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There has been a lot written about the stem cell company Athersys (ATHX) in recent months. In fact, there have been no less than eight articles published since March on Seeking Alpha alone. Emotions and accusations run high when dealing with stem cell companies in particular, and this is understandable. If and when stem cell technology does succeed, it could change the face of the entire medical industry. If it fails, it could end up erasing portfolios and being an enormous cash black hole. The stakes are high.

Why the focus on Athersys in particular? There are two reasons. One is that Athersys' technology Multistem solves two problems that continue to plague many other stem cell startups. One is the ethical issue of using embryonic cells, and the other is tissue matching. Multistem purportedly solves both of these problems by extracting adult stem cells from bone marrow and bypassing the problem of tissue matching, enabling any patient to donate to any other patient without killing an embryo. While other companies also claim to have working technology that solves these problems as well, the reason I believe is really the main one is that Multistem has attracted the attention of Pfizer (PFE), which has teamed up with Athersys to develop the technology. Big Pharma has thus far generally shied away from the stem cell niche with small exceptions like Glaxo's (GSK) $1.4B deal with stem cell cancer treatment company OncoMed back in '07, but OncoMed is private, so little doing there for investors for now until the SEC approves its IPO filing submitted back last May.

Athersys' deal with Pfizer puts the company among the more credible in the stem cell niche, though those interested in Athersys need to exercise considerable caution. For one thing, Big Pharma/stem cell deals have been known to break down in the past. Take for example one of Athersys' competitors, Osiris Therapeutics (OSIR). Osiris cemented a $130M licensing deal (see page 16) with Genzyme including up to $1.25B in milestone payments back in 2008 to develop a stem cell product very similar to Multistem called Prochymal. Athersys claims of Prochymal inferiority notwithstanding, Prochymal is also produced from adult stem cells and administered without tissue matching. In 2011, Sanofi (SNY) acquired Genzyme and scrapped the Prochymal deal. Osiris is once again on its own. The same could happen to Athersys, especially since Multistem has not yet been proven to work in humans, and no phase III has even begun yet.

Aside from the breakup with Genzyme and Sanofi, the Prochymal story has not been a pretty one. Osiris has been in the stem cell business for 20 years now, and has so far failed two phase III trials for Graft vs Host Disease (GVHD) and one phase II trial for diabetes. Prochymal has nevertheless been approved for marketing in Canada and New Zealand for certain special cases of GVHD where the drug seems to help a certain subset of GVHD patients who do not respond to any other treatment, but Osiris investors are grasping at straws here as significant revenues are not expected from a subgroup of a rare disease in Canada and New Zealand. OSIR shares jumped 95% to $13.83 after news of the New Zealand approval last year and have surprisingly kept most of those gains, currently trading at around $11.40 a share. This could be a good opportunity for aggressive traders to short OSIR especially considering the toppy look of the general stock market of late. New Zealand is not exactly a revenue gold mine.

Another issue is the controversy surrounding Multistem itself. There has been some back and forth on this particular issue between two Seeking Alpha contributors (here and here) regarding Multimstem's technology and alleged fraudulent data behind it. One author cites an investigative piece from 2001 alleging that the technology behind what became Multistem, called multipotent adult progenitor cells (MAPC), was falsified by one Dr. Catherine Verfaillie in order to get funding for her lab. The other responds a bit knee-jerkingly that Verfaillie never worked for Multistem and that the company has never been accused of fraud. This is true - Athersys as a company has never been accused of fraud at all and Verfaillie was never employed by Athersys in any way, but that is beside the point. The issue is that the technology behind Multistem, being MAPC, which was later acquired by Athersys and branded to Multistem, may have some fudged numbers behind it. The more relevant point that the second author makes in rebutting these claims is that Multistem has indeed been shown to be effective in preclinical studies, but these findings are quite early in the pipeline.

The overall thrust here is that technologies similar to Multistem like Prochymal have already failed, Big Pharma partnerships like the one Athersys boasts with Pfizer have already broken down, and the technology behind Multistem is controversial in the first place. This may all turn out to be irrelevant and Multistem may yet pass with flying colors, but the stem cell industry being as speculative and unproven as it is to begin with, my feeling is that if one wants to invest in stem cell technology, it is best to do so on companies with dramatic and obvious clinical results rather than one surrounded by doubt.

But despite all the cloudiness surrounding Multistem and Athersys, there still remains some promise with the company. Multistem's first real test is the ongoing phase II trial for ulcerative colitis, fully funded by Pfizer, still recruiting its complement of 128 patients and estimated to be completed in March 2014, less than a year from now. Since Pfizer is sponsoring this trial, one can assume that if it succeeds, Pfizer will double down on its investment in Multistem, and if it fails, Athersys will be in trouble and the Pfizer/Athersys deal may go the way of Osiris/Sanofi.

For those who believe in Multistem despite the negatives, I would suggest straddling the March 2014 options as soon as they become available on the ITM and OTM ends of the chain. We know something big is going to happen when those phase II results come out and Pfizer has its say on what's next with Multistem. In my opinion, this is the best way to capitalize on the current situation without placing all your eggs on the long or short side.

Source: Athersys Has Some Promise, But Controversy And Doubt Remain