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AEMD: Q3 Results. Hemopurifier Pathway Could Benefit From New FDA Mindset

02/06/2018
By Brian Marckx, CFA

NASDAQ:AEMD

Fiscal Q3 2018 Financials, Operational Update

Aethlon Medical (NASDAQ:AEMD) reported financial results for their fiscal third quarter 2018 ending December 31st and provided a business update.  Revenue of $75k matched our estimate while operating loss, at $1.2M was about $200k less than what we forecast.  Q3 2018 EPS was ($0.08), compared to our ($0.12) estimate – with the majority of the difference attributable to an increase in share count as a result of the recent equity raise (and to a lesser extent, warrant exercises).  

Cash used in operating activities was $790k and $2.9M in the three and nine months ending 12/31/17.  Relative to the balance sheet, cash balance was $5.6M at quarter-end and bolstered by the early-October sale of 5.5M shares (w/100% warrant coverage) @ $1.10/share ($6.0M gross, ~$5.3M net).  Another $1.4M was raised post-Q3 via ATM sales (340k shares @ $1.34 avg) and warrant exercises.  Current cash balance should be sufficient to fund operations for at least the next 12 months.  

Highlights on the operational front include in vitro H3N2 flu study, anticipated near-term meeting with FDA regarding Hemopurifier Breakthrough pathway, completion of initial NCI cancer grant milestone and updates to the ESI CTE studies…


Board Appointments – recent highlights also include the appointment of two key persons to AEMD’s board of directors – the consummation of which satisfied NASDAQ’s independent board and audit committee composition requirements.  We expect the new appointments to be integral in developing strategy for AEMD which could include collaboration and/or partnering activities.  

- In late November Dr. Charles Fisher, Jr. joined AEMD’s board and audit committee.  Dr. Fisher was previously Head of the Section of Critical Care Medicine at The Cleveland Clinic Foundation and has extensive research and practical industry experience in the areas of sepsis and inflammation including leading the Xigris Global Product Team at Eli Lilly.  Xigris was the only drug to receive FDA approval for the treatment of sepsis. 

- In January 2018 Sabrina Martucci Johnson joined AEMD’s board and audit committee.  Ms. Johnson is CEO of CARE Biosciences and was previously the COO and CFO of Cypress Biosciences, which developed the PROSORBA column (for the treatment of rheumatoid arthritis).   

Relative to cancer….this has been a potential target program for Hemopurifier for a long time but seems to have oscillated in importance from almost-mothballed to back-burnered for at least the last few years.  Years ago Aethlon had demonstrated the ability of Hemopurifier to capture immunosuppressive exosomes derived from metastatic melanoma – so while the additional recent activity related to cancer is new, the idea that their device may have utility for this application is not.  

We think that now with the ESRD/HCV feasibility study completed and the recent grant from NCI, that cancer may now get some greater attention.  We also think the relatively massive recent interest (with certain recent significant successes) in cancer immunotherapies and greater insight into the role that exosomes may play (as possible enhancers) in regards to CAR-T efficacy might present a new, and potentially, very significant opportunity for Aethlon. 

As a reminder, in September 2017 AEMD was awarded a 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.  In October AEMD completed the initial milestone under this grant and recorded $75k in related revenue in fiscal Q3 2018.  Upon successful completion, they may be eligible for a Phase II grant that is expected to be worth approximately $1.5M.

CAR-T therapies have been recent headline-grabbers with FDA approval of Novartis’ Kymriah and Gilead/Kite’s Yescarta for the treatment of aggressive non-Hodgkin lymphoma.  The therapies have shown such extraordinary efficacy in clinical trials that an FDA panel (recommending approval of Kymriah) member noted that it was the most exciting thing he had seen in his life.  CAR-T therapies involve removing cells from the body, modifying them to target particular cancers and then putting them back into the patient.    

Several recently published studies have focused on exosomes’ potential role in facilitating effectiveness of cancer immunotherapies.  This includes the use of CAR-T cell-derived exosomes as a way to reduce certain challenges of CAR-T cells, such as adverse events (eg cytokine release syndrome) and difficulty in locating and penetrating solid cancers. ,    

So as exosomes’ role in cancer and immunotherapies continues to evolve, we think AEMD could benefit given that whether exosomes are viewed as a facilitator of cancer progression or a facilitator to immunotherapy efficacy (or both), in order to address their role they need to be removed from the body.  Current methods to isolate and remove exosomes from the body are time and cost-prohibitive2, which we think could offer an opportunity for Aethlon and their Hemopurifier.   

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.  Aethlon also recently began an in vitro study to demonstrate capture of the (current) H3N3 flu strain.  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.  

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 noted on the Q3 call (Feb 1st) that they have requested a meeting with FDA for (calendar) Q1- although we do not have insight into whether that timeline could change.  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.

FDA Validation…
42 viruses have been classified by the National Institute of Allergy and Infectious Diseases as life threatening category A, B or C pathogen threats in the United States.  And of these 42, 40 are highly glycosylated viruses – only two of which are currently addressed with an approved therapy.

Given that it is not feasible to conduct randomized controlled clinical studies for targets such as highly virulent viruses or pandemic threats, there is great ambiguity in what FDA may designate as an appropriate program to sufficiently validate the safety and efficacy of Hemopurifier.  However, the broad-spectrum indication, which is not specific to a particular virus, disease or condition may provide some greater optionality in that regard.  The severity of these targets (in the absence of an effective alternative therapy) also leads us to believe that the FDA may be more liberal in defining a viable regulatory pathway and in applying safety/effectiveness criteria as compared to less severe, chronic conditions and viruses (such as HCV or HIV).    

Safety has been demonstrated in prior clinical studies as has the ability of Hemopurifier to capture target substances.  This includes human studies in HIV and Ebola (as well as earlier human studies in HCV) and in vitro studies in a host of other viruses.  Most recently, results of a U.S. single-arm feasibility study (n=8) were presented at the 2017 BIO International Convention in June.  The study, in which Hemopurifier was used to treat patients with ESRD and infected with HCV (i.e. very sick individuals), showed AEMD’s device was well-tolerated (with no device-related adverse events reported) and successfully captured up to 1.62B I.U. of the HCV virus (see Appendix for additional information).  Could capture data be included as an endpoint for clinical validation purposes?  That is another question that may come out of the upcoming meeting with FDA.     

But we do believe, however, that despite the highly deadly nature of these types of targets, that it is unlikely FDA approval (for any indication) is attainable without clinical trials.  As we noted in a recent Investor Note (Oct 20th), we think that Real World Data may play a part in clinical validation.  In 2015 FDA approved more than eight new medical devices and expanded the label on several others through supporting RWD – this included several high-risk, implantable devices.

FDA’s recent move towards greater acceptance of RWD in decision-making has to do, in part, with the idea that traditional clinical trials are too rigid in some circumstances as well as the fact that “traditional clinical trial(s) may be impractical or excessively challenging to conduct” (as AEMD’s might be for highly virulent viruses).  That could mean that (for example), in lieu of a randomized clinical trial, the sponsor may be allowed to use an existing database or medical registry as the control arm for a pivotal study.

FDA’s recently appointed commissioner Dr. Scott Gottleib’s remarks to The National Academy of Sciences on September 19, 2017 provide some additional insight into the regulators’ thoughts towards greater application of RWD and RWE in their decision-making processes - the full text can be found here (http://bit.ly/2yJG4ex). 

Dr. Gottleib and the Trump administration have made several public remarks related to a desire to streamline the FDA approval process and facilitate patient access to novel therapies that target unmet needs.  This includes efforts to streamline cancer drug approvals, easing the burden of genericizing complex generic drugs and speeding approval of digital health devices, among others.  We think these efforts speak to the new broader policy objective at FDA of lowering the regulatory burden for therapies that will benefit patients – which could ultimately provide greater flexibility or optionality in designing a U.S. regulatory program for Hemopurifier.

In the meantime, inclusion in the Strategic National Stockpile as a broad-spectrum countermeasure is another pursuit.  This may be a pathway that lends itself to either partial or full funding from additional government grants. As a reminder one of AEMD’s primary objectives is to be able to fulfill the Public Health Emergency Medical Countermeasures Enterprise (PHEMCE) goal of developing broad-spectrum medical countermeasures (MCM).  PHEMCE is an interagency governmental organization comprised of HHS, CDC, NIH, FDA, VA, DoD, DHS and USDA with a goal of coordinat(ing) the development, acquisition, stockpiling, and use of medical products that are needed to effectively respond to a variety of high-consequence public health emergencies, whether naturally occurring or intentional.”     

This could include both bioterror as well as pandemic threats.  Category “A” bioterror threats and pandemic viruses would likely fall in these categories.  The fact that Hemopurifier has shown utility in capturing a variety of viruses and pathogens should play in their favor – this includes the capture of Ebola, Zika, Chikungunya, Dengue virus, H1N1 swine flu, H5N1 bird flu virus, the reconstructed Spanish flu of 1918 virus, West Nile virus and MERS.  Some of the validation work for these targets was done in conjunction with government agencies including the U.S. CDC. and the U.S. Army Medical Research Institute for Infectious Diseases.   

While we do not yet know specifics relative to requisite deliverables for inclusion of consideration for stockpiling as a countermeasure, indications are that AEMD is coordinating a strategy with that goal in mind.  We hope to hear related updates in the near future.  We do believe that there are factors that may play in AEMD's favor including; 

• Hemopurifier demonstrating the ability to capture a variety of viruses (i.e. broad-spectrum capability)
• Safety profile from the feasibility and previous human studies
• Lack of existing therapies (drugs or devices) to address almost all conceivable virulent threats
• Drugs, if developed, would likely have single-target utility (i.e. not broad-spectrum) and may have relatively short        shelf-life as compared to Hemopurifier
• Drugs cannot be developed for unknown threats - unknown threats are one of the reasons why broad-spectrum capability is important
• Experts believe the risk of bioterror/virulent threats are on the rise and capable of killing tens of millions of people
• The greater the threat risk and consequences of a bioterror attack or pandemic outbreak, likely the lower the bar will be set for consideration of stockpiling therapies that may have countermeasure utility - particularly those that have demonstrated an acceptable safety profile. Importantly, these countermeasures would not necessarily need to be approved by the FDA 
  
Another recent FDA-related development could have applicability to the PHEMCE goal.  In January 2018 FDA and the U.S. Department of Defense launched a joint program to “prioritize the efficient development of safe and effective medical products intended to save the lives of American military personnel.”  Under the program DoD will work together to speed development and approval of medical products aimed at saving lives of American soldiers – this includes devices to treat life-threatening diseases or conditions (presumably such as Category A threats).  Noteworthy, is the DoD/FDA joint memo specifically cites that this program is similar to that of Breakthrough designation.  While we do not know if this joint program will apply to AEMD’s PHEMCE efforts, we think it adds another possible pathway for Hemopurifier’s eventual adoption by the U.S. government.   

Relative to ESI, Aethlon is looking to build on the success of their findings as part of the DETECT study (see Appendix for details) and expects to initiate the largest study to-date in NFL players in the detection of CTE in living individuals.  As a reminder, Aethlon’s majority-owned subsidiary Exosome Sciences has collaborated with Boston University’s CTE Center for the development of a blood-based diagnostic that would be able to identify CTE in living individuals.  Results from DETECT (see below for more details), presented in April 2015, showed that the NFL players had significantly higher levels of TauSome (tau) in their blood/plasma than those of the controls (subsequent to release of these preliminary results, additional analysis (per the company's comments) showed that TauSome levels were approximately 9 times higher, on average, in the NFL group as compared to control subjects).  Tau levels were also correlated to performance on cognition tests, with higher tau levels corresponding to poorer test performance.  Investigators concluded that TauSome levels in blood plasma may be an accurate biomarker for CTE.     

The goal of AEMD’s new study, announced in January 2017, is to further validate TauSome as an accurate, non-invasive, reliable biomarker for the diagnosis of CTE in living individuals.  While management had hoped to have the study well underway by now, the timeline has slipped as they locked down institutional review board approval at the primary site in Arizona.  While IRB approval has since been secured, AEMD noted on the fiscal Q3 call that the study has yet to start as a study protocol modification was submitted to the IRB.  The modification relates to the study enrollment questionnaire – which was updated to be more consistent with that of the DIAGNOSE study (i.e. follow on study to DETECT being conducted at BU).  ESI is also collaborating with BU to confirm that the TauSome biomarker in DETECT was indeed brain-derived (as hypothesized) and ESI will also provide TauSome quantification in DIAGNOSE.  We look forward to future updates including when enrollment begins in ESI’s study.   

This and other studies should provide additional data points and provide more insight into the potential future utility of the diagnostic for CTE – and potentially other conditions such as Alzheimer’s disease.  While the DETECT study included 78 former NFL players (and 16 controls), ESI’s new study is expected to enroll up to 200 former NFL players at several U.S. sites – at full enrollment it would be the largest study in NFL players at risk of CTE.  The study is also expected to assess the potential correlation of Tausome levels in NFL players with that of Alzheimer's patients - with the potential future goal of leveraging this biomarker (as a companion diagnostic) and study data to support enrollment of NFL players in clinical studies evaluating novel anti-tau drugs which are currently aimed mostly at Alzheimer's patients.  Interestingly, additional analysis done subsequent to publishing of the preliminary DETECT data, found that when looking at Alzheimer's patients, they found tau levels in those patients were 10 times higher, on average, as compared to the control subjects in DETECT.    

Success in DETECT was a major milestone, in our opinion, but this larger, follow-on study should provide more definitive information relative TauSome’s place in the detection of CTE (as well as potentially its relationship to other diseases such as Alzheimer’s) – a goal that has escaped the clinical community so far and one that would be a major breakthrough and likely be instrumental in helping to shape the diagnosis, treatment and monitoring of the disease.  As such, we look forward to updates on the progress of both the Hemopurifier and ESI related programs.   

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