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AEMD: U.S. Study Kicks Off, Ebola Looks Promising

By Brian Marckx, CFA


Q3 10-Q Filed (ending 12/31/2014): U.S. HCV Study Kicks-Off, Hemopurifier Used in First Ebola Patient 

Aethlon Medical (AEMD) filed their 10-Q for the fiscal third quarter ending 12/31/2014.  Revenue consisted solely of that from the Battelle subcontract with no billings from the DARPA grants.  And while the lack of DARPA revenue meant that the top-line was relatively meager, importantly OpEx was well below our number, despite a fairly sizeable run-up in G&A related to the initiation of the U.S.-based HCV safety study.  The company also continued to clean up the balance sheet, converting almost $900k of past due debt to equity over the last few months and ended Q3 with just $287k of debt outstanding, all of which is performing. 

But most importantly, in our opinion, is the operational progress and additional validation of the potential utility of Hemopurifier that the company has accomplished over the last several months – including commencing enrollment of the U.S. study, use of Hemopurifier in an Ebola patient, FDA approval of protocol for an Ebola study and additional positive data from the India-based HCV study. 

Q3 revenue was $33k, below our $183k estimate – the difference related to that we had forecast some contribution from the remaining milestones under the year 3 / year 4 DARPA awards.  Timing of milestone completion and related revenue recognition can be irregular which makes forecasting such somewhat of a challenge.

Through the end of fiscal Q3 2015 AEMD had billed approximately $4.5M under the DARPA awards which represents $1.97 million under the initial year-1 contract, $1.6 million under the year-2 contract and $905k under the year-3 contract, the latter which was awarded to the company in September 2013 and initially was to pay up to $1.53 million if all eight milestones are met.  Through Q3 AEMD has billed six of the eight year-3 milestones.  AEMD began work on the Battelle subcontract in early April 2013 and through Q3 has booked a total of $276k in revenue related to this. 

In September 2014 AEMD announced that they were awarded the year-4 DARPA contract which will pay the company $669k if all three milestones are met.  DARPA has the option of entering into the remainder of the proposed contract, that is, for year five. AEMD recently noted that due to budget restrictions, DARPA has reduced the scope of AEMD's contract for years three through five. The three through five year contracts were initially worth ~$3.2M. Due to the budget change, this amount is now ~$2.4M (the breakdown per contract-year was not disclosed). We had already adjusted our model to account for this change.  We currently model approximately $690k in DARPA related revenue in the current fiscal year. 

We also continue to look for additional, although relatively minimal revenue from the Battelle contract in the final quarter of fiscal 2015.  As a reminder, AEMD's subcontract is a time and materials contract so the total that AEMD will eventually bill will not be known until their work is completed. We do, however, think it's likely that there will be additional revenue contribution from this contract. 

Q3 operating expenses were $1.1 million, better than our $1.4 million estimate – the difference mostly related to lower DARPA related expenses.  Operating loss was $1.1 million, slightly better than our $1.2 million estimate as a result of the beat in OpEx.  Net income and EPS, excluding $366k in non-cash debt extinguishment and warrant extension expenses, were ($1.3) million and ($0.00), in-line with our ($1.3) million and ($0.00) estimates.

We are maintaining our Outperform rating.  See below for free access to our updated report on AEMD. 

Balance Sheet / Cash Balance

A significant highlight over the last few quarters has been the accelerated pace that AEMD has cleaned up their balance sheet.  This included converting a significant amount of debt to equity, extending the maturity on other debt and a resultant reclassification of a large derivative liability balance to equity.

As of February of 2014 AEMD had past due debt of approximately $2.1M (plus ~$1.1M in accrued interest).  Fast forward 12 months and as of today the company has no past due debt.  As of the most recent quarter end (12/31/2014), AEMD had just $287k of debt outstanding, all of which is performing and just $56k of accrued interest. 

As we have noted in our ongoing coverage of AEMD, their historical significant past due debt balance had kept their risk profile elevated.  And while the debt conversions and related amendments have significantly increased the share outstanding count, this recent de-leveraging has provided meaningful de-risking in our opinion.  This, along with positive and substantive operational progress that the company has made over the recent past, figured into our upgraded recommendation on AEMD in early November. 

As of 12/31/2014 cash balance, which was bolstered by the recent sale of $4.1 million of common shares, was $2.8 million.  Cash used in operating activities was $1.8 million in Q3, which included a $940k pay-down of A/P and accrued expenses.  Ex-changes in working capital, cash used in operating activities in Q3 was $976k.  We continue to expect cash generated from government and other contracts along with additional funds raised through the sale of securities to fund the company over the near-to-mid term.  We expect AEMD will need to raise additional funds prior to completion of the U.S. HCV feasibility study.

Operational Update:

Aside from AEMD's continued focus and success with cleaning up their balance sheet and eliminating non-performing debt, the company continues to make other progress on the operational front as well.  Most recent highlights relate to additional validation of the potential utility of Hemopurifier -  this includes commencement of enrollment of the U.S. HCV safety study, use of Hemopurifier in an Ebola patient, FDA approval of protocol for an Ebola study and additional positive data from the India-based HCV study.  And an added-kicker was recent recognition from Time Magazine – which named Hemopurifier to their list of The Best Inventions of 2014 as well as included it on their list of 11 Remarkable Health Advances From 2014. 

HCV Study Nearing Commencement, Add’l Positive Data from India HCV Study

While kick-off of the U.S. HCV study has been drawn out longer than expected, this has finally come to fruition.  Patient recruitment began in December 2014 and the first patient was enrolled in early February.  As a reminder, this is a safety study being conducted at DaVita Medical Center Dialysis in Houston with target enrollment of 10 HCV-infected patients who are already undergoing dialysis.  Per the study protocol on clinicaltrials.gov, estimated completion date is December 2015.  Results which were initially expected to be used solely for support of FDA approval to conduct larger pivotal studies in HCV as well as potentially other diseases such as HIV and cancer, may now also include pursuit of clinical studies for other viruses, including Ebola and other category A threats. 

And relative to HCV, Aethlon recently announced additional positive data from its clinical study conducted at Medanta Medicity Institute in India.  As a reminder, the study enrolled 12 HCV-infected patients, 10 of whom completed treatment.  Patients received three, six hour Hemopurifier treatments during the first three days of a standard regimen of 48-week peginterferon plus ribavirin treatment.  Eight of the ten which completed treatment were genotype-1(i.e. – most difficult to treat) and two were genotype-3. 

AEMD had previously reported interim results, which included that seven of the ten followed for 90 days or more (including three for 48 weeks) had undetectable viral load.  The final data, announced in early December, showed that eight of the ten (6 genotype 1 and both genotype-3) achieved sustained virological response (SVR – which is the clinical definition of cured).  Additional data was also announced, including that five of the ten achieved rapid virological response (undetectable viral load at 30 days) – RVR is considered an important metric as 80% - 90% of patients who achieve RVR eventually achieve clinical cure.  Viral capture, which the company also announced preliminary results of in 2012, was as high as 3 billion copies in a six-hour treatment – which was similar to interim results. 

Ebola Could Offer A New Opportunity

AEMD has moved very quickly with the recent Ebola outbreak in West Africa in terms of seizing an opportunity to assess Hemopurifier in treatment of the virus.  While AEMD had already demonstrated Hemopurifier can capture a significant amount of the Ebola virus, this was accomplished only in in-vitro studies.  Human application, until this recent outbreak, was difficult given the issue of finding patients. 

In mid-October AEMD announced that Hemopurifier was being used on an Ebola patient for the first time.  Introduction of Hemopurifier was made possible by a special approval from the German Federal Institute for Drugs and Medical Devices.  The patient, a Ugandan doctor who contracted the virus in Sierra Leone, was treated at Frankfurt Hospital in Germany.  About three weeks later the company announced that the hospital reported that the patient had undetectable levels of Ebola.  He was subsequently released from the hospital. 

The Chief of Nephrology at the hospital where the patient was treated presented the treatment findings at the American Society of Nephrology (ASN) Annual Meeting on November 14th during a special session on Ebola.  Hemopurifier captured 242 million copies of Ebola.  Hemopurifier was introduced 12 days after the patient was diagnosed with Ebola.  Prior to Hemopurifier administration, the patient had multiple organ failure, was unconscious and had a viral load of 400k virus copies/ml.  Following a 6.5 hour treatment with Hemopurifier vrial load was 1k virus copies/ml. 

We view these results as potentially encouraging for the utility of Hemopurifier with Ebola, or perhaps other aggressive and lethal viruses.  However, no concrete conclusions can be made in this regard given that there is no way to know whether introduction of Hemopurifier was an impetus to cure of the patient (who was also undergoing standard care) – although it is clear that Hemopurifier successfully captured the Ebola virus.  AEMD hopes to add evidence that Hemopurifier is effective in treating Ebola and in early January announced that FDA approved protocol to treat Ebola patients with Hemopurifier in a multi-site (up to) 20-patient investigational study.  Hemopurifier therapy will be administered daily for six to eight hours until Ebola viral load falls below 1k copies/ml.  Timetables for commencement of this study have not been offered.  And enrollment will likely be a challenge given the dearth of Ebola-infected individuals, particularly those that are treated in the U.S.  Despite this, we view the protocol approval and the initial results of Hemopurifier use in Ebola as very positive steps.  And, in the meantime, AEMD will look to gain Humanitarian Use Device approval for Ebola and other viruses which could provide the opportunity for additional experience in these potentially highly attractive applications. 

Potential Application in Cancer Gaining More Traction

Aethlon has in the past alluded to the possibility of pursuing development of Hemopurifier for certain cancers.  Cancer, which until recently was considered somewhat of a backburner application, has since evolved into an area that Aethlon expects to pursue more aggressively.  The company now hopes to file an IDE for treatment of cancer.  AEMD has not disclosed what or which cancer types it expects to initially pursue in clinical studies, although as we note below, Hemopurifier could potentially have utility in various cancers. 

A potential application in cancer received arguably additional support in an article titled, "Extracellular Vesicles: Emerging Target for Cancer Therapy" published in the April 2014 issue of the journal, Trends in Molecular Medicine. The article, written by researchers at Harvard Medical School, Massachusetts General Hospital and University of Oxford explores evidence that extracellular vesicles (i.e. - exosomes) play a key role in cancer development and progression and suppression of immune response.  As such, extracellular vesicles (EVs) have increasingly become targets for anticancer therapy.  This coincides with AEMD's cancer research and how Hemopurifier, via the removal of circulating cancer-secreted exosomes, could have utility in the treatment of cancer. 

The authors also believe that EVs may also increase the body's resistance to cancer drugs and hinder their effectiveness.  They further note that, while early evidence suggests that inhibition of EV biogenesis may have beneficial effects in the treatment of cancer, that a challenge has been to find therapies that can specifically target cancer related EVs without affecting normal cell function.  The researchers specifically reference Hemopurifier as a potential therapy to overcome these challenges, noting that with the use of Hemopurifier "it might be possible to specifically capture tumour cell-derived EVs on an antibody-coated matrix during extracorporeal dialysis.  For example, in human epidermal growth factor receptor-2 (HER-2) overexpressing breast cancer, where HER-2-expressing EVs have been shown to interfere with therapy and are associated with tumour aggressiveness, anti-HER-2 antibodies could be used to remove HER-2-expressing EVs from circulation with the aim of improving therapeutic outcome. In principal, this approach could be tailored for other tumour types, as long as the tumour cell-derived EVs are enriched for tumour-specific proteins. However, whether the level and duration of EV depletion after ADAPT (i.e. - Hemopurifier) therapy would be sufficient to achieve a clinically relevant outcome remains to be determined." 

The authors note that their current understanding of EVs role in cancer development and progression is still in the relatively early stages and is based on data from in vitro experiments.  Their acknowledgement of Hemopurifier as potentially having utility in the treatment of cancer is also largely based on the supposition that removal of circulating EVs may be beneficial in interrupting the development and spread of tumors - which is still just a theory at this point.  Nonetheless, we think this research does add meaningful credibility to Hemopurifier's potential role in cancer suppression and adds additional support to AEMD's research which indicates the same. 

Cancer-related studies could potentially be on the near-to-mid term calendar.  And the relationship with DaVita Clinical Research and Dr. Fadem could potentially expand beyond just HCV.  The DaVita MedCenter is in close proximity to MD Anderson Cancer Center which could provide convenient logistics for developing cancer-related studies with Hemopurifier.

AEMD has presented data from preclinical studies at industry conferences that have shown Hemopurifier can capture exosomes of various cancers including breast, melanoma, ovarian and colorectal.  Specific to melanoma, a study led by Cornell University found that exosomes released by melanoma cancer cells facilitated the spread of the disease throughout the body and to other organs and bones. There was also a predictive relationship between exosome levels and severity of cancer with late-stage (IV) patients presenting with much greater exosomes levels compared to earlier stage patients. This indicates that removal of exosomes from circulation could reduce progression of the deleterious effects of melanoma to other parts of the body and potentially improve patient outcomes.

ESI Investigating Brain-Specific Biomarkers

In September 2013 AEMD announced the launch of Exosome Sciences (ESI), a subsidiary that the company had previously formed to pursue other exosome-related applications for their technology.  ESI was revived and charged with investigating exosomes' role in the progression of cancer and infectious and other diseases.

In March 2014 AEMD announced that ESI has been investigating certain brain-specific biomarkers and whether they can be identified in circulating exosomes.  ESI has isolated the brain-specific biomarkers tau, beta-amyloid, glycoprotein A2B5 and S100B in the circulatory system - previously only identified in cerebrospinal fluid.  These biomarkers have been shown to be associated with Alzheimer's Disease (beta-amyloid), Chronic Traumatic Encephalopathy (tau) and traumatic brain injury.  There is currently no cure for these disorders and identifying their presence is often not possibly until either well into their progression or, in the case of Chronic Traumatic Encephalopathy (CTE), until an autopsy is done.  CTE has received significant mainstream media attention of late as it been associated with head injuries of NFL players and been implicated as a cause for severe depression and some resultant suicides.

Then in late September 2014 AEMD announced that they and ESI entered into a collaboration with Boston University's CTE Center in development of a blood-based diagnostic that would be able to identify CTE in living individuals.  Development of an accurate test for CTE in living individuals would be a breakthrough for diagnosing the condition and could lead to improvement in care. 

ESI will use what they learned in how to isolate certain brain-specific biomarkers to evaluate blood samples collected by participants (former NFL players and a control group) enrolled in BU's DETECT (Diagnosing and Evaluating Traumatic Encephalopathy Using Clinical Tests) study.  The study is the first on CTE funded by the NIH.


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