Athersys: An Undervalued Spec Company With High Potential

| About: Athersys, Inc. (ATHX)

Athersys, Inc. (ATHX) is a small cap biotech stock that has the potential for blockbuster returns. The company has a deep pipeline in multiple markets all that can potentially generate billions in sales. Pfizer (PFE) is currently a partner for one of these opportunities. Before I go into specifics regarding Athersys, Inc.'s potential, I briefly want to discuss it's valuation and capital burn rate.

Athersys, Inc.'s stock price decline in fourth quarter of 2012 was attributed to a stock offering. Since then the stock price has been steady and is now starting to trend upward. At the current price, the company's market cap is approximately $60M with $30M in cash. The company's burn rate is approximately $4M per quarter so the current cash position should be sufficient for two more years. With a $60M market cap and $30M in cash, Athersys, Inc.'s pipeline is valued at the remaining $30M. So why is Athersys an undervalued spec company with high potential?

First and foremost, Athersys has a $111M deal with Pfizer. At the end of 2009, the Pfizer partnership for ulcerative colitis with the use of Athersys' multi-stem platform caused Athersys stock to run from $1 to $5. Phase 2 data is forthcoming mid 2013 and this should draw a lot of attention to this stock. This Phase II data is critical because, if positive, it will validate the extreme potential of the medicine in areas that are difficult to treat. This is especially true since the multi-stem therapy can potentially be used on a variety of other platforms. However, negative results can be equally as devastating for the company. Ulcerative colitis treatment has the potential to generate billions since Irritable Bowel Disease (IBD) affects 2.4 million people in the U.S., Europe and Japan which explains the large deal with Pfizer.

Second, Athersys has a partnership with RTI Biologics, Inc. (RTIX) for a bone allograft system. It is expected that RTI Biologics will start generating revenues for Athersys this year. One would expect to hear news about the progress of this partnership and the revenue generation relatively soon.

Third, Athersys has an ongoing Phase II study for ischemic stroke via their multi-stem platform. Ischemic stroke is very difficult to treat because of the limited timeframe to institute treatment. Currently the only FDA approved drug for ischemic stroke is tPA which helps dissolve the blood clot that impedes blood flow to the brain. tPA, however, is only effective if administered within 3-4 hours of the stroke. Athersys Phase II study is evaluating the effectiveness of their medicine in the 24-36 hours following the stroke. This is another billion dollar industry with 2M people suffering from stroke annually in the U.S., Europe and Japan. Results from this study are expected within the next 12 months.

Fourth, Athersys has an interesting compound in their pipeline that is a 5HT2c receptor. This receptor is key for assisting the brain in regulating appetite and food intake that is effective for the treatment of obesity and diabetes. The market places high valuation on weight loss drugs as we have seen with Vivus, Inc. (NASDAQ:VVUS), Orexigen Therapeutics, Inc. (NASDAQ:OREX) and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). What is unique about the 5HT2c compound is that it can treat patients as a single mode of therapy or in conjunction with recently approved therapies from the aforementioned companies. Athersys has publicly stated during a quarterly conference call they are looking to potentially partner this compound.

Fifth, Athersys was granted orphan drug status for Hematopoietic Stem Cell Transplant / GvHD in April 2012. Phase I was completed in early 2012 for patients suffering from leukemia and other blood-borne cancers. In the highest single dose group "no cases of severe GVHD were observed and there was only one moderate grade (grade 2) that resolved with treatment." There is a huge unmet clinical need for this platform and results, to date, have been extremely favorable.

Sixth, Athersys was partnered with Angiotech Pharmaceuticals to co-develop multi-stem for acute myocardial infarction. The Phase I study was promising, however, Angiotech fell on hard times financially so Athersys recovered all rights. The FDA has already approved their Phase II study, however, Athersys is deciding whether to advance this study alone or partner it.

Lastly, if the aforesaid wasn't enough, the multi-stem platform has the potential to treat other neurological disorders and injuries such as traumatic brain injuries, spinal cord injury and multiple sclerosis. Other treatment platforms for multistem include congestive heart failure, peripheral vascular disease, peripheral artery disease, and critical limb ischemia. Athersys also received orphan drug status for Hurler's Syndrome.

Athersys has a "Company Overview" and "Corporate Fact Sheet" that further details each of their programs.

All biotech companies carry with it a risk/reward relationship. Athersys is one of those small cap companiesthat carry with it a high risk while their platform is being tested, however, it also carries with it a high reward if they are successful. With only 50M shares in the float, a $5 stock price would only give Athersys a $250M market cap for a company investigating at least 8 market opportunities each of which are worth billions.

Disclosure: I am long ATHX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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