I am a retired medical device executive that now spends my days trying to find companies with a compelling business thesis to invest in. Back in the spring of 2016 I became very intrigued in the emerging field of regenerative medicine. At the time there were about 600 organizations developing regenerative products which has since expanded to over 959+ companies worldwide today. Four years ago I spent considerable time reviewing several hundred companies and created a list of the top 10 I believed could become highly successful businesses if their products were proven clinically. Ultimately, I ended up investing in 7 companies. Applied Genetics (AGTC), Athersys (ATHX), Juno (JUNO), Mesoblast (MESO), Mimedix (MDXG), Inovio (INO) and Iovance (IOVA). Over the last 4 years I have narrowed my investments down to 4 companies with Athersys currently being my largest investment. I believed then and still do that Athersys has the potential to become a multibillion-dollar enterprise with enormous investment potential.
Part of my rational for investing in Athersys comes from my experiences working at Medtronic in the 1980’s and 90’s. Back then Medtronic was on a steep growth curve and was investing in many new therapies based on their pacemaker platforms. Back in the 80’s, if your recall, were the days when Barney Clark had the 1st artificial heart implanted. It worked but patients with these devices did not survive for long. I’ll always remember when the head of the company's R&D was asked why Medtronic was not developing an artificial heart. He answered by saying that the new technology was very interesting, but the reality was that there were only about 4,000 patients a year getting heart transplants and the market for such a device was quite small. He compared that to the work Medtronic was doing in the field of Congestive Heart Failure (CHF). CHF has a patient population in the US of 6.5 million with 550 thousand new cases per year. So, investing in the development of CHF therapies had the “law of large numbers” working for it from a business perspective. That thought process stuck with me over the years and guided me as I considered investing in regenerative medical companies.
As I researched regenerative medical companies it became evident that many of them were targeting important unmet medical needs, but the potential number of patients was quite small. I determined that companies focused on CHF with 6.5 million patients and stroke with 800 thousand new cases a year in the U.S. had huge potential if effective treatments were developed. MESO, which is developing a treatment for CHF and ATHX a treatment for stroke seemed to follow the “law of large numbers” criteria that was the basis for my investment thesis. My investment in MESO has been doing quite well lately, while ATHX has yet to make a serious move up. The rest of my discussion will focus on ATHX.
I’ve already touched on the large market opportunity for a therapy treating stroke patients. ATHX is currently evaluating MultiStem in stroke patients. The unique clinical opportunity for ATHX, assuming the phase 3 clinical study is successful, is that a patient can be treated within 36 hours of the onset of their stroke vs current therapies that need to be administered within a couple of hours. The ATHX treatment is based on evidence that brain injury triggers an over-reaction of the bodies inflammatory system which leads to severe swelling of the brain which then causes further damage. Treating a patient with MultiStem reduces the bodies inflammatory overreaction which then minimizes further damage. ATHX’s theory on the overreaction of the inflammatory response has been validated extensively in animals and is further supported by human phase 2 clinical trials. The bodies inflammatory system overreaction also presents itself in other disorders such as ARDS which can be a deadly complication of pneumonia. Certain other traumas can also trigger an overreaction of one’s inflammatory system and could benefit from MultiStem therapy.
From a business standpoint MultiStem fits into the “law of large numbers” category if the therapy achieves regulatory approval. As an example, if only 100 thousand stroke victims per year of the 800 thousand patients in the US receive ATHX’s MultiStem therapy and it is priced at $40,000 per patient, then ATHX would have $4 billion in revenue from this one indication in this one country. Clearly the “law of large numbers” would drive the performance of the business. Things get even more compelling when you add the global potential to treat stroke as well as using MultiStem for other potential indications such as ARDS and trauma.
So why are the shares currently trading at such a low valuation you might ask. I believe several factors are at work here. One is that ATHX is 1 of almost 1000 companies in the regenerative medical field and investors have a lot to choose from if they are willing to invest in higher risk equities. Also, years ago the promise of stem cell treatments was oversold, and investors may be weary of committing funds prior to phase 3 clinical results that prove the efficacy of such treatments. The cash reserves that ATHX currently has are less than one year’s burn rate, so investors are anticipating a dilutive event in the not too distant future. I calculate that ATHX needs about $100 million to get Multistem to market.
I believe that ATHX has great potential, but this is a company whose shares could drop to new lows if they fail, while offering the potential for new highs if the phase 3 clinical trials are successful. In addition, depending on their approach for raising more capital the shares could correct upon that announcement.
On the positive side, however, is the expected release of phase 2 clinical results for the ARDS open label study that ATHX’s partner, Healios, is conducting in Japan. If that study shows significant clinical benefit that is similar to the US study, then MultiStem could receive early market approval under Japan's new regulatory framework. Positive results on this study would further validate ATHX’S premise that MultiStem reduces the overreaction of the bodies inflammatory system after the onset of ARDS. This should increase investors’ confidence that the stroke results will also be positive. Positive results on the ARDS study followed by positive results on the stroke study would most likely catapult ATHX’s shares 10x or more and reward patient shareholders for investing in a company that’s value will be driven by the “law of large numbers.” Also, even with the current ongoing clinical studies and the potential for a near term dilutive event I believe the shares are significantly undervalued and they should be trading at 2-3x their current share price. Time will tell but I believe ATHX has the potential for being one of the top investments among the ~1000 regenerative medical companies. MultiStem could very well become the primary treatment for the bodies inflammatory system overreaction to injury whether from ARDS, stroke or other traumatic events. This inflammatory system overreaction most likely effects millions of people around the world and ATHX is uniquely positioned to treat this category of patients.
I own shares in ATHX and am a strong believer in the company’s potential, but investors need to consider the risks they are willing to take when investing in this or any other company.
Disclosure: I am/we are long ATHX.