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Friday, October 5, 2012

Moving To Neutral On Aastrom

By Jason Napodano, CFA

Today we are lowering our rating on shares of Aastrom Biosciences (ASTM) from 'Outperform' to 'Neutral'. Although we believe the stock remains an attractive long-term investment in the biotech sector, we see a number of issues that are expected to continue to weigh on the share price over the near-term. Accordingly, we see the stock trending side-ways for the better part of the next year; thus a more neutral position with respect to our rating is warranted.

...Slow Enrollment In REVIVE...

On the company's second quarter earnings call, management noted that enrollment in REVIVE-CLI program was underway with 10 patients enrolled as of August 7, 2012. Back in August, the majority of the clinical sites, especially many of the one management expects to be most active, were just beginning to screen patients. Aastrom expects that enrollment will accelerate once these high enrolling sites come on. That being said, the enrollment numbers to date seem behind schedule and management noted that final enrollment will be towards the higher end of the 18 to 24 month range first guided when the study began in early May 2012. That means enrollment should complete around mid-2014, with data around mid-2015.

...Lack Of Catalysts...

REVIVE-CLI is the lead development program for Aastrom's ixmyelocel-T. With data still over thirty months away, we see a significant lack of catalysts to drive the shares higher. Likewise, plans with the company’s phase 2b RENEW-DCM trial also seem behind schedule. On the second quarter call noted above, management said they expect enrollment to be underway by the end of August 2012. However, a quick check to Clinicaltrials.gov (identifier number NCT01670981) shows patient recruitment is not yet open. The NIH website notes enrollment should start here in October 2012, about two months behind schedule.

The company plans to enroll 108 patients with ischemic dilated cardiomyopathy. The primary endpoint is major adverse cardiac events at 12 months. Enrollment here should take 12 months, so we are not expecting data from RENEW-DCM until the fourth quarter of 2014.

As a result, 2013 is looking surprisingly slow for a company with two late-stage programs in potential blockbuster indications. That wouldn't normally concern us, but biotech investors are notoriously impatient and Aastrom will need to secure additional funding at some point in 2013 to keep both REVIVE and RENEW enrollment on plan. With no big clinical data expected, we are scratching our heads as to what drives the shares higher despite the low valuation. Valuation alone has never been a significant driver of returns in the biotech sector.

...Capital Needs...

Aastrom exited the second quarter (June 30, 2012) with $28.7 million in cash and investments. Cash use in the second quarter was $8.1 million. We expect the burn rate to increase in the coming quarters as both REVIVE and RENEW enroll. Therefore, we model cash at the end of the third quarter 2013 (September 30, 2012) at around $20 million. We think Aastrom will require another round of financing at some point during the first half 2013. Although the valuation remains attractive, we are concerned that the slow enrollment and lack of catalysts noted above may make it difficult to secure funding on such shareholder friendly terms as the $40 million raised back in March 2012. This is yet another issue that may weigh on the stock over the next several months.

...CEO To Retire...

On October 4, 2012, we learned that Aastrom's president and CEO, Tim Mayleben, plans to retire once the company can hire a successor. As a result, the Aastrom board of directors has initiated a search for a new CEO.

We are disappointed that Mr. Mayleben will be leaving the company. He has been instrumental in turning Aastrom around over the past few years and driving ixmyelocel-T from early-stage development into phase 3 trials for critical limb ischemia and phase 2b for dilated cardiomyopathy. But more importantly, in our conversations with Tim, he was adamant about cleaning up Aastrom's capital structure and bringing long-term investors to the story. The March 2012 financing noted above is an example of this commitment to shareholder friendly deals.

Although he will continue to serve as a member of the board of directors after the transition, it remains to be seen whether or not the new CEO will be as committed to building shareholder value the way Mr. Mayleben has been. As of August 7, 2012, Mr. Mayleben held 133,000 shares.

It All Adds Up

The slower enrollment and delays from REVIVE and RENEW creates a lack of catalysts in 2013. The lack of catalysts creates a hurdle given the need to raise cash and bring in new investors. The need for cash during a CEO transition has us a little concerned.

Aastrom has noted being in partnership discussions for ixmyelocel-T. At this point, management has not said whether or not these talks include CLI, DCM, or both. A partnership could be the saving grace for shareholders at this point. It would not only bring in significant cash and reduce operating costs, but it would validate ixmyelocel-T in the eyes of analysts and investors. Although we never believed that a deal was eminent, we suspect that any talks will take a pause while the new CEO gets up to speed.

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