Athersys: Grossly Undervalued Given Its Potential

| About: Athersys, Inc. (ATHX)

Investors in the stem cell sector (GERN, OSIR, STEM, CUR, ATHX, ASTM, OTC:MEOBF, PSTI, NBS, OTCPK:BHRT) should have at least a basic understanding as to some of the various approaches used by competing companies. For example, Cytori Therapeutics (NASDAQ:CYTX), a company I have followed closely, takes the “autologous“ road to cell therapy, extracting adipose derived regenerative cells (ADRCs) from fat and reinserting these cells back into the same patient during the same procedure.

Most public stem cell companies have taken an approach using “allogeneic” cells. The allogeneic approach involves extracting cells from a healthy donor and culturing them into multiple doses creating an off-the-shelf therapy comparable to the distribution of prescription drugs.

Within this group some companies use adult stem cells while others use embryonic stem cells. This allogeneic approach has obvious scale advantages but also involves a longer and more risky road to FDA approval then does the autologous approach, as the end product is clearly a biologic drug and not a medical device.

Athersys Inc. (NASDAQ:ATHX) is one of the stem cell companies pursuing this approach and appears to be a company worthy of a closer look.

What is it about Athersys that piques my interest? Aside from the vast potential that its regenerative medicine has to reshape the healthcare industry, there are three main factors that make Athersys very interesting at its current level of about $2.81 per share:

  1. The recent partnership deal between Australian stem cell biotech, Mesoblast (OTC:MEOBF), and large U.S. Drug maker, Cephalon (NASDAQ:CEPH), sets a fresh independent valuation for big pharma’s entry into this sector.
  2. The tiny market cap of Athersys and even smaller enterprise value, given its similarities to Mesoblast.
  3. The $111,000,000 partnership deal Athersys signed with Pfizer (NYSE:PFE) in December 2009.

Before I discuss how these factors are important, a little background on Athersys is in order. Much of the following information comes directly from the Athersys website. MultiStem is the name of the Athersys cell line and here are its important attributes:

We believe that MultiStem represents a potential best-in-class stem cell therapy because it exhibits each of the following characteristics based on research and development to date: (1) it may be produced on an industrial scale, in a well validated and reproducible manner; (2) it may be administered without tissue matching or the need for immune suppressive drugs, making it analogous to type O blood; (3) it exhibits a consistent safety profile; and (4) it appears capable of delivering a therapeutic benefit through more than one mechanism of action. Factors expressed by MultiStem are believed to reduce inflammation and regulate immune system function, protect damaged or injured cells and tissue, promote formation of new blood vessels, and augment tissue repair and healing in other ways. Based upon work that we and independent collaborators have conducted over the past several years, we believe that MultiStem has the potential to treat a range of disease indications, including ischemic injury and cardiovascular disease, certain neurological diseases, autoimmune disease, transplant support (including in oncology patients), and a range of orphan disease indications.

The full link to the Athersys “About Us” page can be found here where a complete view of the company is available, including information related to an interesting drug development tool they own called RAGE. More details on the science, specific to their MultiStem technology can be found here.

There are other allogeneic stem cell companies out there so why focus on Athersys? This is where the three points I previously mentioned come in to play. The Cephalon/Mesoblast partnership transaction and corresponding 20% investment is by far the biggest transaction in the stem cell sector. The deal gave Mesoblast the potential to earn up to $1,700,000,000 in milestone payments and, as a result, Mesoblast now has a market cap of approximately $2,500,000,000. This amount dwarfs the $66,500,000 market cap of Athersys by a staggering 37-1 margin. Such a disparity seems unwarranted given the similarities of the two company technologies and their similar states of progress.

Athersys technology is based upon the Multipotent Adult Progenitor Cell (MAPC) discovered by Dr. Catherine Verfaillie and her colleagues at the University of Minnesota. Mesoblast technology is built upon the discovery of adult-derived Mesenchymal Precursor Cells (MPCs). Both progenitor cells and precursor cells are typically derived from human bone marrow and do not have any of the moral issues associated with embryonic stem cells. As this is an emerging science and it is still early in the game, the reality is that it is impossible to determine which, if any, cell is superior or will be more effective in clinical trials.

According to the Athersys website, progenitor cells have distinct advantages. The Mesoblast website discusses the distinct advantages of precursor cells. One advantage Athersys points out:

…cells can be produced in significant quantities, thereby enabling scaled and reliable production. This enables Athersys and its collaborators to produce a standardized, well characterized therapeutic product in a reliable and cost effective manner. Athersys has established cultures and carried cells through sufficient passages to represent potentially hundreds of thousands of potential doses from an individual donor.

Mesoblast’s website states the following about its cells:

Mesoblast aims to generate a series of high margin, off-the-shelf adult stem cell products that are obtained from a single donor, commercially expanded and frozen, and subsequently used in potentially thousands of unrelated, or allogeneic , recipients at the time and place of need.

Both companies are working towards Phase III trials for multiple therapies.

So we have two companies with seemingly similar technologies. Mesoblast is somewhat ahead in the clinical trial race but Athersys seems to have a much greater ability to scale the production of its doses. Each company’s potential has been independently validated, to some extent, by a large drug company with cold hard cash.

The Athersys/Pfizer transaction is specific only to the use of MultiStem for Inflammatory Bowel Disease and nothing more. The Mesoblast deal with Cephalon is wide ranging, covering cardiovascular and central nervous systems, including congestive heart failure, acute myocardial infarction, stroke, Parkinson’s disease and Alzheimer’s disease.

Athersys also signed a partnership agreement with Angiotech in 2006, related to the treatment of cardiovascular disease, and released positive Phase I clinical results in July 2010. One can reasonably speculate that Pfizer, or other large pharma companies, should be looking very closely at Athersys, given the Cephalon/Mesoblast transaction and the dearth of new drug candidates in their pipelines to replace drugs with expiring patents.

Moreover, the recent news from Europe that all embryonic stem cell related patents could be invalidated should raise the value on adult derived stem cell therapies if it were to become law. Yet, it appears that Wall Street hasn’t seemed to take much notice of Athersys. In fact, in a recent Mesoblast Research Report by Nomura Securities, while Athersys was listed as one of only two competitors to Mesoblast, Nomura incorrectly stated that Athersys was a PRIVATE COMPANY! Talk about being undiscovered by Wall Street!

Notably, when Atherys announced its transaction with Pfizer in December 2009, Wall Street did take notice at least temporarily, as ATHX shares skyrocketed from $1.00 to $6.40 per share in just three days. ATHX shares have settled in between $2.50 and $3.50 ever since. If and when another partner shows up at the door of Athersys, I’d expect similar fireworks given its tiny float of 14.4 million shares.

Even absent any new partnership news, it is difficult to justify the market cap disparity to Mesoblast given the similarities between the two companies. Recent insider purchases by Athersys CEO also add some spice to this story.

Athersys finished 2010 with $8.9 million revenues from its collaboration agreements and $15.2 million in cash and short term investments with no long term debt on its balance sheet. It is certainly a tiny speculative company that will need to raise capital through partnership agreements or stock issuance in the future but seems grossly undervalued given its potential.

These are the personal views of the Wall Street Titan. Readers are encouraged to follow all the links on this page (and more) and carefully do their own due diligence.

Disclosure: I am long ATHX, CYTX.