Description

There’s a pathway to doing diligence to the degree that we are able to underwrite it ourselves, which is critical.  And it’s a diligence pathway that we believe our fundamental colleagues at VIC, even for non-biotech specialists like us, can underwrite.

Separately, the proxy battle by Kayne Anderson comes down to this, in our opinion and diligence: they believe ATHA is a valuable company (drug assets will prove themselves out).  If Kanye believed the upcoming study, which is what our thesis and investment is based on, is likely to be negative, they would have sold all of their shares and started the proxy battle AFTER the failed study.  They’d have 1) much more ammunition to show that whatever is happening at the company is bad 2) they would have sold their shares (Kayne was one of the 1st money into this company privately and his cost basis is likely ~$3-5/shr based on our diligence and educated guess and they are easily in the money and could have sold it all versus take a loss and then pile into ATHA after ATHA fails its study.  Instead, Kayne is going activist now and trying to get in front of the data.

The takeaway and key stock driver that will happen in the next 1-1.5 months and it is this event: will the primary endpoint (P300) and secondary endpoint (ADAS-COG) be p<0.05 and p<0.10, respectively, in the ACT-AD Phase 2 study for Athira?

If yes, then the stock should be worth $100 or ~10x from here (~$4B market cap company).  Even prior to data (i.e. unknown if the drug will work), stocks in this space were in the $1-2B market cap range, most notably CRTX in mid 2021 and SAVA today (SAVA is highly shorted and we don’t have an opinion on SAVA other than it’s in the similar TAM as ATHA).  We do have a decently high degree of conviction the scenario above will happen for the reasons below.

If it doesn’t happen and the scenario is, say, P300 is positive but ADAS-COG doesn’t show a “trend,” i.e. P>0.01, then we think the stock only goes down ~20% because ACT-AD is not their only shot on goal–ATHA has another study (called LIFT) whereby the ACT-AD study will create learnings for the LIFT study, which is the where the goal is to be positive (p<0.05, not just p<0.10) on ADAS-COG.  On this note, it is important to note that the ACT-AD study is not powered (meaning they did not make the n for the study big enough to have very high probability of success for ADAS-COG); thus, any trend (again, p<0.10, not p<0.05) or even ADAS-COG change can be seen as a win and the company has also been public about this expectation.

As an aside: sellside has a lot more information on P300 and ADAS-COG: what it measures and what it means and why it’s important.  We recommend you read those if you’re interested in learning more

The ~13:1 upside:downside ratio is based on the ~900% upside case for the stock vs the ~20% downside case.

The data will be revealed in 1-1.5 months so this is very timely.

A few key things:

1. Why will it be worth so much and why don’t others see it?

1. It will be worth a lot because AD is a big TAM–and this isn’t controversial

1. ATHA is focused on Alzheimer Disease (AD)

1. If you do a bottoms up analysis, assuming there are 5M AD patients in the US and a drug costs $20K/yr, the annual, recurring revenue for the drug (100% theoretic penetration) is $100B.  If you assume ATHA gets 20% of the theoretical market (assuming they also charge $20K/yr, which is conservative), that’s $20B annual revenues

2. The markets don’t disagree with the massive TAM of AD

1. BIIB, the much ballyhooed biopharma company with Aduhelm, which we believe should not have been approved for AD, went up ~$20B in market cap the day the drug was approved by the FDA

3. A sellside analyst from Jefferies has a $100 price target for the scenario that we think will happen (Andrew Tsai) from his 2/28/22 report and we’re in line with that on upside case

2. Why don’t others see it

1. Some may think the data is not real and fraudulent given the prior CEO/founder (Leen Kawas) was found to have plagiarized her PhD dissertation

1. https://www.geekwire.com/2021/ex-athira-pharma-ceo-leen-kawas-resigns-leaves-board-image-manipulation-investigation/

2. We feel good ATHA’s data is credible (but the ex-CEO clearly fudged data) because the company audited basically everything that occurred during the tenure of the despicable ex-CEO and everything came out clean: https://investors.athira.com/news-releases/news-release-details/athira-pharma-announces-leadership-changes-mark-litton-phd-mba

3. The investor we highly respect was also a private investor in the last private financing and while they can’t disclose the details, what they said was that the data they saw were directly from the external contract research organizations and not from ATHA and to that end, it was clear to them that the data upon which all the analysis is based, is credible; you won’t of course be able to underwrite this but this relationship and color gives us comfort internally

2. Why don't others see it?  Well, other investors in the space do see it

1. Two groups that are apparently highly respected in biotech called Perceptive Advisors and RTW led the private crossover financing in 2020 https://investors.athira.com/news-releases/news-release-details/athira-pharma-closes-85-million-series-b-financing and are still owners today

2. Importantly, it looks like Perceptive’s CIO and founder, Joe Edelman, is on the board at ATHA and based on Bloomberg, this is the only company board that Joe is on

1. For big binaries, we reviewed stocks that Perceptive has been public about and found this video of Joe talking about SRPT in May 2016 after a very unclear to arguably just really negative FDA Advisory Committee (a public forum convened by the FDA where experts and scientists and patients and the FDA and the company all convene to discuss the drug’s trial and data) and Joe and Perceptive were very bullish on SRPT getting approval despite basically the entire world (based on the stock price) taking the other side; and guess who was right?  Perceptive!  SRPT’s drug was approved and the stock rocketed ~80% on approval a few months later https://www.cnbc.com/video/2016/05/05/showdown-over-sareptas-muscular-dystrophy-drug.html Of course 1 right call doesn’t mean they will get them all right but see the article we found on Perceptive below

3. If the question is why aren’t more biotech investors who know biotech investing in the space, we believe the answer to that is really 2 fold

1. Biotech has had a terrible year last year (XBI, biotech index, was -20.5% in 2021) and it’s even worse this year (-34% YTD in 2022) and many funds that have survived are playing defense, moving away from trial readouts (exactly like this readout) and moving to SMID cap “safe” names like VRTX (check out that stock chart!).  For the unfortunate biotech funds last year, many of them are even rumored to be shutting down like Logos Capital and Cormorant, based on our diligence in speaking with ECM desks at the various banks and in speaking with current and former LPs invested in those funds https://www.wsj.com/articles/hedge-funds-suffer-big-losses-on-biotech-rout-11638727155 

2. Just having more “smart” investors invest alongside doesn’t mean the stock will work as we all know; we generally look less to see who’s involved and more about whether there’s a diligence pathway that we can internally underwrite to gain conviction and a POV, and this latter piece is ultimately what got us there

In short, it’s a massive TAM (and thus why a stock move of this magnitude is reasonable if our call is correct) and the prior CEO issues / credibility questions plus biotech funds generally seeking safety in SMID cap stocks is why there’s this unique opportunity today

Hopefully that sets up the background.  Now here’s the true diligence that we did to get there on why the probability of success is very high.

1. We hired a biostatistician to help us obtain a probability of success (POS), recognizing that garbage in = garbage out so we supplied the inputs and tried as hard as we could to be super conservative

2. The statistics to arrive at POS for ACT, which is screen clipped above, was based on 1) the number of patients in the ACT study 2) the effect size of the endpoint (again, we care about 2 endpoints: P300 and ADAS-COG)

3. For the number of patients, ATHA provided that recently here:

1. https://investors.athira.com/news-releases/news-release-details/athira-pharma-presents-study-overview-and-baseline-data-act-ad 

2. ATHA states they have 57 patients in the study.  Given there are 3 groups and it’s randomized 1:1:1, this is ~19 patients per group

4. For the effect size for P300

1. Effect size is calculated by taking the (drug effect - placebo effect) / standard deviation.

2. So we have 3 variables we need to get to calculate effect size

3. Drug effect: we used the effect from the prior study, which was found here on slide 15: https://investors.athira.com/static-files/60cc83de-a22a-4bf8-adbc-20fd8e58262c and eyeballing the purple line (which is the drug arm at 40mg from the last study), it was ~75 ms (at 8 days). For the effective size calculation, we wanted to be conservative and assume that the drug actually has decreased improvement in the upcoming study from ~75 ms to 58 ms

4. Placebo effect: we used the effect from the same prior study and it was ~2 ms (at 8 days).  For the effective size calculation, we wanted to be conservative and assume that the placebo actually has a greater improvement in the upcoming study from ~2 ms to 20 ms

5. Standard deviation ~20

6. We have the inputs and will calculate the effect size and POS below altogether

5. For the effect size for ADAS-COG

1. The key diligence we did here is that we boiled the literature to find the correlation (Pearson correlation coefficient) between P300 and ADAS-COG because the variable that have from ATHA’s last study for the 40 mg group is P300 (from the last study, screen clipped above) and a way to understand how ADAS-COG may behave or act is through understanding how correlated ADAS-COG is to P300

2. We found these articles and we calculated the R’s ourselves highlighted below.  There is also literature where the R is calculated and we include those below also (not highlighted):

3. We used a very conservative R of 0.485 because that was the lowest R we found in literature between ADAS-COG and P300 (from the Werber paper that can be found here https://link.springer.com/article/10.1007/s00702-003-0817-9)

4. We have the inputs and will calculate the effect size and POS below altogether

6. Putting it all together

1. P300 40 mg drug arm POS = 91% on super conservative assumptions

1. Effect size = (58-20 / 20) = 1.9

2. n=19

3. Even if go even more conservative and assume that P300 effect size decreases by 1/3: 1.9 → 1.25 and assume the 77 total patients are not equally split amongst the 3 groups but more are in placebo and assume 19 patients → 15 patients in the 40 mg group, you see below that the power (or the POS) is 0.91 = 91%

2. ADAS-COG 40mg drug arm POS = 87% on normalized assumptions

1. Effect size = 0.485 * 1.9 = 0.92

1. The 0.485 is the correlation between ADAS-COG and P300

2. 1.9 is the P300 effect size

2. Assume n remains at 19; if you assume less like we did for P300 above, the POS is still robust and we suggest you run this statistics yourself to get comfort on various other scenarios

3. You see below that the power (or the POS) is 0.87 = 87%

3. We presume that the 70 mg drug arm will have even greater POS if there is a “dose response,” which means for most drugs, higher dose = greater efficacy.  If the 70 mg is not better than the 40 mg group, that is fine too because some drugs may have a “ceiling effect,” i.e. once you dose above an optimal level, the efficacy remains at the ceiling and won’t go higher (for often biological reasons).  As long as one of the drug groups hits on both endpoints, this will be a positive study as seen by the markets and investors

4. Safety–thus far, ATHA has disclosed what safety across all patients have been and it’s been largely benign and within expectations

Net net, this key stock driver will happen in the next 1-1.5 months and the ~10x upside case is likely with protected downside (won’t be a $0 stock given it’s pipeline and the company has ~$7 in cash/shr as of 12/31/21-sure there’s cash being burned but there is cash downside protection) with the stock current trading at ~$10/shr.

We think the unique opportunity occurred because of the issue of credibility from the ex-CEO that bled into the company itself (otherwise, the company likely would be $20+ before data) plus the fact that many funds are moving to non-trial binaries given their underperformance last year (trying to defend their AUM and LP exodus) by going to SMID cap biotechs.

Catalyst

ACT Study data readout ahppening at end of May/early June 2022.