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As a follow up to my latest article on Athersys (NASDAQ:ATHX), "A Significantly Undervalued Stem Cell Company Approaching Key Catalysts," here is a candid interview between Blackbird Analytics Founder (Sam) and Athersys CEO Gil Van Bokkelen. This interview goes into great detail about the commercial prospects and scientific approach the company has taken since its inception in 1995.

Sam: Gil, thanks for taking the time to speak with me today.

Gil: Absolutely.

Sam: Let's begin with your background: Stanford, PhD in Genetics, double major in Economics, Molecular Biology. You sound like a whiz kid, are you?

Gil: I've never really thought of myself like that. Personally, I think what I did when I was at Cal and then later at Stanford was really for me just a reflection of the fact that I am really passionate about business, medicine, and technology. I chose to pursue a path that was reflective of those interests, but I've certainly never thought of myself as a whiz kid, by any stretch. In fact, my philosophy has been to find people that are incredibly smart, and very passionate about we are doing, and make them part of the Athersys team.

Sam: What made you decide in 1995 that you wanted to form a company, as opposed to pursuing an academic career or doing the corporate gig?

Gil: Early in my career, I was interested in becoming a pediatrician or specializing in pediatric medicine. When I was at Stanford, I had the opportunity to see a young boy that was afflicted with a rare orphan genetic disorder called Lesch-Nyhan syndrome. For people that are unfamiliar with Lesch-Nyhan syndrome, it's a very debilitating neurological disease that traditional clinical medicine or current interventional approaches just don't have an answer for. Whether you're a parent or a child with this kind of condition, which is incurable and lifelong, it's a tragedy. I thought about how frustrating it would be as a physician to have to tell people for these types of situations, "I'm sorry, but there's nothing we can do to help you." That would be intensely frustrating, but I also knew it simply reflects the current limitations of medical technology -- and that is something that can be changed.

As I thought about that and many other conditions that I was studying in the course of my time at Stanford, I realized that I wanted to focus my career on developing solutions to the serious unmet medical needs in clinical medicine as opposed to providing care that is limited by the current technology or current approaches to clinical medicine. My decision, quite honestly, was a reflection of wanting to combine my passion for business, for medicine, and for technology to develop solutions for serious, unmet medical needs. I was fortunate enough to have a group of peers -- colleagues, friends, and faculty members--that thought about the world in much the same way, and I was able to persuade them to join together to form a company that was focused on doing just exactly that.

Sam: It sounds like you have done that, Gil. Give our readers a little perspective on the company name. What is Athersys? What does it stand for? How did you pick the name?

Gil: Athersys actually stands for Advanced Therapeutic Systems. When we were thinking about a name for the company, we wanted it to reflect as much a core philosophy as anything else. The name Athersys was just kind of a shortened version ... it actually turns out that the name Advance Therapeutic Systems was already registered to a small holding company. Since we couldn't use that name, we decided to go with the contraction, that being Athersys.

The group of us that decided to form the company made a decision that we didn't really want to be constrained to only one particular product type or therapeutic modality, although early on we focused on gene therapy. We wanted the company to be about developing innovative solutions using technologies that could make big steps forward in terms of treatment. We wanted the name to reflect that. Advanced Therapeutic Systems is really meant to reflect just that, a significant jump forward in terms of innovative ways to treat serious, unmet medical needs.

Sam: You have quite a Stanford fraternity here. Tell us more about them, how did you find Ohio from Stanford? It seems like a curious choice to me even though I live here and love Ohio.

Gil: Yes. It's interesting that we have so many people that came out of Stanford, and that we ended up here in Ohio. In full disclosure, when we -- John Harrington and I -- first came out to Ohio from California, our intention really wasn't to stay here. The thing that brought us and the other founding members of the team out here was there was a faculty member that had been at Stanford, Dr. Hunt Willard. I had the opportunity to work with Hunt when he was there, before he had been recruited by Case Western Reserve University here in Cleveland to become the chairman of the Genetics department. Back in 1994, when I came to Ohio to visit Hunt, I mentioned starting a company, and he encouraged us to do the early technology development here in collaboration with his team at Case. We intended to be here just for the early stage. In fact, I left my wife behind in California; she was still out in the Bay Area. We planned to be here in Ohio for maybe six months or a year. Then we were going to go back to California where a big part of the biotechnology industry resides.

As it turns out, once we got out here, we realized Ohio is a pretty good place to be. The institutions here in town, the Cleveland Clinic, Case Western Reserve University, and others said, "We'd really like you guys to consider building your company right here in North East Ohio." They were actually making tangible investments in creating a new incubator facility and other things. They were giving us access to the core facilities at the Clinic and at Case. We very quickly realized that we were getting special treatment, which was great, and that was reflective of a regional interest in trying to promote the biotechnology industry. We were kind of being treated like royalty. We decided, "You know what, this is a good place to start the company." Then we decided this is a great place to grow the company. We've been here ever since.

Sam: Let's specifically focus on the properties of your cell, MultiStem, and what makes it unique, say, compared to IPS Cell. What makes it unique based on pre-clinical data?

Gil: Early on, the characteristics of the cell type we are working with excited us. These cells differ from most other stem cells in several important ways. For example, most cells, when isolated from the human body, can't grow or be expanded to any substantial degree. This is a problem. For example, for a bone marrow transplant patient, you isolate the cells from one healthy consenting matched donor in order to treat a single patient. You can't really take those cells out of the donor and then expand them up to any substantial degree, so, for every leukemia patient that needs a transplant; you have to find one carefully matched donor - a one patient, one donor type of paradigm. That's primarily because you can't grow the cells out to any meaningful degree. However, Dr. Catherine [Verfaillie] had already shown that these stem cells had unique growth properties, meaning that once they've been isolated from the healthy donor source that they could be expanded upon by an enormous degree.

In fact, we've gone on to show that we can take cells from an individual healthy donor and produce banks that have the potential to yield the equivalent of millions of clinical doses of MultiStem from a single donor source. We also see very high consistency across the donors that we isolate material from - about 70 to 80%, which is far greater than other cell types. Scalability, which I believe is going to be critical to unleashing the potential of stem cell medicine at the end of the day, is a key characteristic of this technology. The fact that these cells have very robust growth properties made them unlike anything else that we had seen.

Another key characteristic is the fact that these cells could be administered like type O blood. You don't have to tissue match. You don't have to immunosuppress the patients that you administer them to; that's in stark contrast to the current standard of care in traditional bone marrow transplantation where you have to very carefully match the donor to the patient that's being treated.

The other interesting thing about these cells was that they appeared to be able to form a range of different cell types. We subsequently learned that these cells could actually promote healing and tissue repair through a range of different mechanisms. Now, these cells are not doing something that we thought early on they might do, which is permanently engraft and directly replace a lot of the damaged or injured tissue in various disease or injury models. What we did find was these cells are very adept at promoting repair, and, in fact, they are kind of naturally wired to home to sites of tissue damage or injury or inflammation or where there is disease, for example. When they get there, they express a range of different factors that promote healing and tissue repair in some very powerful ways.

The other thing that we saw about these cells after years of very careful pre-clinical work and subsequent clinical studies is that they have a very consistent safety profile. We can administer these cells; they are only around for a finite period of time. They're cleared from the body over time.

Now, with IPS cells and with embryonic stem cells, the objective historically has been a little bit different. You're trying to take those cells and convert them into a specific cell type or tissue prior to putting them into the patient. In fact, you have to do that, since administering them in their undifferentiated state might leave a risk that they might form teratomas or ectopic tissue. Those are risk factors that you really want to avoid. What people are focused on with Embryonic stem cells and IPS cells is turning them into some more specialized tissue type, whether it's nerve cells, or muscle cells, or some other cell type so that you could then use that as a replacement strategy for nerve cells that have been lost or muscle cells that have been lost, in a variety of different injury or disease-type situations.

So the objectives are a little bit different. On the one hand, with ESC's or IPS cells it's kind of a replacement strategy. On the other hand, with MultiStem and other cell types it's kind of a repair strategy or enhancing healing without directly permanently replacing. I'd say it's just different goals, different objectives, different safety profile issues, and different technical complexities. We have some similarities in some respects, in the terms of powerful forms of cell-therapy that can enhance healing in multiple different ways, but we also have some key differences.

Sam: Gil, I speak to a lot of very bearish professional traders who play primarily in the biotech space and their immediate reaction to the word stem cell is "toxicity," "years behind development" -- but that's just not true in your case. In both your partnership with Pfizer, with IBD, and with your Stroke program, your safety profile is phenomenal and you're going for the highest possible dose with no safety issues. Am I overplaying this?

Gil: No, I don't think so. We've actually got data from four different clinical studies that we've either completed or are running, and as you correctly pointed out, we just recently announced that we've completed the first couple of dosing groups in our Stroke clinical trial. Even when we dose at very high dose levels in that study, we see a clean and consistent safety profile, which reflects what we've seen in other studies that we've run.

Now, I think the toxicity comment is perhaps born from years of experience where people have done traditional hematopoietic stem cell transplants where you absolutely must have a matched donor when you want to treat a particular patient, and even with that you run the risk of some serious issues. Even with matching many patients will experience Graft-versus-host disease, which is where you'll get some immune cells that are going along for the ride as part of the transplant procedure. Then these immune cells will exert a very toxic and damaging effect on the patient that is being treated through an aggressive, inflammatory activity that can impact multiple organ systems, and that can even be lethal. Well, our cells are very different and they have different immunological profiles, so we don't see that kind of toxicity.

In fact, we actually have completed a clinical trial where we're using MultiStem to prevent or reduce the incidence and severity of Graft-versus-host disease. Not only does it not cause that type of condition; we actually think it can be a treatment for preventing GVHD. Certainly in our case, as I said, we're very proud of the safety profile that we've generated from multiple different clinical studies that are already completed or ongoing.

Sam: Gil, that's fantastic. Now for the second part of the bear: Ultra bears don't care about stem cells in general. They say that stem cell technology is years behind any commercial potential. That is not true in your case, because if you get some good data from Pfizer to take it into another indication such as Crohn's disease or Stroke data next year, the value creation is less than 18 months of wait for you. Am I wrong?

Gil: I think you're exactly right. I think that there's another point, which is that many people out there don't recognize that there are a growing number of cell therapy based products that are already on the market today and that are being used clinically and commercially. In fact, as was recently noted in San Francisco during the annual Biotech Showcase, cell therapy products are already generating close to a billion dollars in annual revenue, and that figure has been increasing rapidly over the past several years.

In fact, this is why more and more of the bigger companies are actually starting to pay attention to the sector. Pfizer, Shire, Johnson & Johnson, Roche, and quite a few other companies have started to make strategic bets in the area because they recognize that this is an area that may actually transform medicine in a lot of different ways. Now, in our case, we think that the biggest things that are actually going to drive our value creation potential going forward are on the clinical side, our data from robustly designed, well powered, adequately constructed phase two clinical trials that we're running. In some cases, we're doing it on our own, as we're doing with our current phase two trial and treating Ischemic stroke patients. In other cases, we're doing it with a partner, like our clinical trial with Pfizer, which we expect to have results on sometime in the latter half of this year, for treating patients that are suffering from treatment-refractory, inflammatory bowel disease or ulcerative colitis, in this case. So, I think that we're making good steady headway. I think the field in general is making good steady headway. Over the past couple of years I have had the opportunity to see a lot of this progress when I had the privilege of serving as chairman of the Alliance for Regenerative Medicine.

Sam: Tell us more about your off-the-shelf concept and the fact that you are just like a drug pharmaceutical company that could produce medicine on a large scale. Your margins will only get better with scale, right?

Gil: That's right. There are a number of different approaches that people are taking. Many are using an autologous approach, where you're taking a patient's own cells, processing them or expanding them somehow, and then putting them back into the patient at a later point in time. That's really more of a service type model. Frankly, it's not something that the bigger pharmaceutical companies or the bigger biotech companies are particularly comfortable with. In our conversations with the larger pharmaceutical and biotech companies, they are more focused on a product-based cell therapy model, which is more analogous to their current business model. They like the fact that MultiStem can be manufactured at scale, has a long shelf life in a vial or IV. bag, and can be administered by an IV, syringe, or catheter as needed. Pharmaceutical companies, and most physicians for that matter, want something that can be delivered simply and efficiently at the point of care with a minimum amount of hassle or minimal amount of trouble. They also would prefer something that has been fully characterized from a safety and potency standpoint. So, ease of use, scalability, simplicity -- those are some of the key points that we've been focused on from day one. One of the reasons why we love the profile of MultiStem is that it is something that we can make in a scalable way and deliver in a variety of formats for use in a range of clinical indications. It is something that we believe can be administered off the shelf in a very simple, straightforward manner at the clinical point of care, right when it's needed.

We've actually spent a lot of time trying to understand the perspective of clinicians to really understand how we can provide the simplest, easiest solution for them so that they can use it off-the-shelf and apply it in the patients without having to develop a whole new set of skills or a whole new expertise. I think that we've made a lot of progress in that regard, and that reflects our commitment to delivering a best-in-class product.

Sam: That sounds like a dream profile from a pharmaceutical commercialization perspective. Is that why Pfizer was attracted to you and signed a $111 million contract with you?

Gil: Pfizer announced back in 2008 that they were forming a new business unit called Pfizer Regenerative Medicine, under the leadership of Dr. Ruth McKernan and some of her colleagues. What Pfizer had recognized was that, if stem cell medicine and cell therapy are going to become a wide spread reality, they are going to touch a lot of different therapeutic areas that Pfizer is really interested in. They also recognized that they didn't have a lot of in-house expertise in the area. So, for them to kind of figure out how to get into this new area of opportunity, they were going to have to partner with somebody that was really on the cutting-edge. Pfizer spent a couple of years looking at a broad range of technologies before they finally announced at the end of 2009 that they had selected us as their key partner in the area of regenerative medicine. That's exactly how they described it. In fact, Ruth McKernan said, "We believe this is the cornerstone of what Pfizer is going to do in the regenerative medicine area." Now, I think that was a very indicative statement about Pfizer's mindset and how they view this field. They see it as a big area of opportunity, but they also wanted to make sure that they were really doing an extremely thorough job and a lot of due diligence to evaluate each of the technologies.

Sam: Let's talk more about your top two indications, IBD and then Stroke. You will expect data from the IBD trial with Pfizer in the second half of 2013, correct?

Gil: Correct. Right now it's looking like sometime this fall.

Sam: What do expect that event to mean to your company? Why are you so confident of a positive result?

Gil: We've done a lot of pre-clinical work, not only models of inflammatory bowel disease but also in immunological models and inflammatory models generally, and what we see over and over again is that these cells, MultiStem, are very powerful immunomodulators. They can reduce inflammatory damage, and they can restore a durable balance to immune system function, which frankly gets to the root cause of the process that's causing the damage in patients that have inflammatory bowel disease.

We, and Pfizer, believe that the current trial is an appropriate way to initially evaluate the clinical relevance of MultiStem in a chronic inflammatory immune condition, and if we're successful there, frankly, it opens up a whole other host of possibilities in other inflammatory and immune conditions that will be based on years of pre-clinical work we've done in other indications.

In our minds, this is very important because it could provide the first evidence in an inflammatory immune condition outside of the work we've already done in preventing graft versus host disease. From a phase II, robustly designed, double blind, placebo-controlled trial, they could actually pave the way for a lot of other opportunities beyond.

Sam: Let's focus on inflammation in MultiStem. You seem to suggest that MultiStem can be the best-in-class inflammatory stem cell in the market. What data guides you to say that?

Gil: We've actually run comparative studies, examining MultiStem against other cell types and seeing where the similarities and differences are. Over and over again, we see that the class of cells that we work with are very, very potent at modulating immune system function and reducing inflammation, reducing the key signaling cascades that are actually driving or enabling the inflammatory damage that occurs in diseases like IBD or other disease indications.

We have a lot of evidence that shows that MultiStem is doing things that other cell types just don't appear to be capable of. I'll give you a couple of examples. We know that our cells are very capable of regulating the infiltration of activated immune cells into target organ systems and tissues where they're exerting their inflammatory damage, and we know that in contrast to other cell types that we've looked at, like mesenchymal stem cells or other cell types that people work with, MultiStem is very potent in regulating the key gatekeeping signals that allow immune cells to cause damage. It's these signals that are enabling the infiltration of those activated immune cells into the target organs and tissues where they do their damage, and MultiStem regulates these pathways very effectively, in contrast to some of these other cell types, which don't do it at all or don't do it nearly as effectively.

We've also done other comparative studies where we've looked at MSC's or other cell types that were evaluated, and our cells appear to be much more potent at conveying a pro-angiogenic or vasculogenic effect in regions of ischemic damage or injury, and that's because our cells express factors that these other cell types don't express -- and we know specifically what those factors are.

Again, we don't just take it for granted that our cells might be better. We've actually gone to the trouble of running these types of studies to determine where they might be better, and if they are better, understand why they are better -- that's the key to unlocking the potential of this platform.

Sam: Gil, stroke could be a potential blockbuster drug for you. I noticed that you were savvy in the design of the trial, administering the drug 24 to 36 hours after the stroke, when you know that the patient is not recovering on their own, which has been a big problem in previous stroke trials. This eliminates, or at least minimizes, a lot of placebo effect and background noise, doesn't it?

Gil: Yes, absolutely. In fact, it was one of the central aspects of the clinical trial we focused on when we were designing it. We knew that there have been lots of things that people have tried for treating stroke over the past 15 to 20 years that have not worked well. However, one of the common themes that we've seen is that most of these approaches have to be administered within the first several hours after a stroke has occurred.

As you correctly noted in your question, we know that there's a meaningful number of patients, roughly 30% to 40% of patients, in fact, that may show substantial recovery within that first 24 to 36 hours after the stroke has occurred. However, if you're treating patients well before that, you're going to see a lot of background noise in your clinical trial where patients that are getting placebo are going to appear to recover, but it had nothing to do with the fact that they were getting a drug or not getting a drug. When we designed our studies, we said that we wanted to avoid that problem, and we've already published data from preclinical studies that shows that we can give MultiStem days after a stroke and see profound, and in many instances, virtually complete recovery.

Knowing that, we decided to take advantage of that fact to make a more powerful, and frankly, a stricter study. We decided that we were going to design a study where we're treating patients within the first one to two days after the stroke, really focusing on that timeframe, 24 to 36 hours post-stroke, but we were going to do it in such a way that patients that are spontaneously recovering in the first 24 hours are excluded from the trial.

What does that do? In some ways, it actually makes it a more informative study because we know we're working on patients that have a significant durable neurological deficit after that first 24 hours. If we can show, as I believe we will, there is a meaningful benefit in these types of patients, ones that have significant deficits beyond that 24-hour mark, then because of the way we've designed the study, I think it's the type of result that everybody will be able to believe. We've set the bar high for ourselves in terms of how we're testing the therapeutic effect in this trial, because we really believe in the technology.

Another key advantage is that MultiStem is unlike traditional drugs, since it can do multiple things in parallel to help enhance recovery and healing after a stroke. A traditional pharmaceutical is going to do one thing, and we've seen over and over again, that may not be enough to help stroke patients. MultiStem is more powerful than a single pill.

Sam: Gil, you are going to avoid the confounding effects of previous stroke trials. The stroke data can take your $70 million market cap, give or take, to a $5 billion company in a heartbeat, can it not?

Gil: I believe if you think about the commercial scope or the magnitude of the opportunity, it is enormous. Let's walk through some of the numbers just to give people a sense of that. Right now we know that there are about two million people a year in the U.S., Europe, and Japan combined that suffer a stroke each year, and only a very small percentage of those patients are getting the one and only drug that's currently available to treat them. It's a drug called tPA that was developed by Genentech and first approved for use in treating stroke patients in 1996.

The purpose of tPA is to dissolve the clot and restore blood flow to the area of the brain where the stroke has occurred. However, because you've only got about a three- to four-hour window to give tPA to patients that have suffered a stroke, only about 5% of stroke patients get treated with it. The other 95% are basically getting palliative care, which is a clinical equivalent of just keeping the patient in a safe, carefully controlled environment, but it's really not doing anything to help the patients get better.

As I mentioned, we've published data that shows from independently conducted preclinical studies that demonstrates if MultiStem is administered even days after a stroke has occurred, very powerful and durable therapeutic benefits are seen -- many animals saw virtually complete recovery. Think about what that might mean from a clinical perspective and a commercial perspective. Typically, hospitalization, physical therapy, occupational therapy, and rehabilitation costs, as well as permanent institutional care and home care costs, can be an enormous financial burden for patients and their families - let alone the quality of life impact.

Let's just say we're only focused on the U.S., Europe, and Japan; that's about two million patients a year. We know that number is likely to go up over time because of the aging demographics that we are seeing in the United States, Europe, Japan, and most other parts of the world. Over the next few years in the U.S., for example, we will see an 80% increase in the number of people over the age of 65 -- exactly the segment of the population most susceptible to stroke.

But just take the current two million stroke patients a year number, and begin by recognizing the current cost of care for stroke patients is enormously high and it doesn't really help many of them get better. I don't think it's too difficult to imagine that you could see reimbursement maybe $15,000 to $20,000 or substantially higher for a stroke treatment that is really as safe and effective as we believe MultiStem will be, and if it is improving care, patient quality of life and lowering overall healthcare costs. If you assume that we are only reaching half of the stroke patients in that two million a year number, you're talking about a million patients a year and you're talking about $15,000 to $20,000 per patient. That creates a $15 to $20 billion a year market opportunity, and again, I think that's making fairly conservative assumptions of both the reimbursement side and on the number of patients that would potentially benefit from treatment. It's a pretty big number.

Sam: Gil, your board saw the unblinded data for the first cohorts in the stroke trial that enhanced their excitement for the program. Can you shed more light on that, please?

Gil: I don't want to go into too much detail yet because it's very much a study in process, but we actually have the opportunity as a board to look at the data from the first two cohorts of the study, the low-dose cohort and the higher-dose cohort. Without going into the specifics, I can tell you that what we and the clinical safety committee observed is one, a clean and consistent safety profile, even at the very high dose level, which people are very excited about, and two, we and the board were excited about encouraging signs from the interim data, and as a result prioritized moving the study ahead as quickly as possible. There's no guarantee of success, obviously, but we like where we are.

Sam: Gil, you had a successful equity raise recently. Can you give more light to the quality of new and old investors who participated?

Gil: Yes. First, it was a successful raise in the sense that we raised the capital we needed, although it was somewhat dilutive. I think investors really liked the valuation that we were at, so that's one of the reasons why they were happy about it, and why it was oversubscribed. However, a second, and perhaps more relevant, point is that the financing was entirely institutionally focused, with some very high quality healthcare investment funds. I think that is actually quite significant, because it shows that the "smart money" is betting on us to succeed. Quite a few of them were already shareholders so they stepped up to re-invest, but we also brought some new institutions on board, as well.

Sam: You have potentially exponentially moving data coming up in the next 12 to 18 months. Investors would love to see you and your leadership increase your stake in the company. That could demonstrate confidence -- should we expect that?

Gil: I have consistently purchased our shares when my window has opened over the past couple of years. We're required to file when that happens, so it's public record. I've never sold a single share, and I've consistently bought when I have had the opportunity to do so. That's true of other members of the management team as well. I'm not going to speak for all the other members of the management team, but I can tell you, I look around at the investment opportunities that I see, and I think we represent one of the most undervalued opportunities out there today. Of course, I take my personal money and invest it in the company every opportunity I get because I believe we're an extraordinary investment opportunity.

Sam: Basically, you think that the stroke program and others can create outsized value, some of which can be realized through partnerships with other companies, and some of which can be advanced through internal development, correct?

Gil: Exactly.

Sam: When can we expect something on the partnering front?

Gil: We're focused on trying to complete a partnership sometime early in 2013. We're actually looking at multiple opportunities, across several programs, and although some opportunities will take a bit longer to mature than others, I think within the first half of the year we expect to have a new partnership in place.

Sam: In summary, you have a unique cell therapy program that reads out potential stock moving data in 2013 and 2014, and you have multiple, meaningful potential partnerships besides Pfizer on the horizon. What else should a buyer need to know about your company?

Gil: Frankly, I think that should be sufficient to get people excited; I think it's going to be pretty exciting for us and for the people that own our stock.

Sam: Gil, this has been a fantastic and very eye-opening interview for me. Hopefully, my readers will appreciate your candidness and your insights into your program; it sounds to me like you and your company are poised for success for the next few years. We wish you the best and look forward to watching your progress. It also sounds like a great story for our readers to really take a step into and be supportive of your journey from here onward.

Gil: Thank you very much.

Disclaimer: I am not a certified financial adviser and you should consult with your personal financial adviser before making any investment decisions. All investments carry risks, including total loss of capital. Trade based on your own risk tolerance.

Source: A Candid Conversation With Athersys CEO Gil Van Bokkelen