Athersys. On track for a big Japanese trial. Japanese stroke trial design. Larger trial has multiple benefits

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1 Athersys On track for a big Japanese trial Quarterly update Pharma & biotech Athersys and its Japanese development partner Healios are on track to begin a patient registration trial for MultiStem in stroke in Japan. We expect the company to file an IND with the Japanese Pharmaceuticals and Medical Devices Agency (PMDA) in mid-summer and begin enrolling patients in Q416. Importantly, a successful trial of this size could enable them to gain full approval in Japan instead of conditional approval and could potentially be used as part of a registration package in the US. Year end Revenue ($m) PBT* ($m) EPS* ($) DPS ($) P/E (x) Yield (%) 12/ (28.9) (0.37) 0.0 N/A N/A 12/ (17.2) (0.21) 0.0 N/A N/A 12/16e 16.5 (16.4) (0.19) 0.0 N/A N/A 12/17e 0.0 (34.1) (0.39) 0.0 N/A N/A Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments. Japanese stroke trial design Based on discussions with the PMDA, Athersys reported that the trial will likely have participants, making this the largest MultiStem trial to date. The PMDA agreed to evaluate the proportion of excellent outcomes at 90 days as the primary endpoint, which was significant following subgroup analysis of patients treated 36 hours after stroke who did not receive tissue plasminogen activator and mechanical reperfusion. Note this endpoint was significant (p=0.02) for the entire intent-to-treat population at one year. Larger trial has multiple benefits While the trial size is larger than originally expected, there are several benefits. First, it increases the powering and therefore the chance of success. Second, a successful trial of this size would increase the chances of receiving full approval in Japan instead of conditional/time-limited approval, which would require reapplication within seven years. Third, and most importantly, this has the potential to be used as part of a registration package with the FDA, which may mean the need for only one pivotal trial in the US. Were that to be the case, our current estimate for a 2021 US launch could prove conservative. Valuation: $394m or $4.68 per basic share Our valuation has increased to $394m or $4.68 per basic share ($4.57 per diluted share) from $373m or $4.48 per basic share ($4.39 per diluted share). This is driven by an increase in the probability of success to 40% from 30% for MultiStem in Japan and advancing our NPV to Q116, but was offset by the realization and spending of the $15m Healios upfront payment, as well as an increase in estimated clinical trial costs ($1m per indication in both 2016 and 2017) for the AMI and ARDS Phase II programs. We forecast an additional $150m in capital needs (including $50m through to year-end 2017) before profitability in We expect to update our valuation upon further regulatory clarity from the FDA and EMA as well as potential partnering activity in the US and EU. Price Market cap 30 June 2016 US$2.12 US$177m Net cash ($m) at 31 March Shares in issue 84.1m Free float 98% Code Primary exchange Secondary exchange Share price performance ATHX NASDAQ N/A % 1m 3m 12m Abs (7.4) (12.4) 79.7 Rel (local) (6.2) (13.1) week high/low US$2.6 US$1.0 Business description Athersys is a US biotech company developing MultiStem (allogeneic, bone marrow-derived stem cells). A Phase II trial with MultiStem in ischemic stroke has completed. The company has ongoing Phase II clinical trials for AMI and ARDS and a Japanese registration trial for stroke is planned. Next events Japan stroke trial initiation AMI data Analysts Q416 Q416 Maxim Jacobs Nathaniel Calloway healthcare@edisongroup.com Edison profile page Athersys is a research client of Edison Investment Research Limited

2 Corporate update Japanese stroke program In January 2016, Athersys announced a collaboration with the Japanese regenerative medicine company Healios to develop MultiStem in Japan. The deal included a $15m upfront payment, $215m in additional milestones and double-digit royalties. Healios will be responsible for all Japanese development, although Athersys will manufacture MultiStem for the clinical trials. This partnership was formed to take advantage of the favorable Japanese regulatory environment surrounding regenerative medicine. In order to encourage the development of regenerative medicine therapies for its ageing population, the Japanese Pharmaceuticals and Medical Devices Agency (PMDA) has initiated a policy that allows for the market approval of products with consistent safety and meaningful evidence of efficacy, although not necessarily to a level of statistical significance. This was part of a broader effort by the PMDA to accelerate approval times as the PMDA had been known as one of the slowest agencies to approve drugs (see Exhibit 1). Exhibit 1: Approval times across six regulatory agencies Source: PMDA, Center for Innovation in Regulatory Science In September 2015, the first regenerative stem cell therapy was approved under the new program: Temcell from Mesoblast with Japanese partner JCR Pharmaceutical. Temcell is a mesenchymal stem cell therapy for acute graft vs host disease (agvhd). The approval of Temcell gives a first window into the PDMA s decision process for this program. Temcell (at the time under the name Prochymal and in development by Osiris) underwent a Phase III trial in which it failed to show any statistical significance in the steroid refractory agvhd patients (35% vs 30% response rate, p values not released) and trended towards no effect as a first-line treatment (45% vs 46%, p values not released). However, a post-hoc analysis revealed that the steroid refractory per-protocol population approached significance (76% vs 47%, p=0.087) and the gastrointestinal (GI) subgroup showed significance (88% vs 64%, p=0.018). These data were supported for Japanese approval with a 25-person, open-label study of Japanese steroid refractory GvHD patients showing a 60% response rate. Based on this evidence, Temcell received complete market approval in Japan for agvhd. Athersys has announced the initial design for the Japanese trial following discussions with Healios and the PMDA. The current target is 150 to 200 stroke patients, which would make this the largest MultiStem trial to date. In terms of timing, we expect the company to file an IND with the PMDA in mid-summer and begin enrolling patients in Q416. Athersys 30 June

3 The company indicated that the inclusion criteria for the trial would be informed by the subgroup analysis of the previous clinical trial. We interpret this as meaning the trial will only include patients who are treated with MultiStem hours post-stroke, because reduced efficacy was seen in patients receiving treatment beyond 36 hours in the previous clinical trial. Right now, it seems likely the trial will exclude patients who receive both tissue plasminogen activator (tpa) and mechanical reperfusion (MR), since recent studies show that these patients generally experience better outcomes. The primary endpoint will be the proportion of excellent outcomes at 90 days, which corresponds to an improvement in each of the three clinical diagnostic scales used in this and many other stroke studies: NIH Stroke Scale, modified Rankin Scale, and the Barthel Index (Exhibit 2). Exhibit 2: Stroke severity metrics Metric Scale Description NIH Stroke Scale (NIHSS) 0-42 A measure of neurological impairment based on the assessment of 11 different items including level of consciousness, motor issues, and the ability to recall everyday details such as the month. Modified Rankin Scale (mrs) 0-6 A measure of morbidity roughly describing the level of disability ranging from symptomless (0) to bedridden and incontinent (5) or death (6). Barthel Index (BI) A measure of the degree of independence. Patients must be able to perform 10 specific daily tasks such as grooming, feeding, and bowel/bladder control. Source: National Institutes of Health This is a different primary endpoint than was used in the Phase II trial (which used the global test statistic, a combined measure of change across multiple parameters). The Phase II trial also measured the number of excellent outcomes 90 days post-treatment, and the proportion of excellent outcomes showed statistical significance in the subset of patients receiving MultiStem in under 36 hours who did not receive tpa and MR. At one year, the excellent outcome results improved for all treated patients (23.1% vs 8.2%, p=0.02) as well as those treated within 36 hours of the stroke who did not receive both tpa and MR (29.6% vs 5.8%, p<0.01) (Exhibit 3). Exhibit 3: Excellent outcomes in MultiStem Phase II trial at 90 days and one year Source: Athersys. Note: *Excluding patients receiving tissue plasminogen activator and mechanical reperfusion. The design of the trial is larger than originally expected, especially due to the Temcell precedent of approval from a 25-person study. However, investing in a larger trial has numerous benefits. First, it increases the power of the trial, which increases its probability of success (hence we increased our probability of success for the MultiStem in Japan from 30% to 40%). Second, even if the trial misses statistical significance, strong trends could give Japanese regulators enough confidence that they have seen the signal of effectiveness necessary under the new framework to approve it despite the primary endpoint miss. Third, a successful trial of this size would increase the chances of receiving full approval in Japan instead of conditional/time-limited approval, which would require reapplication within seven years. Fourth, and most importantly, this has the potential to be used as part of a registration package with the FDA, which may mean the need for only one pivotal trial in the US. Currently our base case is that two US pivotal trials would be needed and that approval Athersys 30 June

4 occurs in However if the FDA is willing to accept the Japanese data due to the fact that acute treatment is currently limited to just 5-8% of treatable patients and hence a major unmet medical need, our current US launch estimate could prove conservative. ARDS and AMI going slowly Outside of stroke, Athersys has two ongoing Phase II clinical trials. The company has a trial studying MultiStem for the treatment of acute myocardial infarction (AMI) and in Q116 it initiated a study to investigate the therapy for acute respiratory distress syndrome (ARDS). On the Q116 conference call, the company indicated that these two trials were progressing more slowly than initially expected. The company is attempting to mitigate the slow enrolment by increasing the number of clinical trial sites. At this time, we are not delaying our projections for these two programs, although we have modestly increased the costs for the Phase II trials (by approximately $1m per program). It should be noted that both of these clinical trials are supported through grant funding: $2.8m from the NIH for AMI, and 2.0m from Innovate UK for ARDS, which significantly offsets the cost to the company for these trials. Valuation Our valuation has increased to $394m or $4.68 per basic share ($4.57 per diluted share) from $373m or $4.48 per basic share ($4.39 per diluted share). This is driven by an increase in the probability of success to 40% from 30% for MultiStem in Japan and advancing our NPV to Q116, but was offset by the realization and spending of the $15m Healios upfront payment, as well as an increase in estimated clinical trial costs ($1m per indication in both 2016 and 2017) for the AMI and ARDS Phase II programs. The valuation of the Japanese stroke program has been reduced to reflect the realization of the $15m upfront payment from Healios. Our remaining parameters remain unchanged. We expect to update our valuation upon further regulatory clarity from the FDA and EMA as well as potential partnering activity in the US and EU. Exhibit 4: Athersys valuation table MultiStem Indication Status Prob. of Launch Peak sales ($m) Patent/exclusivity Royalty rnpv success year protection Ischaemic stroke (US) Phase II 25% , % $95 Ischaemic stroke (EU) Phase II 25% , % $63 Ischaemic stroke (Japan) Phase II 40% % $90 AMI (USA) Phase II 25% , % $92 ARDS (US/EU) Phase IIa 15% , % $24 Total $363 Cash and cash equivalents (Q116) ($m) $30.4 Total firm value ($m) $394 Total basic shares (m) Value per basic share ($) $4.68 Stock options and Warrants (3/2016, m) 2.1 Total number of shares 86.2 Diluted value per share ($) $4.57 Source: Edison Investment Research Financials Athersys reported $15.5m in revenue for Q116, the majority of which ($15m) was due to the Healios upfront licensing payment. This income resulted in net income of $4.8m and the company ended the quarter with $30.4m in cash. The company increased operational spending from $7.1m in Q415 to $8.7m, largely due to increases in R&D spending associated with clinical costs and manufacturing, presumably in preparation for the upcoming Japanese trial. Athersys 30 June

5 We have made changes to our revenue forecasts because we previously amortized the Healios upfront payment, and it is now accounted for entirely in Q116. We have increased our estimates for R&D spending in 2016 and 2017 by approximately $2m each year to account for the increase in trial sites for the AMI and ARDS trials. We have also increased our SG&A forecasts slightly following the Q116 results. We expect that Athersys will end 2016 with $9m in net cash, compared to our previous estimate of $10m, and we have not changed our assumption that the company will need an additional $150m in funding before profitability in Exhibit 5: Financial summary $000s e 2017e Year end 31 December US GAAP US GAAP US GAAP US GAAP US GAAP US GAAP PROFIT & LOSS Revenue 8,708 2,438 1,623 11,948 16,536 0 Cost of Sales Gross Profit 8,708 2,438 1,623 11,948 16,536 0 Research and development (19,636) (20,484) (23,366) (21,316) (25,062) (25,814) Selling, general & administrative (4,753) (6,065) (6,909) (7,536) (7,834) (8,069) EBITDA (17,493) (24,776) (29,336) (17,499) (16,911) (34,433) Operating Profit (before GW and except.) (17,173) (24,430) (28,976) (17,232) (16,421) (34,154) Intangible Amortisation Exceptionals/Other Operating Profit (17,173) (24,430) (28,976) (17,232) (16,421) (34,154) Net Interest Other (change in fair value of warrants) 2,404 (6,324) 6, (2,181) 0 Profit Before Tax (norm) (17,139) (24,419) (28,926) (17,232) (16,421) (34,140) Profit Before Tax (IFRS) (14,735) (30,743) (22,335) (16,460) (18,602) (34,140) Tax Deferred tax Profit After Tax (norm) (17,139) (24,419) (28,673) (17,194) (16,385) (34,104) Profit After Tax (IFRS) (14,735) (30,743) (22,082) (16,422) (18,566) (34,104) Average Number of Shares Outstanding (m) EPS - normalised ($) (0.53) (0.42) (0.37) (0.21) (0.19) (0.39) EPS - IFRS ($) (0.45) (0.53) (0.29) (0.20) (0.22) (0.39) Dividend per share ($) BALANCE SHEET Fixed Assets 1,294 1,333 1,470 1,312 1,114 1,127 Intangible Assets Tangible Assets 1,294 1,333 1,270 1, Other Current Assets 26,309 32,855 27,248 23,817 30,225 29,042 Stocks Debtors Cash 25,533 31,948 26,127 23,027 29,093 27,874 Other Current Liabilities (4,478) (4,368) (4,692) (4,756) (4,025) (3,729) Creditors (4,478) (4,368) (4,692) (4,566) (4,025) (3,729) Short term borrowings (190) 0 0 Long Term Liabilities (2,878) (9,999) (3,131) (649) (22,830) (52,830) Long term borrowings (169) (176) (183) 0 (20,000) (50,000) Other long term liabilities (2,709) (9,823) (2,948) (649) (2,830) (2,830) Net Assets 20,247 19,821 20,895 19,724 4,484 (26,390) CASH FLOW Operating Cash Flow (17,665) (22,784) (25,791) (13,764) (13,900) (30,942) Net Interest Tax Capex (347) (385) (297) (132) (285) (292) Acquisitions/disposals Financing 30,357 29,584 20,267 10, Dividends Other Net Cash Flow 12,345 6,415 (5,821) (3,100) (13,934) (31,219) Opening net debt/(cash) (12,784) (25,364) (31,772) (25,944) (22,837) (9,093) HP finance leases initiated Exchange rate movements Other 235 (7) (7) (7) Closing net debt/(cash) (25,364) (31,772) (25,944) (22,837) (9,093) 22,126 Source: Edison Investment Research, Athersys accounts Athersys 30 June

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