Top Stock Idea For 2016? - Athersys, A Beaten Down Stem Cell Stock With Great Upside

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Summary

  • Athersys Shares Well Positioned for Success in 2016.
  • A Deeper Look at Stroke Trial Post-Hoc Analysis.
  • Japan's Lowered Bar for Regenerative Medicine Therapies is a Big Positive.
  • M&A Activity in U.S. Stem Cell Sector Bodes Well for A Successful Japan Partnership.

Over the last few years, like many companies in the stem cell sector, Athersys Inc. (NASDAQ:NASDAQ:ATHX) shares have underperformed as clinical data using its biologic bone marrow derived stem cell therapy have so far failed to meet investor expectations. However, an even keeled and deep analytical look at this company reveals that this underperformance may soon reverse itself. Clinical trial mishaps, though painful, are often a normal part of a learning process when properly and honestly vetted. In the case of Athersys, stroke clinical trial results appear to provide valuable information that will contribute to the design of future clinical trials and allow Athersys to reach the ultimate goal of developing a potential blockbuster therapy that can help patients and enrich shareholders. Other dynamics, related to recent stem cell sector M&A activity and new regenerative medicine regulations in Japan, are also key potential catalysts for 2016.

Image Source: Author edited photo from National Institute of Health

The lead product for Athersys is MultiStem, a proprietary "off the shelf" stem cell product that has shown promise for treating indications in the inflammatory and immune, neurological, and cardiovascular disease areas. To understand why ATHX shares still hold great potential, a step back in company's history is necessary to gain a proper perspective of why shares currently trade at close to all time lows.

The first stumble for the company occurred in April 2014 when a Phase II clinical trial in chronic Ulcerative Colitis (UC), which was designed and run by Pfizer (NYSE:PFE) using MultiStem, failed to meet end points. One year later, in April 2015, the company's own Phase II clinical trial for acute ischemic stroke showed evidence of efficacy in patients treated within 36 hours but also failed to meet top line end points. Investors' disappointment with these back to back top line endpoint failures have left the company with a market cap of only about $90,000,000. However there is much evidence in these stroke data that indicate how a few simple adjustments to patient inclusion/exclusion parameters could portend unambiguous efficacy in future clinical trials that will provide a springboard to success for both Athersys and its shareholders.

The Phase II Acute Ischemic Stroke Results

According to the World Health Organization, 15,000,000 strokes are suffered annually across the globe. The costs to the healthcare system are staggering since the only approved treatments must be administered within the first few hours following an ischemic stroke and, as a result, many victims go untreated. In the U.S. alone, according to the Center for Disease Control, stroke costs the healthcare system $36.5 Billion annually.

Currently, the Athersys stroke program is the primary value driver for shares as stroke remains a huge unmet medical need and is the most advanced company sponsored program. Understanding why Athersys failed to meet its primary endpoint in stroke is a key to understanding why this company could be a lucrative turnaround story in 2016 and beyond.

The problems with the stroke trial began when Athersys prioritized a goal to shorten the trial's enrollment period. To do this the company decided to make changes from the original trial design, to both patient inclusion and exclusion criteria, in order to broaden its potential patient pool. In hindsight, two of these changes had a significant impact on the trial's ability to cleanly demonstrate efficacy and damaged the company's shares.

This excerpt, from the 2015 2nd quarter earnings conference, is the key to understanding the factors that led to the decision to make the enrollment parameters less restrictive and how future trials will be adjusted:

Well I think the enrollment was complicated in the last study because of the complications we were seeing with the processing of the product prior administration of the patients. It required in the last study, it required that we work with the bone marrow and cell processing units at the hospitals that were participating in this study where they didn't have such a unit and they had to rely on one from a neighboring hospital. The problem that we ran into and the reason why we made the protocol adjustments that we did was that those processing centers were typically only open from 9 to 5 Monday through Friday and we were missing a huge percentage of patients that would have been eligible for inclusion in the study simply because they were showing at the wrong time of the day or the wrong day of the week. Patients who came in on Thursday afternoon they weren't, in all likelihood they weren't going to get into the study because there wasn't going to be anybody around on Friday or into Saturday that would actually be able to prep the product and treat them but we corrected for the complications that forced us to use those cell processing centers and now we have a true thaw administered formulation of the product that essentially will be maintained in the hospital pharmacy and with a very simple process, very simple procedure that just takes a few minutes. You can transfer, you thaw the product, transfer it directly into the IV bag and then it's ready to go into the patient.

The pharmacies operate on a 24/7 kind of continuous basis whereas the cell processing facility did not. So the things that limited us in the last study and hampered enrollment are not going to be limitations in future studies for us and in fact we're already applying some of this in some of the other studies that we're running. So I believe that because of the safety data that we have and the very positive feedback that we have gotten from clinical KOLs and clinicians around the world that because of the safety data the very promising and encouraging signs of efficacy and the much simpler logistics that then next trial is actually going to be much more efficient than what we had to do with in this last study.

The new thaw and administer process that will be used in future trials can be found at the 4:55 mark of this video.

The first change made to inclusion parameters was to expand the treatment window. The original therapy administration time frame for the PHASE II stroke trial was set at 24-36 hours. Subsequently, this window was expanded to 24-48 hours.

The primary mechanism of action of MultiStem for stroke is to modulate the inflammatory response of the spleen (as explained in this article) and it has become clear over time that timing of therapy administration is very critical. The additional 12 hours window created a problem in meeting the trial endpoints.

The second change designed to help speed up enrollment was the inclusion of patients who were treated with BOTH tPA and mechanical reperfusion (MR). Both of these therapies are designed to remove the clot that caused the stroke but can only be administered in the early hours after onset. tPA dissolves the clot through a drug-like mechanism while MR is clot removal by a mechanical device. The original inclusion criteria included tPA patients but excluded patients who received tPA in combination with the more recently approved MR treatment.

An interesting side note is that the regulatory approval of MR for stroke was controversial as it was seen as heavily reliant upon the skill of the surgeon. The following extract from this 2014 study published in Frontiers in Neurology, seems to independently foretell some of the difficulties Athersys could face in obtaining confirming data by expanding enrollment to include patients treated with both tPA AND MR (emphasis added).

Currently, the use of intra-arterial revascularization is performed by skilled operators in centers with stroke-trained interventionalists (interventional neuro-radiologists, endovascular neurologists, or neurosurgeons), and thus procedural success is highly dependent on interventionalists' skills and on the device that is used. Mechanical thrombectomy emerged in stroke with the development of a device called the MERCI retriever. The device deploys a screw-like wire, which engages the thrombus and tracks it toward proximal vessels with larger diameter, and finally aspirates the retrieved parts of a thrombus. The initial studies (MERCI and Multi-MERCI) showed recanalization rates of 46-57% and symptomatic intracranial hemorrhage rates of 7.8-9.8% (12, 13). In the cases of Multi-MERCI clinical study, when an adjunctive therapy, such as intra-arterial injection of a lytic drug, was used, recanalization rate increased to 69.5% (13). Even though in both MERCI and Multi-MERCI studies concurrent controls were lacking and the recanalization rates that they reported were less of that in PROACT trial, FDA Medical Devices panel granted approval for clinical use of MERCI retriever in stroke patients (85). This decision was heavily criticized by many researchers, as the spreading use of this device in routine clinical practice further hindered the ability to test new stroke treatments with proper controls (85).

Ironically, even before the Athersys stroke trial had completed enrollment, independent researchers had realized that approval of MR without a control, for a therapy that relies greatly on a surgeon's expertise, added yet another variable to the clinic that would create more difficulties in conducting placebo controlled studies for new stroke therapies.

Post-Hoc Analysis of Stroke Data Demonstrate Efficacy

One must be careful in looking at post-hoc data as it is not that difficult to pick and choose a subset of data and draw conclusions that may be nothing more than statistical anomalies that are meaningless in the drive towards commercialization. However, no one can argue that it is logical to perform an analysis to examine how the treatment window affects efficacy. A stroke therapy that can be safely administered up to 36 hours would be a significant advancement from the current window of up to about six hours.

The following is the analysis that Athersys has presented to make its case that, while the primary endpoint was not met, these data suggest that when treated within a shorter treatment window the therapy showed strong signs of efficacy among various measures:

As previously noted, the interim results following the 90-day patient evaluation demonstrated favorable safety and tolerability for MultiStem treatment, consistent with prior studies. With respect to the primary and component secondary endpoints for the intent-to-treat population, the cell therapy did not show a significant difference at 90 days compared to placebo. However, MultiStem treatment was associated with lower rates of mortality and life threatening adverse events, infections and pulmonary events, and also a reduction in hospitalization. Furthermore, a higher proportion of patients receiving MultiStem achieved an "Excellent Outcome," which is defined clinically as the patient achieving excellent recovery in each of the three clinical rating scales, as evidenced by patients achieving a score of mRS ≤1, NIHSS ≤1 and BI ≥95 (p=0.10).

In addition, analyses show that patients who received MultiStem treatment earlier (24-36 hours post-stroke) in the study's treatment window had better recovery in comparison to placebo, and this treatment effect appeared to be more pronounced the earlier the MultiStem administration within this timeframe. For example, at 90 days post-stroke, patients who were treated with MultiStem within 24-36 hours of the stroke (i.e. consistent with our original study design) had much better outcomes compared to placebo patients as measured by the proportion of patients who achieved good or excellent recovery in each of the key secondary endpoints (i.e. Global Recovery), defined as: mRS ≤ 2, NIHSS Δ ≥75% and BI ≥95, with 41.9% of MultiStem-treated patients achieving recovery in all three categories versus only 24.6% of placebo patients, a difference of 17.3% (p=0.08).

Furthermore, additional analyses demonstrate that patients who received treatment with MultiStem within 24-36 hours post-stroke versus patients receiving placebo exhibited even stronger recovery when considering all patients except those that received both tPA and mechanical reperfusion (and who were excluded in the original trial design). Among these patients, 44.4% of MultiStem-treated subjects achieved good or excellent recovery in all three clinical rating scales, whereas only 17.3% of subjects receiving placebo achieved this level of recovery, a difference of 27.1% (p < 0.01), representing a greater than 2.5 fold increase in the number of patients achieving robust recovery.

Comparison of MultiStem (MS) and Placebo (P) Treatments

At 90 days

Intent-to-Treat
65 MS v 61 P

Early MS treatment
31 MS v 61 P

Post-hoc
(excludes tPA + MR)
27 MS v 52 P

Global Recovery
(patients achieving mRS≤2,
NIHSS∆≥75% and BI≥95)

MS: 30.8% vs P: 24.6%
Δ = 6.2%

MS: 41.9% vs P: 24.6%
Δ = 17.3%*

MS: 44.4% vs P: 17.3%
Δ = 27.1%**

Excellent Outcome
(mRS≤1, NIHSS≤1 and BI≥95)

MS: 15.4% vs P: 6.6%
Δ = 8.8%*

MS: 16.1% vs P: 6.6%
Δ = 9.5%

MS: 18.5% vs P: 3.8%
Δ = 14.7%**

Life threatening AEs / death

MS: 10.8% vs P: 24.6%
Δ = (13.8%)

MS: 9.7% vs P: 24.6%
Δ = (14.9%)

MS: 11.1% vs P: 26.9%
Δ = (15.8%)

Secondary infections

MS: 36.9% vs P: 47.5%
Δ = (10.6%)

MS: 16.1% vs P: 47.5%
Δ = (31.4%)

MS: 14.8% vs P: 53.8%
Δ = (39.0%)

Hospitalization days

MS: 7.9 d vs P: 9.8 d
Δ = (1.9 d, 19.4%)

MS: 6.8 d vs P: 9.8 d
Δ = (3.0 d, 30.6%)**

MS: 6.7 d vs P: 10.3 d
Δ = (3.6 d, 35.0%)**

* p-value ≤ 0.10; ** p-value ≤ 0.05

mRS = modified Rankin Scale; NIHSS = NIH Stroke Scale; and BI = Barthel Index

As indicated in the chart above, statistical significance was met at 24-36 hours when excluding tPA/MR patients in Global Recovery, Excellent Outcome and Hospitalization Days. However, in order accept this analysis as significant there must be must be logic behind the rationale for excluding patients treated with both tPA and MR. Other than what was mentioned earlier on this topic, the logic is not that obvious. In order to get a better explanation I posed the question by email to the company's CEO, Gil van Bokkelen, "What is the logic for excluding tPA/MR patients in your post-hoc analysis?"

This was his response:

Short answer - the groups receiving both tPA and mechanical reperfusion were unbalanced.

It's well known that patients that have good early improvement (either spontaneously, or due to intervention) will typically recover well. Recall we designed our study to exclude patients that were recovering spontaneously/well in the first 24 hours, as evidenced by improvement of 4 points or more in NIHSS. The inclusion/exclusion criteria was structured to evaluate all subjects that were potentially eligible for enrollment by applying this criteria.

It's known that following tPA and MR, patients that successfully respond will usually improve quickly (i.e. within the next few hours). Patients that did exhibit such improvement shouldn't have been enrolled in our study (as noted previously, any patients improving by 4 pts or more from screen to baseline were to be excluded - we wanted patients that had substantial and durable deficits, since these types of patients typically have poorer outcomes).

Two factors became obvious when looking at the tPA + MR patients: (1) The late placebo tPA + MR patients had substantially lower baseline NIHSS scores relative to all other tPA + MR patients (or all patients for that matter), and; (2) these same patients were screened very late relative to all other patients (e.g. ~4 hours median screen time for early MultiStem, in contrast to ~22 hours for late placebo), which shouldn't have happened. Note that all of those patients were at the hospital early (in order to be able to receive tPA and MR), and so therefore should have also been screened early. But the "late placebo" patients in this tPA + MR group, for whatever reason, were typically screened very late. That meant any early improvement that occurred was not captured, and the patients in this group were clearly responders to tPA + MR treatment. For example, a review of the records for one of the patients in the late placebo group showed they had improved by 11 pts in their NIHSS score in the first 24 hours, and therefore never should have been enrolled (i.e. a protocol violation) - whereas others were enrolled simply because the late screening didn't reflect the early improvement (or they had substantially less severe strokes to begin with). The baseline NIHSS values for the late placebo patients that received tPA + MR were substantially better than the other groups.

To be clear, among all the tPA + MR patients, the greatest absolute improvement from baseline to 90 days was in the early MultiStem treatment group. But the substantially lower baseline values for the late placebo patients makes that a moot point. Think of it as a 100 yard dash, where some runners start at the 15 yard line, and everyone else starts at the starting line - it's not a legitimate comparison. So we ran the post hoc analysis excluding all tPA + MR patients to adjust for the clear imbalance - when you do that everything is balanced, and the differences in treatment outcomes become extremely obvious.

How a Recent a Pre-Clinical Study in Spinal Cord Injury Adds Further Heft to the Stroke Results

On November 9th, Athersys announced the publication of a pre-clinical study in spinal cord injury. Good results in pre-clinical studies in rats are not really a cause for excitement as they represent no more than a baby step on the long, long road to commercialization. However, this trial was interesting in that it provided further evidence on both the mechanism of action and importance of the treatment window.

In this study, intravenous administration of MAPCs one day after injury prevented loss of spinal cord tissue resulting in significant improvement of walking function and urinary control. The study is also yet another piece of evidence that demonstrates the role of the spleen in neurological injuries:

Nervous system injuries, including spinal cord injury, traumatic brain injury and stroke, result in excessive inflammation, which is toxic to surrounding healthy tissue. Therefore, modulation of the immune system has long been an acute therapeutic target for neurological injury and disease. In this study, a single dose of MAPC was administered to rodents one day following severe spinal cord injury. Injured animals that received treatment demonstrated significantly improved voluntary control of bladder function, walking ability and preservation of at-risk nervous tissue. Further, the study defines a key mechanism of action of MAPC treatment, which occurs through the modulation of neuro-inflammation, including a significant reduction of inflammatory cell accumulation within the injury.

The authors examined the biodistribution of MAPC cells following injury and observed that large numbers homed to the spleen, a primary reservoir for inflammatory cells in the body. These findings are consistent with other evidence suggesting that a primary effect of this cell therapy occurs through modulation of systemic inflammation via splenic interactions. Close examination of the spinal cord injury site, peripheral blood, and the spleen identified meaningful changes in inflammatory pathways after MAPC administration.

As mentioned previously, the primary value driver for Athersys is its stroke program. The interesting aspect of this study, as it relates to stroke, is the treatment window. Consistent with the stroke trial, response was correlated to the treatment time frame. Statistically significant improvement was demonstrated in rats treated at 24 hours. However, rats treated at the time of injury did not demonstrate significant improvement, once again demonstrating how timing is critical to mitigate the spleen's inflammatory response. Apparently, while administration of MultiStem after 36 hours is less effective, administration too early is also not ideal, as the chart below illustrates:

Chart Source: DePaul, M. A. et al. Intravenous multipotent adult progenitor cell treatment decreases inflammation leading to functional recovery following spinal cord injury. Sci. Rep. 5, 16795; doi: 10.1038/srep16795 (2015).

So while investors have, so far, placed minimal value to the stroke results, changes to inclusion criterion should be expected to result in a much better outcomes as the program moves ahead.

THE JAPAN CATALYST: The Lowered Bar for Regenerative Medicine Helps Immensely

One of the most significant regulatory developments in regenerative medicine in the last few years is new legislation implemented by Japan to not only shorten the development timeframe for regenerative therapies but to provide reimbursement for regenerative therapies that have demonstrated safety and "are likely to predict efficacy". This new framework is illustrated in the following diagram that was extracted from a document on the website of the Japan Pharmaceuticals and Medical Devices Agency (PMDA):

Source: Japan Pharmaceuticals and Medical Devices Agency

This expedited approval system for regenerative therapies is a significant boon to the regenerative medicine sector as demonstrated by Mesoblast Limited's (NASDAQ:MESO) recent announcement related to one of the first approvals under this new legislation. Mesoblast recently disclosed that it had obtained a reimbursement rate for Graft vs. Host Disease of between $113,000 and $170,000, per treatment protocol, for its stem cell based therapy. It is notable that this approval was based on a small open label study of only 25 patients in Japan and supported by additional data from a clinical program outside of Japan that did not meet the primary endpoint but did provide evidence of safety and signals of therapeutic effect. Athersys management has been heavily involved with the PMDA in Japan over the last few years and has prioritized this Japan opportunity in its business plan. In fact, the e-mail above that I received from CEO Gil van Bokkelen, came while he was conducting business in Japan.

THE PARTNERSIP CATALYST - Awaiting News on a Japanese Partner

The new regulatory framework in Japan and the short road to revenues for regenerative medicine therapies have lead to a mini merger boom in the stem cell space. On March 30, 2015, Fujifilm (OTCPK:FUJIY) announced it would acquire Cellular Dynamics International, a developer and manufacturer of induced pluripotent stem cells for $307,000,000 in cash. Just last month, Astellas Pharma (OTCPK:ALPMY) reached an agreement to acquire Ocata Therapeutics (NASDAQ:OCAT), at a 90% premium to the prior closing price, for about $360,000,000. Ocata is focused on diseases of the eye and only recently commenced recruiting patients in a Phase II clinical trial.

A few months prior to the release of the Phase II stroke results, Athersys surprised investors by entering into a development agreement with Chugai Pharmaceutical Ltd to develop and commercialize the stroke therapy in Japan. Athersys received $10,000,000 up front and was scheduled to receive an additional $7,000,000 payment if Chugai exercised its option to move ahead after seeing the Phase II results. In October 2015, Chugai decided not to go forward for reasons that were explained in my previous SA article. However, at the same time, Athersys announced that it had entered into a letter of intent with another Japanese company, accompanied by a good faith payment, to commence partnership negotiations on the development and commercialization of MultiStem cell therapy for a broader range of indications in Japan, including ischemic stroke.

While Athersys has not indicated any interest in being acquired, the recent merger activity involving U.S. stem cell companies certainly demonstrates the value that big Japan pharma sees in stem cell based therapies in light of the recent regulations that dramatically shorten the time frame to revenues. News of a new partnership in Japan is an obvious potential catalyst for Athersys shares and the recent merger activity demonstrates that a favorable environment exists for Athersys to negotiate a new partnership.

Other Athersys Clinical Programs

Aside from the stroke program, Athersys has clinical programs in other indications. A Phase II clinical trial to treat patients after suffering a heart attack is currently enrolling. The primary outcome measures are the incidence and severity of adverse events and changes in cardiac function assessed by cardiac MRI. The final data collection date for primary outcome measure is July 2016.

Athersys is also conducting a Phase I/II clinical trial in Acute Respiratory Distress Syndrome (ADRS) with the support of Cell Therapy Catapult, a not-for-profit center, which is focused on the development of the United Kingdom cell therapy industry, although enrollment has not yet commenced.

Regarding graft vs. host disease, the indication mentioned above that was recently approved in Japan, Athersys has obtained Orphan Status from both the U.S and E.U. and has conducted an open label Phase I trial. An interesting difference from the Mesoblast therapy for GvHD is that the protocol for MultiStem is to treat the disease prophylactically in an attempt to prevent or reduce the severity of the disease before the disease has taken hold.

The following chart represents the entire pipeline obtained from the Athersys website:

Source: Athersys Inc.

Balance Sheet and Cash Burn

Athersys closed September 2015 with $28.5 million in cash on the books after using up $3.7 million in operating activities during the most recent quarter. During December 2015 quarter, the company will book revenues related to the $10,000,000 cash payment it had received from Chugai earlier in the year although this amount is already included on the balance sheet. Athersys recently renewed a purchase agreement with Aspire Capital Fund LLC that requires Aspire to purchase up to 16,350,000 shares of common stock over three years, at the option of Athersys. Athersys controls the timing of any stock sales under this agreement.

In Conclusion

Like many biotechs, the road to commercialization has been anything but smooth for Athersys. While the lack of efficacy in the UC trial and the missteps in the design of the stroke trial have damaged the company's reputation and valuation, the lessons learned will prove invaluable as the company moves forward and designs new clinical studies. The commitment of the Japanese government to advance regenerative medicine has now been confirmed with actual PMDA approvals that include reimbursement from a single payer health care system. Just as significantly, as promised, these streamlined PMDA approvals were based upon the demonstration of safety with clinical results that "are likely to predict efficacy", a far cry from an expensive and lengthy Phase III trial. The graft versus host disease approval obtained by Mesoblast was based upon a failed Phase II trial and a small open label study in Japan. This approval confirms the promise of these new regulations that were met with great caution by some as it was such a dramatic departure from the normal lengthy drug approval process in Japan. No one can argue that safety hasn't been demonstrated in MultiStem and a case can be made that its Phase II results in stroke "are likely to predict efficacy" when the treatment window is shortened to 18-36 hours. Another positive is how these new regulations have lead to the recent acquisitions of two U.S. stem cell companies by large Japanese entities. This development should be viewed as favorable to a company that just happens to be in critical negotiations on a new partnership in Japan.

For all these reasons, the table is set for Athersys to be a top performer in 2016.

This article was written by

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Spent my entire 28 year career on Wall Street with over a decade at Bear Stearns. Over the past decade, I have gained a significant amount of knowledge regarding the stem cell and regenerative medicine sector. My premium service covers this promising subsector of the Biotechnology Sector.Wall Street Titan Research
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Disclosure: I am/we are long ATHX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: These are the personal views of Wall Street Titan Research and should not be relied upon for your investment decisions. All investors should always do their own due diligence.

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