Athersys: Valuation

| About: Athersys, Inc. (ATHX)

By: @BioInvestor71 of

After the March 27, 2013 article "Athersys, Inc. Has Blockbuster Potential," I received many requests for further analysis into revenue potential and what would constitute fair present day valuation for Athersys, Inc. (NASDAQ:ATHX).

Athersys, Inc. has a market cap around $90M, and the company ended 2012 with $25M in cash or cash equivalents. The company burns approximately $4M per quarter but that may be increasing some as the company indicated they are expediting enrollment in the stroke study. Athersys has historically generated operating capital through grants, cash infusion from partnerships and through stock offerings. At the present time, Athersys has enough capital to last at least another year. Assuming no financial grants, Athersys may be generating significant money soon without stock dilution.

First and foremost is the partnership with RTI Biologics, Inc. (NASDAQ:RTIX) for bone allografts for orthopedic purposes. RTI is using Athersys's patented stem cell technology and although the specific terms of the deal are not public, Athersys is still entitled to $30M from RTI for milestone payments in addition to royalties from sales. During RTI's February 7, 2013 conference call RTI indicated "Looking forward to 2013, we are continuing to progress down the path of commercialization of our MAP3 cellular allogeneic bone graft. The MAP3 bone graft is a natural, safe alternative to autograft and will be available in multiple sizes and configuration… we still anticipate the MAP3 will launch in 2013." Getting a large cash infusion and having a recurrent revenue stream would obviously be great for Athersys.

Next, Athersys's partnership with Pfizer (NYSE:PFE) for Inflammatory Bowel Disease (IBD) is worth around $110M in milestone payments, let alone royalties. The specific terms of the deal are not public; however, one could easily assume Athersys will be entitled to a significant milestone payment upon successful completion of their phase 2 study for IBD later this year. Assuming the phase 2 study is favorable and Athersys receives 25% of their milestone payments, the company would receive around another $30M. Again, the 25% rate is an estimation and the actual number could be more or less.

Assuming the above milestone payments are made, Athersys could be trading slightly below cash value later this year while discounting their entire pipeline and royalties from RTI Biologics.

The elephant in the room could also be a significant partnership for 5HT2c for obesity, diabetes and schizophrenia. Considering the compound exhibited superiority over Locaserin in preclinical studies, Athersys has yet another real opportunity to strengthen their balance sheet by having a cash infusion as part of the partnership in addition to more milestone payments and eventual royalties if the compound is ultimately successful. Everyone knows the value of weight loss drugs given the growing concern for obesity and diabetes. Athersys has already negotiated similar deals with RTI and Pfizer and Athersys has openly stated that they are actively engaged in a variety of partnering discussions for 5HT2c solely for obesity, solely for schizophrenia, or both. A cash infusion from this partnership, in addition to the above, could mean Athersys could be trading below cash value this year, or at the very least be in a position for significant milestone payments.

In addition to the aforesaid, Athersys is "evaluating partnering opportunities in several different areas around MultiStem across different therapeutic areas." If history repeats, then one would expect further cash infusion, more milestone payments, and more potential royalties. Assuming some or all of the above occur, Athersys has the real possibility of generating large amounts of cash that is of great benefit to its shareholders. Obviously, there is the risk that some or all of the above do not occur as well, but Athersys still has a variety of opportunities to raise significant capital.

For me, the biggest factors when considering what would be fair present day value of a stock are A) the potential future revenues, and B) the risk of the company being able to get the therapy to the market. I give a higher present day valuation for companies that have the greatest potential for future revenues because the potential return on investment is much higher. I am also willing to risk more in an investment if the potential return could be significantly higher. Along the same lines, I will not invest as much, if any, in a company if the risk is really high and the return on investment is not significant. Whatever I do is always after careful review of the preclinical and clinical trials so that the risk is also fully appreciated.

For Athersys, MultiStem is what must be looked at when evaluating the present day value of the company. Amazingly, MultiStem literally has the potential to generate billions for therapeutic indications in each of the following categories: Ischemic Stroke, Inflammatory Bowel Disease, Graft vs. Host Disease, Acute Myocardial Infarction, Spinal Cord Injury, Acute Brain Injuries, Multiple Sclerosis, Congestive Heart Failure, Critical Limb Ischemia, Peripheral Vascular Disease, and Peripheral Artery Disease; among others.

Since Athersys has an ongoing phase 2 study for stroke that the company is expediting enrollment, I will review what the success of MultiStem for the treatment of ischemic stroke alone could mean for this company. As stated above, there are many indications for MultiStem and the following analysis is solely for the treatment of ischemic stroke. did an analysis on the value of stroke treatment on September 6, 2011. For the record, I have no affiliation with nor do I know any of the authors. The September 6, 2011 article by is entitled "Identifying Compelling Investment Opportunities In The Biotech Sector." As stated in the article, according to the World Health Organization (WHO) about 15 million people suffer a stroke worldwide of which 2 million reside in the United States, Europe and Japan. The article further states, of all the strokes, roughly 85-90% are ischemic strokes. Ischemic strokes are when a clot or blockage impedes blood flow to the brain. To restore blood flow to the brain, the only approved therapy is tPA (also known as "clot buster") that is a medication that must be given intravenously and within a few hours of the stroke symptoms. Because the "clot buster" must be given within a few hours, only about 5% of stroke victims even get the therapy.

Unlike current standard of care wherein tPA only has a 3-4 hour window of treatment, MultiStem is being evaluated for treatment up to 36 hours post stroke onset. Needless to say, this therapy potentially opens up a market where there is significant unmet medical need.

The article by further states "biologic therapies (which MultiStem is) also tend to be more expensive than traditional pharmaceuticals, and can frequently cost in the range of $30,000 per patient per year, or more." The article uses, for argument sake, a conservative treatment cost of $15,000 per patient. Since treatment options for ischemic stroke are so limited, assuming 1 million of the 2 million patients in the United States, Japan and Europe get stroke therapy, at the $15,000 per treatment price point, that equates to $15 billion in annual revenues. (1M x $15,000 per treatment) If one wants to be more optimistic and factors in greater market penetration with 2M patients out of 15M patients worldwide with a higher price point of $30,000 per therapy, that would equate to annual revenues of $60 billion. 2M patients of the 15M who suffer strokes annually also only equates to 13.3% of the total patients worldwide that suffer strokes annually. Obviously, the potential annual revenues for ischemic stroke are extremely large in a market where there is significant unmet medical need. Athersys has not partnered this indication, so it retains full rights for all stroke therapy. Because of this, I would expect interest in the stock to continue to appreciate while investors and institutions take positions awaiting these clinical results.

According to the Center of Disease Control and Prevention, over 700,000 people per year have heart attacks in the United States. Approximately 2.8M people suffer from heart attacks annually between the United States, Japan and Europe. It is estimated that at least 20M people suffer from heart attacks world wide on an annual basis. Because there are other treatment options for acute myocardial infarctions (AMI), the potential price point for biologic therapy would most likely be less than that of stroke. Assuming the price point is $10,000 per treatment for biologic therapy for heart attack victims and market penetration of 500,000 patients per year, revenues would equate to $5B annually. Depending on the effectiveness of the treatment, market penetration and price points could be significantly higher. Athersys has not partnered this indication so they retain full rights to all potential revenues.

Athersys does have a partnership with Pfizer for Irritable Bowel Disease. In the U.S., Europe and Japan there are approximately 800,000 people with Crohn's and 1.6M people with ulcerative colitis. Milestone payments to Athersys are approximately $110M. Although the specific terms of the deal have not been made public, Athersys has a phase 3 opt in right. This basically means that Athersys has the right to acquire more potential profits by making a payment to Pfizer if they so choose. One would assume a fair price point for biologic therapy for IBD would be between AMI and stroke so $10,000 - $25,000 per therapy. Since this indication has been partnered and since the specific terms of the deal have not been disclosed, it is difficult to calculate what revenues Athersys would ultimately receive with or without the opt in right. Nonetheless, if MultiStem is successful and Pfizer is able to capture 500,000 patients per year at a $10,000 price point, Athersys would be entitled to royalties on $5B in annual revenues.

Graft versus Host Disease ((GvHD)), for which Athersys has orphan drug status, is another indication with substantial market opportunity. According to the company, a much higher price point can be justified because of the limited treatment options. GvHD affects 50,000 people globally. Because of the limited treatment options, according to the company, $50,000 per treatment would be justified. Assuming Athersys can capture 20% of the 50,000 patient population for GvHD and the price point stays the same, that equates to $500M per year in revenues (10,000 patients x $50,000 per treatment). Athersys has not partnered this indication, so they retain full rights to all future revenues.

On April 11, 2013, Athersys put out a press release entitled "Publications Demonstrate Relevance of MultiStem for Autoimmune Disease, Transplantation and Vascular Disease". The publication from the Journal of Immunology interestingly enough was co-authored with Pfizer. The article goes on to state that MultiStem cells suppressed T cell proliferation and other adverse immunologic biologic responses leading to the possibility that MultiStem may be effective in treating "Type 1 diabetes, graft-versus-host-disease, solid organ transplantation, inflammatory bowel disease, and other autoimmune diseases, such as scleroderma, lupus and rheumatoid arthritis." The article further discusses a publication in Circulation whereas MultiStem was used to treat Critical Limb Ischemia in preclinical studies and "ultrasound imaging of the ischemic limb (CLI) following MAPC treatment showed more complete recovery of blood flow and greater expansion of microvascular blood volume in MAPC treated animals." According to the journal, CLI, which is an advanced form of peripheral vascular disease, may affect more than five million people in the U.S., Europe and Japan.

MultiStem also has the potential to treat: Spinal Cord Injury, Acute Brain Injuries, Multiple Sclerosis, Congestive Heart Failure, Peripheral Vascular Disease, Hurler's Syndrome, Peripheral Artery Disease, Autoimmune Diseases, and Critical Limb Ischemia; among other indications. None of these indications have been partnered yet, but one can clearly see there is significant market potential with an approved product. MultiStem has already extensively been tested for safety, so that could put Athersys in a position to expedite studies for MultiStem treatment in other indications.


I would expect interest in Athersys to significantly increase in the investment community pending the results of the stroke and IBD studies. The continued movement of the GvHD and AMI studies should further attract investors.

The biotech community also has a very watchful eye on Athersys as evidenced by the amount of articles written since the beginning of the year. I'm expecting Athersys to receive more press as the catalyst dates keep getting closer, if partnerships occur, and/or milestone payments are made. The following are some of the articles that have recently been written:


First Analysis has a price target of $7, which gives Athersys a $371M market cap. The Maxim Group upped their price target from $3 to $6 near the end of 2012 and at $6, Athersys would have a $318M market cap. Piper Jaffray initiated coverage on Athersys with an overweight rating and a price target of $4, which would give Athersys a market cap of $212M. Zacks upgraded Athersys to outperform but with a price target of $1.80, however, I wouldn't be surprised to see that amended, so it is more in line with the price targets of the other analysts.

Competitors and Industry Price Comparison

Athersys's main competitors are Pluristem (NASDAQ:PSTI) that has a market cap of $172M; Osiris (NASDAQ:OSIR) that has a market cap of $314M; and Mesoblast (MSB.AX) which is an Australian company that has a $1.71B market cap. By comparison, Athersys has less than $100M market cap, no debt, cash, potential cash infusions from milestone payments this year, a partnership with Pfizer, in a variety of partnership discussions which may result in additional cash infusions and royalties, approaching catalysts, and they have an advanced stroke study. By industry comparison alone, Athersys should at least be trading at a $200M market cap and same equates to $3.80 per share; close to the $4 Piper Jaffray price target.

Personal Valuation

Long-term analysis:

When applying the risk versus reward analysis, Athersys has less than a $100M market cap and has the potential to be generating $15B in annual revenues from the stroke indication alone, if their biologic therapy works. The upside potential is clearly very large. At issue is whether it works. When analyzing the risk factor of whether it works, I am most intrigued how MultiStem "appears capable of delivering therapeutic benefit through multiple mechanisms of action" by reducing inflammation, protecting damaged or injured tissue, and enhancing the formation of new blood vessels in the regions of ischemic injury. According to the company "these cells exhibit a drug-like profile in that they act primarily through the production of multiple factors that regulate the immune system, protect damaged or injured cells, promote tissue repair and healing, and the cells are subsequently cleared from the body over time." From a logical standpoint, since the therapy is multifactorial, I think the chance of it showing efficacy increases, thereby reducing the risk factor some. Along the same lines, MultiStem has been shown to produce positive response in a variety of preclinical and phase 1 studies for different indications. However, as we know there are never any guarantees by any means. Long term, if MultiStem ultimately gets FDA approval for some of their indications, based on the aforesaid, it would not be unreasonable for Athersys to have a $1.5B market cap that would put Athersys at $19 per share. If you crunch the numbers that is obviously a low estimate if MultiStem is able to make it to the market. That is why I believe interest in Athersys and biologic therapy will continue to grow.

Short-term analysis:

I agree with Piper Jaffray and Maxim with their short-term valuations in the sense that it is by far not unreasonable for Athersys to be trading around $4, with a market cap of around $200M. A $4 price target would still be in the lower end of competitors in the same field. Partnerships, cash, and the results of clinical studies could dramatically impact the share price. Positive clinical studies for the IBD and/or stroke could really propel Athersys to at least $7-$8 which would give the company around a $400M market cap. The $7-8 price would be justified by the mere fact that the potential revenues for stroke treatment alone is so large, but also discounted by the fact an additional study would be required. To be objective, if one or both of the studies for IBD or stroke do not show efficacy, that would have a significant adverse effect on the stock price.

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.