September 08, 2011 -- Athersys Inc. (NASDAQ: ATHX) is a company focused on regenerative medicine, similar to companies like Osiris Therapeutics Inc. (NASDAQ: OSIR), Mesoblast (ASX:MSB), and Cytori (NASDQ: CYTX) and others that are developing a stem cell platform to target a range of disease indications. From heart disease to ischemic stroke, the company’s MultiStem® platform offers multiple advantages over traditional approaches to treatment, as well as other approaches to regenerative medicine and stem cell therapy. It leverages unique biological mechanisms of action to enhance tissue repair and healing in areas of great clinical need, but also offers a highly scalable platform that is easy to administer clinically as an “off-the-shelf” product.
The company’s stock is significantly undervalued with a recent market capitalization of just $50 million. Looking at just one of its many target markets, ischemic stroke, the risk-adjusted net present value (NPV) of the firm’s future cash flows could be in excess of $2 billion, and could soar even higher after additional clinical results are generated. As a result, this is one compelling investment opportunity that biotech investors may want to consider sooner than later.
Larger entities, like Cephalon and Shire Pharmaceuticals have been on the prowl of late, with the former entering into a $1.7 billion alliance with Mesoblast, and the latter recently acquiring Advanced BioHealing for $750 million in cash the night before it was slated to complete its Initial Public Offering.
Athersys – Some Key Highlights
- A portfolio of high impact opportunities. Most drugs have limited use – typically only one or two disease indications. However, Athersys is developing MultiStem for multiple indications, including cardiovascular disease, neurological conditions, and certain inflammatory and immune disorders, each of which represent potential multi-billion dollar markets.
- A leader in the field – and partnered with other leaders. Athersys already has a partnership with Pfizer around one disease program, to treat inflammatory bowel disease, which affects roughly 2.4 million people in the U.S., Europe and Japan. The company also actively collaborates with leading research and clinical institutions across the U.S. and Europe. But it has held onto the vast majority of its programs, preserving value in the process.
- Success in just one disease area, like treating stroke, could create enormous value. More than two million individuals have a stroke each year in the U.S., Europe and Japan alone, which conservatively equates to a $15 billion market annually, or even higher.
- Historically, biologics have a higher rate of success than pharmaceuticals. Recent industry studies show that the success rates for biologics (i.e. odds of FDA approval from the time clinical trials are initiated) are roughly twice as high as traditional pharmaceuticals. With multiple early clinical safety studies already completed, Athersys has already significantly de-risked the entire platform.
- A Significantly Undervalued Stock. Athersys could be worth more than $2 billion for its stroke indication alone, when using discounted cash flow analysis valuation, even accounting for the risk, time and cost of drug development. Success in multiple areas could easily propel the company to an industry leadership position. Assessing the Value of the Market Opportunity
Athersys has a compelling set of markets to pursue given the flexibility of its MultiStem platform to treat multiple disease indications. Treating damage from heart disease, inflammatory and immune conditions, and other disease indications are enormous opportunities, with each of these markets worth potentially billions of dollars per year. However the biggest opportunity of all may be ischemic stroke – given that only a small percentage of stroke patients actually receive treatment with the only currently available therapy, tPA, since it has to be administered within several hours following the stroke.
There are more than 15 million people that suffer a stroke each year, according to the World Health Organization (WHO). Approximately two million are located in the United States, Europe and Japan alone. Assuming that just one million of these stroke victims could be treated with MultiStem® – and a conservatively priced $15,000 therapy (many biologics are more expensive) – that equates to a $15 billion per year market.
At the same time, increasing numbers of young adults are being hospitalized for ischemic strokes. According to a Centers for Disease Control (CDC) investigation between 1995 and 2008, ischemic stroke hospitalization rates rose 37% in adolescents and young adults between 15 and 44 years old. These figures – apparently tied to a rise in conditions like hypertension, diabetes, obesity and other disorders – could mean even faster growth rates in the coming years.
The company already has already successfully advanced one MultiStem program into Phase II clinical development, and is about to begin a Phase II clinical trial for stroke patients, following up on promising results from two recent Phase I trials in the cardiovascular and transplant support areas. If MultiStem can reduce the substantial hospitalization, institutional care, physical therapy and rehabilitation costs that are common for stroke patients, third party payers should be clamoring to see it become standard of care. If that happens, Athersys could easily become one of the leading biotechnology companies in the industry, with a valuation and share price many times the current level.
Quantitatively Evaluating the Opportunity – Discounting for Time and Risk Factors
There are many risks associated with investing in development-stage biotechnology companies, ranging from evaluating efficacy and safety profiles to assessing the time and funding requirements. In February of this year, a group of analysts reported results from a comprehensive study that looked at over 4,200 drugs that had entered clinical development in the past decade (from October, 2003 to December, 2010). The BioMed Tracker study found that the overall success rate for an experimental drug from the time the program enters clinical trials varies substantially according to the type of therapy. For traditional pharmaceuticals, the success rate was around 14% for a lead indication. However, the success rate for biologics has historically been substantially higher – around 26% for biologics, according to Biomed Tracker. This could be because biologics are frequently based on substances that are ordinarily found in the human body, perhaps giving them an edge with respect to safety and effectiveness.
The rate of failure also varies according to stage of development. Approximately one third of therapies fail in Phase I trials, while the remainder fail in later stages of development, according to the same study. Based on historical success rates, (which are obviously no guarantee of future outcomes), the company has a roughly a one in four to one in five chance at successfully developing MultiStem® for the treatment of ischemic stroke – a market which unquestionably represents a huge clinical and commercial opportunity.
However, that estimation doesn’t reflect the fact that Athersys has already successfully completed two Phase I clinical trials with MultiStem, providing initial safety data. As a result, the company has already de-risked its entire MultiStem platform, since about 35% of programs fail during Phase I due to lack of safety. Future clinical trials could have a higher-than-average success rate when compared with biologics that are just beginning Phase I clinical trials, resulting in a higher valuation for those programs, and the company’s shares.
How Much is Athersys Worth Today?
The value of any stock is equal to the present value of future cash flows, which in some cases have to be adjusted for risk of development or other factors (See: Learn How to Value a Biotech Company). By estimating the market potential as described above, and applying discounting techniques to account for development risk, cost of development and time of development, we can estimate what the value of a novel treatment for stroke should be to Athersys shareholders.
Using a discounted cash flow analysis, assuming modest market penetration and growth over time, we can estimate the value of the stroke program to Athersys shareholders. If we conservatively assume a 15% probability of clinical development success and a 7% risk-free rate of return (which is well above the current risk free rate), this equates to a net present value of about $2.4 billion, or about $102 per share. If we make more conservative assumptions (e.g. a higher discount rate of 10%, a lower estimated likelihood of success of around 10%, and more modest market penetration over time) we still obtain a valuation of more than $40 per share.
However, currently, Athersys trades with a market capitalization of just $50 million and a recent price of just $2.25 per share, suggesting that it is significantly undervalued, even if some future dilution is factored in for financing the clinical development activities. Furthermore, this analysis does not even consider the other development programs at the company, in areas like heart disease, inflammatory and immune conditions (such as the IBD program that is partnered with Pfizer), obesity, and other conditions. Success in just a couple of these programs could easily make Athersys an industry leader – with a far higher valuation than current levels.
A Great Investment Opportunity
Athersys Inc. (NASDAQ: ATHX) represents a great investment opportunity, given the potential of its treatment for stroke alone. Adding in the many other indications, the stock appears to be trading at a significant discount to a fair valuation. As a result, this is one stock that biotech investors may want to take a closer look at – before the company gets scooped up.
