July 18, 2013 (Investorideas.com newswire) We have updated our report on Aethlon Medical (
OTCBB:AEMD) for their 10-K filing as well as other recent events. See below for access to the full report.
10-K Filed for Fiscal 2013 (ending 3/31/2013)
Aethlon (AEMD) filed their 10-K for the fiscal year ending
3/31/2013 on July 15th. Results (excluding non-cash change in
derivative liability expense) remain very much in-line with our
estimates. AEMD booked $404k in DARPA contract revenue in Q4 compared
to our $380k estimate. Revenue relates to the tenth and eleventh
milestones under the DARPA contract (the second and third milestones
under the year-2 contract). Subsequent to (in April 2013) the end of
fiscal 2013 AEMD booked another $196k related to the twelfth milestone.
These three milestones are (per AEMD's 10-K):
Milestone 2.3.2.1 – Demonstrate the effectiveness of the prototype
device in vivo in animals preventing platelet activation or clotting in
at least a 2 hour blood pumping experiment at 75 mL/min blood flow. The
milestone payment amount was $195,581. Management considers this
milestone to be substantive as it was not dependent on the passage of
time nor was it based solely on another party's efforts. The prototype
device was successfully used in vivo in animals preventing platelet
activation or clotting in at least a 2 hour blood pumping experiment at
75 mL/min blood flow. The report was accepted by the contracting
officer's representative and the invoice was submitted thereafter.
Milestone M4 – Target capture > 50% in 24 hours for at least 5
targets in blood or blood components. The milestone payment was
$208,781. Management considers this milestone to be substantive as it
was not dependent on the passage of time nor was it based solely on
another party's efforts. We demonstrated that we were able to capture
> 50% in 24 hours for at least 5 of the agreed targets in blood or
blood components. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter.
Milestone 2.3.2.2 (booked in fiscal Q1 2014) – Formulate initial
design based on work from previous phase. Begin to build and test
selected instrument design and tubing sets. The milestone payment amount
was $195,581. Management considers this milestone to be substantive as
it was not dependent on the passage of time nor was it based solely on
another party's efforts. We demonstrated that we had begun to build and
test selected instrument design and tubing sets. The report was accepted
by the contracting officer's representative and the invoice was
submitted thereafter.
Through April 2013 AEMD has booked approximately $2.8 million in
DARPA revenue and had approximately $790k remaining to invoice under the
year 2 contract. As a reminder, DARPA has the option of entering into
the remainder of the proposed contract for years three through five,
which would pay Aethlon up to an additional $3.2 million, annual
payments under which would range between $775k and $1.6 million.
Q4 operating expenses were $1.3 million, just slightly higher than
our $1.2 million estimate. Q4 net income and EPS of ($2.8) million and
($0.02) were below our ($1.0) million and ($0.01) due to a non-cash
change in derivative liability expense.
Cash
Aethlon exited fiscal 2013 with $125k in cash and equivalents,
compared to $108k at the end of the prior quarter (12/31/2012).
Subsequent to fiscal year end the company raised an additional $128k
from the sale of equity, entered into $400k in loans from directors of
the company and collected $404k from the DARPA contract.
Cash used in operations was $522k in Q4 ($2.1 million in 12 months
ending 3/31/13), compared to $662k in Q3 and $1.8 million in fiscal
2012. AEMD continues to be successful in raising operating capital,
raising over $2.1 million from the sale of common stock in fiscal 2013.
Along with their ongoing ability to continue to raise operating
capital, we have been encouraged, from the standpoint of strengthening
their financial position and balance sheet, by the success of converting
some of their outstanding debt to stock. While a substantial portion
of debt remains in default, the company continues to make progress on
cleaning up their balance sheet, which we view as meaningful from a
de-risking perspective. We reiterate, however, as we have in the past,
that Aethlon will need to raise a substantial amount of cash, enter into
partnering arrangements or score additional valuable contracts/grants
in order to complete the recently announced <_st13a_place _w3a_st="on">U.S. safety study and to be able to maintain operations
for the longer-term. Nonetheless, we believe management's recent
progress should not be marginalized.
Using DCF To Value AEMD
Since initiating coverage of Aethlon Medical back in March 2012 we
listed several risks and concerns, some of which we felt precluded us
from assigning a reasonable value on the company. Among the greatest
concerns, which we felt had the potential to essentially stop the
company in its tracks, were AEMD's outstanding and non-performing debt
as well as the real uncertainty of whether FDA would ever green-light
the company to run U.S. human trials. And while the debt issue remains
an overhang, we feel that the company's success in continuing to raise
financing (particularly financing that is subordinate to the debt) and
ongoing progress with converting some debt to equity, provides us much
more comfort that their still tattered balance sheet can continue to
meaningfully improve. We also view, as we explain below, the IDE
approval as major positive and while this does not necessarily get the
company substantially closer to eventual U.S. commercialization, it
removes the most near-term hurdle that AEMD had to clear for that to
happen and one that had it not happened, in our opinion could have
doomed the company.
For those reasons, we now feel the company's future is less
uncertain (or near-term risks are at least meaningfully mitigated) and
believe it's now appropriate to use a discounted cash flow model to
value the company. We continue to expect somewhat insignificant revenue
in the near-to-mid term, largely from the DARPA contract and the
subcontract with Battelle. We also think there may be a small revenue
contribution from compassionate use of Hemopurifier in India. But, as
we noted in our previous updates, a favorable decision by the FDA on the
IDE application to begin U.S. studies would potentially provide some
upside to our current financial estimates over the longer term. We have
now built a 10-year DCF model through fiscal 2024. Our relatively
lofty 15% discount rate is appropriate given our remaining concerns, and
risks and hurdles that company will need to clear as well as the
potentially lengthy runway until AEMD begins to generate meaningful
commercial sales, which we still believe is contingent on launching
Hemopurifier in the U.S. Based on our DCF model AEMD is valued at about
$0.15/share. We are maintaining our Neutral recommendation. We feel
that continued progress in hitting operational and financial milestones
would provide additional de-risking and potentially further upside to
the value of the company.
FDA Grants IDE, Approving Human Study With Hemopurifier
After a years-long quest, Aethlon Medical (AEMD) cleared what we
view as a major milestone, announcing in late June that they received
IDE approval to initiate a human feasibility study with Hemopurifier.
Whether FDA would approve an IDE was an ongoing question in our mind
and, given that such an approval would be required as a first step
towards potential U.S. commercialization (where we believe the bulk of
potential opportunity lies) of the device, was something that could have
been highly detrimental to AEMD had FDA denied the IDE request.
As a reminder, in early January 2013 AEMD announced that they
submitted an IDE to the FDA seeking approval to commence a 10-patient
safety and effectiveness feasibility study of Hemopurifier. Included in
the submission was data from the recent and ongoing studies at
hospitals in India as well as HCV capture data, the latter which that
the FDA had requested at a pre-IDE meeting in 2011. Then in late-March,
following response from FDA which included comments and study design
considerations, AEMD resubmitted the IDE.
FDA subsequently communicated that they were withholding clearance
of the IDE until AEMD addressed the agency's safety concern, namely that
the company detail their training and monitoring procedures for
heparinization - the anticoagulant used during dialysis and with the
Hemopurifier. AEMD noted in early May that they were gathering the
requested information and expected to have it submitted to FDA in the
coming week (i.e. - by mid-May). Given this recent news of the approved
IDE, FDA's safety concerns have clearly been satisfied.
The feasibility study will enroll 10 end stage renal disease
patients infected with HCV to demonstrate safety of Hemopurifier
therapy. The patients, which must not have received any HCV drug
therapy for at least the preceding 30 days, will receive three
treatments of standard dialysis in the first week (i.e. - control
phase), followed by a total of six dialysis treatments using
Hemopurifier over the next two weeks. The rate of adverse events during
the control and Hemopurifier treatments will be compared. Viral load
changes will also be measured in order to provide an indication of
efficacy. AEMD also notes that they may also collect HCV capture data
(another efficacy metric with positive results in trials in India and
which FDA had previously indicated interest in). AEMD had previously
announced that the study is expected to be conducted by the Renal
Research Institute, a partnership between Fresenius Medical Care (FMS), a
leader in dialysis products and services, and <_st13a_placename _w3a_st="on">Beth Israel Medical Center in NYC. AEMD is now in the
process of preparing for the study.
Assuming positive results, the expectation is this will lead to
larger U.S. studies to support an eventual FDA approval filing. And
while we do not expect U.S. commercialization to be a near-term event,
IDE approval to conduct human studies is a huge positive, meaningful
hurdle that's now cleared and significantly increases the likelihood of
initiation of larger studies to support an eventual FDA filing.
Cancer / Infectious Disease Presentation
Dr. Annette Marleau, AEMD's Director of Tumor Immunology, made a
poster presentation titled, "Extracorporeal Exosome Removal: A
Therapeutic Strategy to Address an Evolutionary Survival Mechanism
Shared by Cancer and Infectious Viral Pathogens" in April at the 2013
International Society of Extracellular Vesicles conference in Boston.
The presentation addressed cancer-secreted exosomes and the role
these exosomes play in cancer progression. Aethlon's Hemopurifier
directly targets exosomes in infectious diseases and is also being
investigated to target cancer-secreted exosomes, something that current
cancer drugs fail to sufficiently address. Pre-clinical studies with
the Hemopurifier have shown that it can capture exosomes of various
cancers including breast, melanoma, ovarian and colorectal.
While cancer currently remains somewhat of a back-burner
application for AEMD, the company has been fairly active in pursuing
additional research into the role Hemopurifier could play in cancer
therapy. Aethlon's focus with cancer had until recently been mostly in
the treatment of HER2 breast cancer, although they are also seriously
looking at other cancers including melanoma, ovarian, colorectal and
lymphoma as they believe their device could also have potential utility
with targeting different pathogens and with treating other types of
tumors. In particular and based on recent research, melanoma may hold
promise for treatment with the Hemopurifier which Aethlon may also
pursue in the near future. Furthering AEMD's quest towards application
of Hemopurifier in treatment of cancers, in October 2012 the company
announced that a U.S. patent was issued to them entitled "Extracorporeal
Removal of Microvesicular Particles" which gives AEMD the exclusive
right to remove immune suppressive microvesicular particles, which
include but are not limited to exosomes from the circulation of treated
patients.
Relative to melanoma Aethlon noted in a press release in June 2012
that based on findings from a study led by Cornell University and
published in the (online version) journal Nature, that the company may
pursue a melanoma treatment study that has been proposed by a (unnamed)
U.S. cancer research institute.
The Cornell study 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. Aethlon has
previously demonstrated in pre-clinical testing that their Hemopurifier
can capture exosomes from patients with late stage melanoma.
Melanoma, the incidence of which is growing rapidly, is the most
deadly form of skin cancer, accounting for approximately 4% of all skin
cancer cases. Melanoma can be lethal, especially if it penetrates the
lowest skin layer and enters the lymph system. Statistics show that
five-year survivability is as high as 97% if melanoma if diagnosed and
treated at its earliest stage (IA) but this drops precipitously as the
disease progresses. As such, a device that could effectively treat these
late-stage melanoma patients would have massive appeal, not just in the
U.S. but worldwide.
As a melanoma study is still in the early proposal stage and
Aethlon remains focused on the near-term opportunities with HCV and the
DARPA contract, management does not currently have a timeline when a
melanoma or other cancer study may commence. This proposed melanoma
study could potentially speed Aethlon's cancer program along, although
still likely to be more of a back-burner application as Aethlon pursues
their near-term endeavors. Nonetheless, we view this as a positive
development, potentially offering another opportunity for Aethlon and
their Hemopurifier.
In September 2012 AEMD made a presentation at the MD Anderson
Cancer Center in Houston entitled, "The extracorporeal removal of
tumor-secreted exosomes: An adjunct strategy to reverse immune
suppression and inhibit metastases in melanoma". The presentation
focused on the potential of the Hemopurifier to be combined with chemo
and immunotherapies as a strategy to improve melanoma treatment
outcomes.
Battelle Subcontract
In mid-April AEMD announced that they have been selected as a
subcontractor by Battelle Memorial Institute under Battelle's $22.8
million systems integrator contract with DARPA related to the sepsis DLT
program. The systems integrator is responsible for integrating the
various component technologies developed under the DLT program by the
various participating organizations, including AEMD. The contract will
pay AEMD on a cost (time and materials) plus margin basis so the total
that AEMD will eventually bill will not be known until their work is
completed. AEMD noted that they began work on this subcontract in early
April.
AEMD's Bioterror Program Potentially Revitalized
Another somewhat back-burner application for AEMD's technology has
been bioterrorism. Earlier in vivo studies conducted by Aethlon and in
conjunction with other organizations, including the Centers for Disease
Control and Prevention (CDC), have shown the Hemopurifier was able to
rapidly clear viral particles and remove glycoproteins in cell cultures
fluids. Pre-clinical studies have shown success with the capture of
several Category A (i.e. most serious) pathogens including the Ebola
virus, Dengue virus, Lassa virus, West Nile virus, Monkeypox virus, H5N1
Avian flu virus and the H1N1 Swine flu virus.
Aethlon, in collaboration with the United States Army Medical
Research Institute for Infectious Diseases (USAMRIID) and other
organizations, have worked in the past to validate Hemopurifier for use
against Category A threats. Studies have yet to move forward, however -
possibly as enrolling for a trial with Ebola infected patients would
present serious challenges. As a result, Aethlon's bioterror program
had been in somewhat of a holding pattern.
AEMD's bioterror program could potentially be revitalized, however,
and sparked by renewed federal funding for bioterror countermeasures
(including medical countermeasures) through the Pandemic and All-Hazards
Preparedness Reauthorization Act (PAHPRA) of 2013. The CBO estimates
that $11 billion will be spent on PAHPRA from 2014 to 2018. Included in
the scope of the program is countermeasures against the new strains of
bird flu. Given Hemopurifier's success in pre-clinical studies in
capturing the H5N1 Avian flu virus and the H1N1 Swine flu virus, AEMD
may be in a solid position to pursue any grant funding targeting the new
strains of bird flu.
A copy of the full research report can be downloaded here >>
Aethlon Medical Report
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