pricing assumptions due to extremely lucrative reimbursement decisions for recently approved cell-based products in Japan. This was somewhat mitigated by pushing back the expected launch dates for the stroke and AMI programs by a year. The bulk of the value of the company (~60%) comes from the stroke program, which could have peak sales of $3.6bn worldwide (which is higher than our previous estimate for $2.8bn due to higher pricing assumptions). Further data from the stroke trial as well as the potential for partnerships in the stroke program could help serve as catalysts for shares.

Athersys held $28.5m in cash at the end of Q315 and based on the current cash burn rate (~$6-7m per quarter) it faces a fresh financing requirement by mid-2016. We currently expect it to raise $20m in 2016 and $30m in 2017 ($150m total prior to profitability in 2020); however, these requirements may be lessened through partnerships for MultiStem in Japan and elsewhere. Currently we are showing this funding requirement as illustrative long-term debt in the model. If these become equity raises, there would be significant dilution, especially at current levels. Also, while we removed the Chugai milestone payment that had been expected in Q315, we have added a risk-adjusted $10m upfront payment for a new partner in Japan for 2016.