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Athersys: Why Did Big Shareholders Come Knocking At The Door Again?

|Includes: ATHX, Cytori Therapeutics Inc (CYTX), ICPT, MESO

In yet another vote of confidence by existing institutional shareholders, Athersys (NASDAQ:ATHX), a leading company in regenerative medicine, successfully raised $20,500,000 (before underwriter fees) this past Friday, bringing its total cash position to an estimated $50,000,000. The offering consisted of 5,000,000 common shares along with warrants to purchase an additional 1,500,000 shares at $4.50 (expiring July 15, 2016). Shares had closed the night before at $4.08 and the units were sold for $4.10.

Athersys is close to discovering whether its Multi-Stem platform, that has been in development since the company went public company in 2007, will continue moving forward towards the goal of a blockbuster therapy platform it has envisioned. As many Seeking Alpha readers know, the Multi-Stem platform, based on Multipotent Adult Progenitor Cells (MAPCs) has the potential to treat many human afflictions and has shown efficacy and safety in both pre-clinical and clinical studies. The last couple of months have seen a surge of interest in the Athersys as shares have rocketed from a recent low of $1.52 on November 13, 2013 to today's price near $4.00.

This new and unexpected capital raise can only be viewed as a testament to how large Athersys shareholders feel about potential value of the Athersys platform. It was just a little more than a month ago when Athersys issued 10,000,000 shares/warrants for $2.00 in a similar private placement. A week later, on December 4, 2013, it was disclosed in a presentation by Chief Operating Officer B.J Lehmann that existing shareholders had initiated that transaction. Even though shares have since doubled, it is revealing to see that many of these same shareholders have the confidence and conviction to came back for more as the upcoming year will see Phase II clinical data for ulcerative colitis and stroke.

What Does It Mean? Why Do a Capital Raise Now?

  1. Money Talks - All the Athersys articles combined on Seeking Alpha (including this one) can't bring the sense of comfort to investors that a second private placement at a price over $4.00 per share can bring. In simple terms it is a third party validation of the Athersys investment thesis. In my view, when large investors put in COLD HARD CASH at DOUBLE their recent purchase price, it indicates that the Athersys story is still at its genesis and that the recent run up may be only the start. Once the shareholders came calling again it made sense for Athersys to oblige. A strong cash position is one of the criteria that institutional investors consider when establishing a position in a biotech as they loath being burned by unending dilution. On a side note, the underwriter for these two private placements is Maxim Group and the company's biotech analyst Jason Kolbert has been very bullish on Athersys, along with other leading stem cell companies such as Cytori Therapeutics (NASDAQ:CYTX) and Mesoblast (MBLTY) and his views presumably played a role in bringing the parties together once again.
  2. What Are The Implications With Regard to the Ulcerative Colitis Phase II Trial? - Many investors may not fully appreciate the terms of the Pfizer agreement on ulcerative colitis (UC). This isn't a basic licensing and royalty deal that you'll see in similar situations with small biotechs. Athersys has retained the right to partner with Pfizer upon release of Phase II data, expected in April 2014. As per the agreement: "Under the terms of the agreement, Athersys will receive an up-front cash payment of $6 million from Pfizer, as well as research funding and support during the initial phase of the collaboration. In addition, Athersys is also eligible to receive milestone payments of up to $105 million upon the successful achievement of certain development, regulatory and commercial milestones. Pfizer will have responsibility for development, regulatory and commercialization and will pay Athersys tiered royalties on worldwide commercial sales of MultiStem IBD products. Alternatively, in lieu of royalties and certain commercialization milestones, Athersys may elect to co-develop with Pfizer and the parties will share development and commercialization expenses and profits/losses on an agreed basis beginning at phase III clinical development." In order to be in a position to fully monetize the upside of a successful UC therapy for shareholders and partner with Pfizer if it chooses to do so, Athersys needs a strong balance sheet to buy in. Is Athersys preparing for success? It sure looks like it.
  3. Stroke Phase II Clinical Trial Results - Athersys has no partner to concern itself with for its Stroke Multi-Stem therapy, a great position to be in given the tremendous size of this market. If successful results are shown this year, moving to the next level takes funding and/or a strategic partner. Are these large shareholders betting on strong data? It sure seems like it.
  4. The Immediate Opportunity: Japan - Last November, I published an article titled: Ramifications Of New Japanese Stem Cell Legislation Are Unappreciated By Investors. There is an immediate opportunity for Athersys in Japan where regenerative therapies will only need to demonstrate safety to gain conditional drug approval from Japan and eventually show efficacy to maintain approval. Just last week, Athersys announced the grant of two patents from the Japan Patent Office related to Multi-Stem. Athersys needs strong financial resources to launch and invest in the Japan market. Just yesterday, in an article in Crain's Cleveland Business, CEO Gil Van Bokkelen spoke about the Japan opportunity and he noted that Athersys executives have visited the country several times over the past few months and that Athersys is in talks with Japanese pharmaceutical companies that could help develop and market MultiStem in the country.
  5. Other Opportunities - Multi-Stem is a platform and there are many other loaves of bread in the oven. One cannot overestimate the value of having a single therapy that can treat so many diseases. Among the opportunities: Graft Versus Host disease, Acute Myocardial Infarction, Organ Transplant, Bone Allograft. It is pretty clear why Athersys would take this opportunity to raise funds now. Of these four therapies, the biggest market is in cardiovascular therapies and Athersys is fortunate to have regained control of all rights to this market as a result of financial difficulties of its cardio partner in 2011.

Has Risk Been Eliminated?

Well, let's not get carried away. As I mentioned above, there are many exciting things occurring at Athersys and I didn't even cover all of them. However, even with the vote of confidence by existing shareholders, the upcoming Phase II results still represent BOTH a risk and a potential launching pad. For every biotech like Intercept Pharmaceuticals (NASDAQ:ICPT) that goes up 500% on fantastic Phase II data, there are probably 20 that bomb out. Fortunately, Athersys has many shots on goal but if it fails to deliver on both ulcerative colitis and stroke it will get ugly.

In Conclusion

Biotech shareholders often bemoan secondary offerings as the resulting dilution causes a deep and immediate haircut in share price. This has certainly not been the case with regard to the back to back private placements executed successfully by Athersys. One man's dilution is another man's validation.

Disclosure: I am long ATHX, CYTX, . 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.

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