By Brian Marckx, CFA
Fiscal Q2 2018 Financials, Operational Update
Aethlon (AEMD) reported financial results for their fiscal second quarter 2018 ending September 30th and provided a business update. Operating loss was $1.2M, slightly better than our forecasted $1.4M as a result of lower than anticipated G&A and professional expenses. This compares to operating losses of $1.2M in Q1 2018 and $2.3M in Q2 2017. The significant difference from the prior year relates to lower stock-based compensation in the current-year period. Q2 2018 EPS was ($0.14), compared to our ($0.16) estimate and ($0.15) in Q1 2018 (excluding non-cash debt-extinguishment and warrant exchange expenses) and ($0.29) in Q2 2017.
Cash used in operating activities was $1.0M in Q2 and $2.1M in 1H 2018. Relative to the balance sheet, AEMD exited Q2 with $920k in cash but subsequent to quarter-end, they raised $6.0M ($5.3M net) via a secondary equity offering (5.4M shares @ $1.10/share, with 100% warrant coverage: 5yrs, $1.10 strike). AEMD expects current cash (i.e. Q2 ending balance plus offering proceeds) to be sufficient to fund operations through at least October 2018. The ATM program via HC Wainwright also remains active, although is suspended (per terms of the October financing) until early January 2018.
Relative to the operational update, highlights include award of a Phase I NCI grant, onboarding of Hemopurifier-related production capabilities, EAP/Breakthrough Device status for Hemopurifier and IRB approval to commence the new CTE study…
In October AEMD completed the initial milestone under the cancer-related Phase I grant that was awarded by NCI. We model the milestone, in the amount of approximately $75k, to be recognized as revenue in Q3. As a reminder, in September AEMD was awarded the Phase I grant funded by the National Cancer Institute. The contract, dubbed "Device Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes” is for $299,250 and has a nine-month term. The University of Pittsburgh and Massachusetts General Hospital (researchers at Mass General were part of the tumor exosomes study discussed below) will work under AEMD to complete the contract which involves evaluation of AEMD’s technology in the capture of circulating tumor-derived exosomes. Upon successful completion, AEMD may be eligible for a Phase II grant that is expected to be worth approximately $1.5M.
Production Capabilities Secured
Perhaps an indication of management’s expectations of eventual commercialization, in October Aethlon announced a formal collaboration with iBio, Inc (IBIO), a plant-based biopharmaceuticals company, to provide (as-needed) large-scale production of the plant-derived lectin (a recombinant form of Galanthus nivalis agglutin, or GNA) housed within the Hemopurifier cartridge that captures circulating viruses from the blood.
As a reminder, Aethlon had noted during their U.S. feasibility study that they had leveraged their contract with DARPA to fund current good manufacturing practice (cGMP) systems for the production of the Hemopurifier. The DARPA grant included two manufacturing-specific milestones – the first of which AEMD completed during year-three of the contract and the other which they completed during year-four.
AEMD has noted that they completed a study with iBio, confirming their ability to produce GNA under cGMP. Per iBio’s website, their CDMO development and manufacturing facility, located near Houston, is capable of growing over four million plants as “in process inventory”. The large-capacity facility is also capable of meeting high production quotas which could be important, particularly in the event of high on-demand need such as, for example, if Hemopurifier was cleared for use as a countermeasure against certain pandemic outbreaks.
EAP/Breakthrough Designation, Broad-Spectrum Indication for Treatment of Life-Threatening Diseases
On September 12th AEMD announced that FDA approved their application seeking Expedited Access Pathway designation for their Hemopurifier with the following proposed indications for use; "The Hemopurifier is a single-use device indicated for the treatment of life-threatening highly glycosylated viruses that are not addressed with an approved treatment." This implies a fairly broad indication given its non-specificity to a particular virus, disease or condition as well as the fact that many of the highly glycosylated viruses lack an effective therapy.
As a refresher, viruses use glycosylation as a means to avoid detection by the body's immune system. Highly glycosylated viruses, such as HIV, HCV, Ebola, West Nile and pandemic flu strains (among a host of others) have proven to be particularly resilient and difficult to treat. The filter within the Hemopurifier contains galanthus nivalis agglutinin (GNA) which binds to the glycan shield of these viruses, thereby removing it from the bloodstream prior to the toxins infecting other cells or organs.
While we had anticipated that FDA would approve the EAP pathway, confirmation of that is nonetheless a significant event given the benefits of the program. In late October FDA issued new draft guidance for their (previously proposed) ‘Breakthrough Device’ program. This program was borne out of the agency’s 21st Century Cures Act and will supersede the Expedited Access Pathway as well as the Priority Review Program. Similar to those programs, the Breakthrough Device program is aimed at facilitating development and expediting review of those devices that provide for more effective treatment of life-threatening illnesses and conditions.
Management noted that since receiving notice of EAP designation, that they have been in contact with FDA, including with the personnel that will be working directly with them. AEMD expects to schedule an in-person meeting with FDA - which they think could happen sometime near the end of 2017 or in early 2018. Noteworthy is that (per comments on the Q2 earnings call on Nov 2nd) management expects this meeting to be productive in terms of defining the FDA pathway for Hemopurifier. As such, we will be eager to hear results of this meeting.
See below for free access to our most recent report on AEMD.
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By Brian Marckx, CFA