Clients often ask about our investment process and how do we decide to sell or handle difficult situations. We take the opportunity of Athira, a stock in our Biotech 360° portfolio whose CEO is suspected of scientific fraud, to illustrate our way of working.

What happened

Thursday night, Athira CEO Leen Kawas was placed on temporary leave by the company's board of directors after her University started an investigation claiming she published several papers containing altered images¹ during her Ph.D. studies. It is noteworthy to mention that she founded and based Athira’s ground science on these papers. The resulting scientific bias could jeopardize the entire program, which explains the sharp drop in stock price.

As a reminder, Athira is a biotech company developing treatments for Alzheimer's and other neurodegenerative diseases. The foundational science behind Athira's lead drug hypothesizes that activating a specific pathway in the brain promotes neuronal health and alleviates cognitive symptoms associated with Alzheimer's.

In such circumstances, our risk management process requires an ad-hoc meeting of our investment committee, which includes the whole fundamental research and portfolio management teams, to decide upon the course of action.

Impact on our investment case

Why did we enter the position

Following the Aducanumab (Adu) advisory committee last November, we developed a firm conviction that the FDA will adopt a more “accommodative” stance to Alzheimer's drug development. Our view materialized with Adu's approval earlier this month.
To optimize the risk/reward profile of our investment thesis, we entered positions on different, interrelated players: Biogen for potential aducanumab approval, Quanterix as a pure player brain diagnostics, and Athira, who is developing an additional drug that would not be competing with Biogen’s but would benefit from the regulatory precedent.

We decided to buy Athira as the company offered a compelling risk/reward profile, driven by its biomarker-focused, placebo-controlled study², which demonstrated intriguing activity in a small number of patients. We also met with the management and enquired about clinical result data the company committed to releasing before year-end in a medical meeting.
Still, with realistic expectations about the probability of success of a single-drug portfolio, we sized the position at a modest 2% of our portfolio, complementing our exposure to the theme.
 

Our internal review

Following the news, our investment committee was convened. The healthcare team presented initial findings and implications. From a corporate governance standpoint, Athira’s board implemented good practice and took immediate action to remove Dr. Kawas from an active role. There were no known financial shenanigans or accounting wrongdoings, nor was there a significant realignment of the company’s strategy. Under these circumstances, our automatic selling triggers were not met³. The investment committee concluded that the team in charge should take the time to delve into the details and present complete findings in a subsequent meeting the next working day.
 

Why is this relevant for Athira

The research work led by Dr. Kawas and currently being put into question relates to activating a specific pathway. These papers were referenced in the patent application of their leading molecule, ATH-1017. Also, although it is not entirely uncommon to modify publication images for quality purposes, the inconsistency over four different articles by Dr. Kawas is concerning.
Finally, while the biomarker study was done by an external contract research organization (CRO), and therefore data integrity is not called into question, these results would be significant only if the mechanism of action of the drug activates the specific pathway, which is the subject of Dr. Kawas’ papers. Thus, in our view, conducting this study based on potentially misleading assumptions presents a scientific bias that could put the entire program into question.
 

Sector impact

The inherent dynamic of scientific and clinical work, in the core of the biotechnology industry, makes this incident a real anomaly:
 

• Papers like the ones published by Dr. Kawas are always peer-reviewed, which usually serves as a gatekeeper to the professional and scientific integrity of published work.
• In most cases, CROs are handling the preclinical work from animal to large phase 3 human studies, minimizing bias from the scientific founders.
   

We, therefore, do not think this incident has much read through to neither the biotech nor, more specifically, the central nervous system (CNS) space. But, at the same time, such an incident could actually promote better controls, which would be a net positive for the space.
 

Final decision

The outcome of Athira’s internal investigation could range from no wrongdoing to questioning the entire validity of the clinical program. With few details provided by the company, it is difficult to assess the probabilities of each scenario. Nevertheless, it is plausible that the company could be subject to substantial public and judiciary scrutiny, making a short/mid-term value inflection less likely as well as being a distraction for a newly appointed management team.

With additional feedback and financial analysis from the portfolio managers’ team, it was decided that in its current state, Athira’s is no longer in line with our growth focus, particularly in light of more attractive opportunities.

We, therefore, decided to remove the company from our portfolio and, given the already satisfying portfolio exposure to the Alzheimer’s space, allocate the proceeds elsewhere.

Our takeaway

While our holding period spans a multi-year investment horizon, we have a strict policy to eliminate portfolio positions in specific situations, including accounting wrongdoing, invalidated investment thesis, and deteriorating corporate governance. Athira's board of directors took swift action towards the founder and CEO, Dr. Kawas. However, a loss of confidence in management is a serious issue which we believe affects the risk/reward profile of the company and warranted a detailed revision of the investment case.

We view this incident as a sporadic one in science/tech-driven investing. Nevertheless, having the tools to handle such occurrences is crucial, and we firmly believe in the importance of a structured and robust investment process.