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Athersys, Inc. (NASDAQ:ATHX)

Q3 2008 Earnings Call

November 10, 2008 4:30 pm ET

Executives

Lisa Wilson - IR, In-Site Communications

Gil Van Bokkelen - Chairman and CEO

B.J. Lehmann - President and CFO

Analysts

Adam Cutler - Canaccord Adams

Matt Osborne - Lazard

Craig Gordon - Cowen and Company

Operator

Good afternoon. My name is Ken and I will be your conference operator today. At this time, I would like to welcome everyone to the Athersys Q3 2008 financial results earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions).

And now I would like to turn the call over to Ms. Lisa Wilson. Ma'am, go ahead.

Lisa Wilson

Thank you, and good afternoon, everyone. I am Lisa Wilson of In-Site Communications, Investor Relations for Athersys. Thank you for joining today's call. You should have a copy of the press release issued at the close of market. If you have not received it, please call, Libby Abelt at 212-759-5665 and it will be sent to you immediately.

Gil Van Bokkelen, Chairman and Chief Executive Officer and B.J. Lehmann, President and Chief Operating Officer of Athersys will host today's call. The call is expected to last about 45 minutes and maybe accessed through the company's website at athersys.com. A replay will be available after this call's completion by dialing 800-642-1687 in the US and Canada and 706-645-9291 from abroad and entering access code 68456292.

Any remarks that Athersys may make about forward expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's Form 10-Q, 10-K and other public SEC filings. Athersys anticipates the subsequent events and developments may cause its outlook to change, while the company may like to update these forward-looking statements at some point in the future the company specifically disclaims any obligation to do so.

With that I would like to turn the call over to B.J. Lehmann. B.J.?

B.J. Lehmann

Thanks, Lisa. Good afternoon and welcome to the Athersys third quarter 2008 Earnings Call. I am B.J. Lehmann, President and Chief Operating Officer at Athersys. I will review our financial results for the quarter ended September 30, 2008, and then I will turn it over to Gil Van Bokkelen for a corporate update.

In the third quarter of 2008, revenues increased to $1.3 million compared to $860,000 for the same period in 2007. Our revenues are comprised of license fee and grant revenue. Our license fee revenue increased by $385,000 in the third quarter 2008, compared to the same period 2007 as a result of activity related to our collaboration agreement with Bristol-Myers Squibb. Grant revenue also increased $33,000 in the same period due to the timing of reimbursable expenditures under our grant programs.

Our research and developmental expenses for the third quarter of 2008 increased to $4.7 million from $4.2 million for the same period last year. This $0.5 million increase results primarily from an increase in clinical and preclinical cost related to preparation for a Phase II clinical trial of ATHX-105 and two Phase I clinical trials in MultiStem for Acute Myocardial Infarction and graft versus host disease.

Our clinical expenses for the third quarter are reflected net of the cost sharing amount of $243,000 from Angiotech Pharmaceuticals related to our MultiStem AMI collaboration. There were also increases in patent legal cost, and decreases in other expenses for the third quarter of 2008, as compared to 2007.

General and administrative expenses decreased $1.2 million in the third quarter of 2008 compared to $2.1 million in the third quarter of 2007, primarily as a result of reductions in legal and professional fees and in other cost associated with being a public company.

Net interest income decreased to $232,000 in the third quarter of 2008 compared to $600,000 in the third quarter of 2007 due to declining interest rates and lower cash balances, and we expect interest income to continue to decline over the reminder of the year.

Other income for the third quarter of 2007 included $500,000 as the final payment on the sale of non-core asset in 2007, which is the reason for the variance compared to the same period in 2008. Overall, our net loss was $4.5 million in the third quarter of 2008 compared to $4.4 million in the third quarter of 2007.

In terms of operating capital, at September 30, 2008, we had $34.7 million in cash, cash equivalents and available-for-sale securities, which puts us in a good position to meaningfully advance our development activities. This capital position represents the $1.83 per share in cash, cash equivalents and available-for-sale securities.

Now, I would like to turn the call over to Gil.

Gil Van Bokkelen

Thanks, B.J. Good afternoon everyone and thank you for joining our call today. We all know the capital market can be volatile especially when there is a lot of macroeconomic and financial uncertainty or geopolitical instability. Recent events are having a far reaching impact on the financial markets and our economy. In addition to the effects on the financial services industry, they will undoubtedly have a lasting effect on the healthcare industry and will also impact many biotechnology and biopharmaceutical companies.

Despite the current market uncertainty, the team here Athersys remain highly focused on advancing our portfolio of key programs. We have dealt with adversity before, and I am confident that we have a strong committed, resilient organization that will effectively deal with the challenges and take advantage of the opportunities that lie ahead. But we cannot control macroeconomic conditions, financial market fluctuations, political events or other things that occur outside the company. We can’t maintain our focus, execute against our plan and adjust our tactics and strategy as circumstance dictate. That is precisely what we intend to do.

Since our transition to becoming a public company in 2007, our internal focus has been on advancing key programs into clinical development, achieving additional validation in key preclinical programs and maintaining our operational and financial efficiency. Particularly in the current market environment, in order to protect shareholder value, we believe that maintaining financial and operational efficiency is key and is something, we are committed to.

In our view, the evidence of that commitment is our advancement of three programs into the clinic in the areas of obesity, cancer treatment support for leukemia and lymphoma patients and cardiovascular disease. We have accomplished this while maintaining a modest spend rate or cash burn relative to many of our peers.

In addition, we have made important progress in key preclinical programs in areas like ischemic stroke and our H3 antagonist program. This program has potential clinical relevance in a number of areas, such as enhancing cognition in various conditions, promoting wakefulness and indication such as excess of daytime sleepiness, narcolepsy and potentially other areas.

Our study progress is not been without some unexpected obstacles however. Earlier this year, we announced positive Phase I clinical trial results and moved ahead with an IND and proposed Phase II clinical plan, submitted to the FDA this summer. Subsequent to that, the FDA conveyed some specific comments and suggestions, placing the program on a partial clinical hold, while requesting some additional data and information. Since then, we worked hard to be fully responses to the FDA’s request. We prepared a draft response and submitted it for FDA review, requesting in expedited meeting with the agency to discuss their comments and concerns. The FDA granted our request and late last week we have that meeting.

During the meeting, we obtain feedback from the agency and based on that information, we intend to prepare and submit the formal response addressing our partial clinical hold in the next several weeks. Our recent interactions with the FDA regarding ATHX-105 have been collegial and productive and we are confident a favorable resolution in several of the outstanding questions and issues raised in the partial hold (inaudible).

However, we believe while continued development of ATHX-105 maybe possible, certain risks identified in our recent discussions with the FDA, suggest that ultimate success could be difficult and importantly could have a substantial impact on our ability to complete an attractive development and commercialization partnership. This in turn would make it difficult for us to support the continued development of ATHX-105.

We are continuing to work with outside experts, further evaluate recently obtained data, information and guidance from the FDA as well as one (inaudible) some additional analysis. We intend to submit our formal response to the FDA in the next few weeks and hope to get feedback from the FDA by yearend to determine if further development will be possible and warranted.

We believe that the FDA may request additional information and/or studies to the condition to lifting a partial clinical hold. If so, we will evaluate the cost and benefits of conducting such studies in light of these changes to the development profile for ATHX-105. Based on the FDA response and our assessment of available information, we may decide to amend, delay, suspend or terminate the further developments of ATHX-105. Rest assured that as we continue our efforts and engage in further communication with the agency. We will update our shareholders and the market as appropriate.

In addition, we will continue to provide updates on our other clinical and preclinical programs, such as those involving our propriety stem cell product MultiStem. The practice of stem cell therapy has historically included, the requirement for close tissue matching between donor and recipient, a frequent need for immunosuppressive drugs even with such tissue matching and lack of ability to expand stem cells in a meaningful way, once isolated from the human body.

These limitations create the need for a donor for every recipient and are inconsistent with production and administration of well characterized product. In addition, a range of safety considerations, including rejection risk, the occurrence of graft versus host disease. The risk of ectopic issue and teratoma or tumor formation have prevented stem cell medicine from achieving its true potential.

However, based on the extensive research we and our collaborators have conducted over the past six years. We are optimistic, that MultiStem has the potential to address each of these limitations, representing a profound step forward in stem cell medicine. We believe, that we will be able to demonstrate, the safety and efficacy of MultiStem across a range of clinical indications.

As we described previously, we have two ongoing Phase 1 clinical trials involving the administration of MultiStem. In the first of these MultiStem is administered to patients that have suffered an acute myocardial infarction or heart attack.

In preclinical studies, working with independent investigators, the institutions like the Cleveland Clinic, we have demonstrated that MultiStem is safe and provide a substantial therapeutic benefit. Additionally and importantly it can be administered off-the-shelf without requiring tissue matching or immunosuppressive drugs.

Recently Dr. Marc Penn, one of the key clinical investigators involved in the Phase 1 study presented data at the annual Transvascular Cardiovascular Therapeutics conference in Washington DC. During his presentation Dr. Penn described administration of MultiStem to the first patient for acute myocardial infarction demonstrating that the product was safely and efficiently administered was well tolerated and there were no adverse events observed.

Since treatment of this first patient additional patients have been added to the study and we are also adding clinical sites. Simultaneously, we have had made progress in another Phase 1 study involving administration of MultiStem to leukemia and lymphoma patients receiving bone marrow or hematopoietic stem cell transplants.

Prior preclinical studies conducted with independent experts in the field have shown that MultiStem is safe and delivers a substantial therapeutic benefit in models of graft versus host disease or GvHD a frequent and serious complication in these types of cancer patients.

In preclinical studies, MultiStem substantially improves survival and overall health of the animals experiencing GvHD. Recently we administered MultiStem to the first patient in the study with no apparent complications. All patients that will be enrolled in the study will undergo safety monitoring for 30 days following treatment. We expect the enrollment of addition patient soon and like the AMI study, we are adding additional sites to expand the patient. Although, we are in the early stages of clinical development for MultiStem, we believe that we will able to demonstrate that it is safe and effective product with potential application across the range of disease areas.

In addition to the current clinical studies that I just discussed, we have conducted extensive preclinical work in other disease models in indication areas, including certain neurological applications such as ischemic stroke. Based on this work, we intend to seek FDA authorization for a Phase I study in this area and hope to announce authorization of an IND for this study later this quarter.

Our continued progress in the development of MultiStem has not gone unnoticed. A few days ago, we were honored to be selected by Frost & Sullivan as the recipient of the product innovation of the year award for MultiStem. An independent team of research analysts surveyed the stuck from a technologies and products and the stem cell and with generative medicine field and selected MultiStem as best in class.

We are proud of this recognition, but ultimately it will be our ability to demonstrate the safety and effectiveness of MultiStem in clinical trials that will drive substantial value creation. We are encouraged by recent significant partnerships in the stem cell area and signs of growing interest among larger biotech and pharmaceutical companies. We are optimistic that as we continue to advance the MultiStem platform, we will add new partners with the appropriate therapeutic focus and resources to enable us to advance additional specific programs with this important product candidate.

With that, we would like to open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instruction) All right, first up is Adam Cutler from Canaccord Adams. Your line is open, sir.

Adam Cutler - Canaccord Adams

Hi. Thanks for taking my question. Just wondering if we can get a little bit more detail on the ATHX-105 update is specifically, you noted certain risks that changed your outlook I suppose on the program. I’m wondering if you can elaborate on those risks and are these risks, is the FDA feedback related to ATHX-105 specifically, are there potential opportunities for any backup compounds or is it something related to the mechanism. Wondering if you can just give us a little bit more color there.

Gil Van Bokkelen

Sure. So, let me give you kind of a couple of brief responses to that. The first is that, we think (Audio Gap) the issues are specific ATHX-105 and it does to the general class of 5HT2c agonist. We very much likely to give additional information on the issues and question here, but we are currently engaged in a process that is ongoing with the FDA and also involves work with outside experts and consultants.

So, today we are not going to go into additional detail basically about the specific nature of the issues. But we will at some point in the future, once we've got more feedback from the FDA and we got a little further down the path. At this time, this is very much an ongoing process and we want to be respectful and cognizant into the fact that we are still engaged in this process with the FDA.

Regarding backup compounds, we do have a portfolio backup compounds that we are very interested in. We work hard to establish backups and as we've talked about previously, the 5HT2c receptor is one of the receptors that we are focused on the obesity area, but we have other things in our obesity portfolio, that we are also interested in as well.

Adam Cutler - Canaccord Adams

So, how confident are you that the same issues won't arise with the backup compounds? How close do you think, you maybe to putting a backup compound in to the clinic assuming that, that still fits with your strategic plan?

Gil Van Bokkelen

Well, I’m not going to comment on that. But I will say that with respect to whether or not this issue would pertain to a backup compound. Obviously, we would take into our evaluation process, all of the things we've learned in our development efforts with ATHX-105 to make sure that, if we ran into a similar issue with another compound, we would have avoided and focus our efforts on other opportunities.

Adam Cutler - Canaccord Adams

And then just--

Gil Van Bokkelen

And just to be clear. I think that's very possible.

Adam Cutler - Canaccord Adams

Okay. And then just one last question on this is, when we will get an update on the status of 105 then and final decision on whether or not to advance or whether it is worth pursuing partnership discussions for 105 that sort of thing?

Gil Van Bokkelen

Our hope is that, we are going to get additional feedback from the FDA as I mentioned we intend to file our formal response in the next several weeks, hear back from them before the end of the year. And I think once we hear back from them, that is when we would propose to actually have another update call and let everybody know what's going on. So, we will let you know, as soon as, frankly we had a couple of choices, I mean we just had the meeting with them at the end of last week.

And so we were trying to provide real-time update just given the magnitude of this, to let people know as soon as possible that there is some things we are facing here and trying work through with the agency. But we also recognize that we need to and will an appropriate time provide a more thorough explanation exactly what’s going on and how it impacts what we intend to do as we move ahead.

Adam Cutler - Canaccord Adams

Okay. Thanks a lot.

Gil Van Bokkelen

Yes.

Operator

Your next question comes from Matt Osborne from Lazard. Your line is open, sir.

Matt Osborne - Lazard

Yes, thanks for the question. Can you just focus on ATHX-105 with a more of question or signal that you or the FDA persistence with the FDA either pre-clinically or in the Phase 1 trials that really sets up the challenge for you going forward.

Gil Van Bokkelen

It was a non-clinical issue and I think everybody here recognizes that the FDA especially over the last couple of years has, they are being very cautious and safety oriented. I mean obviously that the key part of their mission, but I think that there is an obvious conservatism if you will.

We ourselves, we hold ourselves a very high standard with respect to anything that we look to advance into the clinic or even advance beyond that. And so I think the dialogue that we have engaged in with the FDA, as I indicated in my comments has been very productive and very collegial, I mean basically we look after the same thing.

As we have talked about previously, we are committed to developing best in class therapeutic products and best in class in our view relates to both safety and efficacy. So, I think that we feel like we’ve learned a lot in a dialogue with the FDA and I think we’re going to continue to learn some things as we move ahead. But again, the issues are really relevant specifically to ATHX-105.

Matt Osborne - Lazard

Okay. And can you remind us at what stage were you with the preclinical studies in the [toxs] related three to six months out or did you begin the two year studies or what’s required pre-clinically and where were you?

Gil Van Bokkelen

Well, we have had not begun the two year studies yet, and we’ve conducted a range of preclinical or non-clinical tox studies. In our dialogue with the FDA, they actually asked us to do some stuff that we had done previously, under slightly different conditions, which we did reconfirmed, what we seen previously in terms of the safety or tox profile or the compound, but they also suggested that we do some additional things that we did for the first time and these are relatively specific with good suggestions on the part of the FDA and we followed up on what they asked us to do and is that information basically has come to bear.

Matt Osborne - Lazard

Okay. So, I’m just questioning why would this present a challenge to potential partner even at this early stage?

Gil Van Bokkelen

Yes, I think, again, we don’t really want to get into the detail from the specifics basically of what’s been done or what the rational for is. Rational is just yet, because we want to complete the process with the FDA and our outside experts and consultants in the additional analysis that we’re doing. That when we get to the point, where this has been result one way or the other then we will let you know.

Matt Osborne - Lazard

Okay. Thank you.

Gil Van Bokkelen

Yes.

Operator

(Operator Instructions) And your question comes from Craig Gordon from Cowen and Company.

Craig Gordon - Cowen and Company

Hi, good evening. A couple of questions, assuming here by yearend ‘08 and you need to revise your development plan for 105. I assume you have no time line right now is to how long that revision would take before you can get to the Phase II often running. Is that fair?

Gil Van Bokkelen

Yes, we don’t have a time line, because it’s going to obviously depend very much on what the nature of the ongoing discussion with the FDA produces.

Craig Gordon - Cowen and Company

And so with your cash, how long do you anticipate that last you and I guess is that all cash and equivalents in cash I assume is not invested any type of high risk asset.

Gil Van Bokkelen

We didn't move our money into the mortgage, the mortgage-backed debt securities. No, we've actually got a very, very conservatively constructed portfolio, which we are; our confident is very well protected and very safe. So, it does consist of cash, cash equivalents and things that available-for-sale securities that we are very confident.

With respect to how long our current capital would last is obviously that the function of our development efforts across couple of different dimensions. We had previously said that, were we to launch the Phase II study around ATHX-105 that our current capital we are assuming we didn't do anything else no new partnerships or other transactions would that capital would last in the mid 2010.

Obviously, if we are not going to move forward with development of ATHX-105 and a Phase II clinical study that would extend our runway somewhat. And, but I think that, it really is going to be a function of how we move forward with respect to some of the other clinical programs and some of the other activities that we can envision pursuing. We've actually got a Board Meeting coming up just in a few days here and obviously this is going to be a topic of discussion with our Board as we look our range at different things. So, want to get for our head of ourselves here, but I do think that as B.J. indicated, we do have a meaningful cash position right now that we think will allow us to hit some milestones and value adding milestones in our various programs.

Craig Gordon - Cowen and Company

And when you anticipate, I guess, next data from the Phase I MultiStem is that you think you'll have, would you anticipate an update on the effects on is the safety side in mid '09 or you have no timeliness for that, yet?

Gil Van Bokkelen

No. Actually, we are talking with MultiStem?

Craig Gordon - Cowen and Company

Correct.

Gil Van Bokkelen

Yes. With MultiStem both of these initial Phase I study are open label study. So, we have the ability to provide intermittent update as we go and which is, people like Dr. Penn could provide data on the first patient treated and speak to the safety and tolerability of it and efficiency of delivery. So, we will actually have the ability to talk about specific cohorts that are involved in the study, as we complete them and provide and update along the way.

Craig Gordon - Cowen and Company

And what about the H3 antagonist preclinical program, is that going to be progressive, where you can vision next year filing an IND or what's the inside into that program?

Gil Van Bokkelen

Well, I want to focus on next milestone around that, which is actually selection of a clinical candidate and that's something that we've indicated, we expect to do this quarter. We actually have a number of studies that are ongoing right now and we are cautiously optimistic that we will able to select the clinical candidate this quarter and then let everybody know, when we've done that. From that point, I think we will be able provide more visibility about what's going to happen beyond that.

Craig Gordon - Cowen and Company

Okay, great. Thank you.

Operator

(Operator Instructions) And currently the queue is closed, sir.

Gil Van Bokkelen

I'm sorry because there is no more questions in the queue?

Operator

No, sir and I will turn it back to you for any closing remarks, sir.

Gil Van Bokkelen

Well, once again I would like to thank everybody for your participation in the call today and for your continued commitment to follow the company. We are realizing that this is kind of an unusual time and we are facing some difficult circumstances here. But I want just to reiterate that we are excited about the programs and the portfolio things that we are advancing and we look forward to updating you as we have the opportunity to do so. Thanks very much.

Operator

This now concludes your Athersys Q3 2008 financial results earnings call. You may now disconnect.

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