Since early December, Athersys, Inc. (NASDAQ:ATHX) is up more than 100%, with the company doubling in value from a little over $120M to its current capitalization of $240M. In an effort to find out just how I have managed to miss out on such a move, I have spent a long time trawling the various press releases, analyst estimates and articles (both domestic to SA and elsewhere). The only conclusion I have drawn through my research however is this-there is no identifiable reason for the upside revaluation and, as such, Athersys is overvalued at its current price. Here is why.
A Quick Look at the Company
Athersys is a development stage biotechnology company that operates in the stem cell space. The company's main, and only real focus is application of its MultiStem product to a range of disease instances. Athersys' advantage over the majority of other stem cell companies is the nature of the stem cells it uses. Rather than draw cells from embryos, Athersys draws its human stem cells from adult tissue, primarily bone marrow, which removes from the equation the ethical uncertainty that surrounds the stem cell industry.
Potential Revaluation Factors
On December 19, 2013, Athersys announced the completion of patient enrollment of a phase II clinical trial involving MultiStem treatment of ulcerative colitis (bowel disease). Some might argue that this announcement justifies the subsequent stock price rise but I do not believe that to be a valid argument. The only reason that patient enrollment completion might warrant a revaluation, and even this is a stretch, is if the disease being treated is extremely rare, or aggressive. Glioblastoma Multiforme, for example, for which it is very difficult to find and enroll patients in clinical trials. For an instance such as ulcerative colitis, a disease that 1.4M individuals suffer from and 70,000 per year are diagnosed with in the U.S. alone, enrolling patients should not be difficult. This is not a value-adding event.
A couple of days before this announcement, on December 17, 2013, the company announced its MultiStem treatment had received orphan drug designation in Europe for the prevention of graft-versus-host disease which, as the name suggests, occurs when transplanted immune cells attack host tissues. Again, it could be argued that this event adds value to Athersys stock and, more so than the enrollment completion, this argument is somewhat valid. The question is, however, how much value? The treatment received the same status in the U.S. back in September 2010, so I question how much of a "surprise" it was for investors to hear the same designation in Europe, and further, whether this surprise was enough to spark a flurry of buying.
Fast forward to January 9, 2014, and Athersys announced that the Japan Patent Office had granted the company three patents for several inventions involving its proprietary cell therapy technology. Again, this adds undeniable value to the company and strengthens its international marketing position-analysts expect the Japanese market for regenerative medicine to top $15B by 2030-but as with the orphan drug designation the value added is not enough to justify a doubling in company value.
During the last three months, these three announcements represent the sum of material events that could potentially move the stock. During the same three months, a slew of Seeking Alpha articles appeared online, promoting the company's potential. While I am not suggesting these articles have been published with any sort of agenda (often researcher pick up on a wave of interest and continue it just because it happens to be popular at the time), and most are in depth and accurate in their reporting, I am suggesting that the aggregate of this wave of attention might have something to do with the bullish behavior of the company's stock. This article in particular, concludes with the suggestion that Athersys will trade over $10 per share during 2014. The primary factor behind this projection, and in my opinion the driving factor behind Athersys' credibility, is a 2009 partnership the company entered into with Pfizer (NYSE:PFE), the goal of which is to commercialize MultiStem for the treatment of inflammatory bowel disease (the umbrella term for a group of diseases that includes the aforementioned ulcerative colitis).
Investors must understand however, that while a big pharma partnership is a positive event, it does not guarantee success. MultiStem must achieve FDA approval if the company has any hope of trading near $10. The only real benefit to having Pfizer involved in terms of Athersys' current position is financial, in the sense that the partnership relieves some of the approval process cost burden. Milestone payments mean nothing long term if Athersys has no treatment to take to market. Furthermore, Big Pharma partnerships happen more often than one would think. Pfizer itself has dropped out of numerous partnerships historically, solely based upon poor trial results. Some examples being Medivation (NASDAQ:MDVN) and its Alzheimer's drug Dimebon (notwithstanding the fact that Medivation succeeded wildly despite losing that particular partnership); Biocon and its insulin products Glargin, Aspart and Lispro; and famously, Nektar Therapeutics (NASDAQ:NKTR) and its needle free insulin, Exubera.
The same piece also raises, and attempts to discount, the very real threat of competition from, among other companies, Mesoblast Limited (OTCPK:MBLTY). I believe the author's dismissal of this threat is unwarranted. Mesoblast's financial resources vastly outweigh those of Athersys, and the operations of both companies are too similar to suggest they could exist alongside each other without competing for market share. In addition, the author claims that the multipotent adult progenitor cells ("MAPCs") used by Athersys are superior to mesenchymal precursor cells ("MPCs") used by Mesoblast, to quote, they "have better manufacturing characteristics and a favorable potency." This is not true. MAPCs are simply a subpopulation MPCs, and studies have shown the reverse is correct.
Having said all this, I would like to highlight that I am not suggesting Athersys does not have the potential to be a rewarding stock and a successful biotech company. The company has a number of things going for it, and a number of upcoming catalysts that could spark significant gains in its share price. These include April/May and late Q2 2014 results from the phase II ulcerative colitis trial and mid-year results for an ongoing phase II MultiStem trial for the treatment of ischemic stroke. The question is, what really are the chances that these trials will succeed, and by how much has approval already been priced in considering the recent doubling?
In addition, the company is generating revenue (which is more than can be said for a lot of development stage biotechnology companies), has a strong management team, is well financed and has a product that looks to be performing well at the cutting edge of an industry that could change the face of modern medicine.
What I am suggesting however, is that the success of MultiStem in its ongoing trials will ultimately determine the success of Athersys, and that is still a big question. A Pfizer partnership, three new patents and a flurry of online company coverage will not answer it.