ATOS: ATOS’s Endoxifen Programs Progressing; Phase II MBD Completes Enrollment, Positive Phase I Results In Men

By Brian Marckx, CFA

NASDAQ:ATOS

READ THE FULL ATOS RESEARCH REPORT

Q3 Results / Business Update: Endoxifen Programs Progressing, FDA Grants Expanded Access…
Atossa (NASDAQ:ATOS) announced results for their third quarter ending September 30th. As anticipated, no revenue was generated in the quarter. Operating expenses were $3.3M, up from $2.1M in the prior-year period and down significantly from $4.1M in Q2 of this year.

Net loss and EPS were $3.3M / $0.64, compared to $2.2M / $0.18 in Q3’17 and $15.6M / $5.08 (or $4.1M / $1.35M as-adjusted for deemed dividends on preferred shares) in Q2’18.

Cash balance, recently bolstered by the late-May sale of $13.6M ($12.3M, net) worth of convertible preferred stock, was $12.9M at Q3 quarter-end. As we first noted following the raise, with the boosted balance sheet, we think Atossa is in a better position to focus on its growth plan and create long term shareholder value.

Cash used in operating activities totaled $2.3M and $6.5M ($2.3M and $6.4M, ex-changes in working capital) in the three and nine months ending 9/30/18, compared to $1.7M and $4.9M ($1.8M and $5.0M, ex-changes in working capital) in the comparable prior-year periods. Based on the recent burn rate, current cash balance represents approximately 17 months’ worth of operating capital (i.e. through ~April 2020).

As it relates to the operational front, highlights since our last update in late-August include completion of enrollment of the Phase II study of topical Endoxifen in the treatment of mammographic breast density (MBD), positive results of the Phase I dose-escalation study of topical Endoxifen in men and, in early December, an announcement that FDA granted Expanded Access (i.e. Compassionate Use) to Endoxifen in the preoperative setting for a single patient awaiting surgery for breast cancer.

Results of the Phase I study of topical Endoxifen in men are particularly exciting as this sets up a move into Phase II in prostate cancer patients having undergone anti-androgen therapy and at high-risk of developing gynecomastia. If successfully developed and approved for such an indication, topical Endoxifen would represent the only (non-surgical option) for these individuals, a U.S. market estimated size estimated at approximately 10M.

Expanded Access Affords Real-World Experience…
While we do not anticipate that Expanded Access will result in meaningful revenue for ATOS, it can be of significant value as it affords initial real-world experience and may also help build additional awareness about the therapy. Interestingly, ATOS notes in the press release announcing FDA’s approval of Expanded Access (only for this particular patient) that it came about following a physician’s request to the company for access to their oral Endoxifen for a pre-menopausal, estrogen-receptor positive (ER+) breast cancer patient that was awaiting surgery. The physician was concerned about using standard therapy such as aromatase inhibitors as it typically induces menopause. Noteworthy is that this real-world experience largely mimics the clinical setting of that of the ‘window of opportunity’ Phase II study of preoperative systemic oral Endoxifen in breast cancer patients. It is not yet clear if ATOS may have future opportunities at Expanded Access use for Endoxifen under their existing IND program.

Update on Topical Endoxifen for Men’s Breast Health Program…
On March 22, 2018, Atossa announced that it expanded its breast health program by launching a men’s breast health initiative. The company initiated a Phase I study of its proprietary topical Endoxifen in men which has moved along very rapidly – with positive topline results announced in mid-September (more detail below). These topline results were confirmed on January 9th, when ATOS announced that those results are final.

The objectives of the placebo-controlled, repeat dose study of 24 healthy male volunteers were to assess the pharmacokinetics of proprietary topical Endoxifen dosage forms over 28 days, as well as to assess safety and tolerability. Subjects were randomized to one of three doses (2mg, 6mg or 10mg) of topical Endoxifen or placebo. Atossa plans to use the data from this Phase I study of topical Endoxifen for future development into men’s breast health, including male breast cancer and gynecomastia.

In April 2018, Atossa received a positive interim review on the Phase I study. The Independent Safety Committee reviewed the blinded data generated from the first group in the study (eight subjects) and concluded that the study may advance to the next dosing level

In May 2018, Atossa received a second positive interim safety review on its Phase I study. The Independent Safety Committee reviewed the blinded data generated from the second group in the study (eight subjects) and concluded that the study may advance to the final dosing level

In June 2018, Atossa completed dosing and clinical visits and at that point were proceeding to the final stages of the study

In mid-September 2018 Atossa announced positive preliminary results from the study including that there were no clinically significant adverse safety signals or events, topical Endoxifen was well tolerated at each dose level throughout the duration of the study and pharmacokinetics analysis showed no measurable topical Endoxifen in the blood. Specifically,
as it relates to ‘safety’, no safety signals were observed in weekly assessments of blood chemistry, coagulation parameters, hematology parameters, urinalysis, vital signs, heart and physical examinations
 ◦ as it relates to ‘tolerability’, a daily self-assessment of potential local symptoms including redness, burning, pain, itching and irritation were scored as either ‘none’, ‘mild’, moderate’ or ‘severe’. Results showed that more than 97% of the (24 patients x 28 days = ) 672 self-assessments were scored as ‘none’, while 2.5% were rated ‘mild’ and just 0.3% were assessed as ‘moderate’. Moreover, one of the 24 patients accounted for over 50% of the reports of skin reactions. Side-effects, which were assessed by an in-person interview every seven days, were also essentially non-existent. In fact, all of the Endoxifen-dose subjects reported ‘not at all’ to queries about side-effects while the only ‘a little bit’ response came from one of the subjects that received placebo

View Exhibit I

as it relates to the pharmacokinetic profile, Endoxifen levels were too low to be detected by the assay (as was hoped for and expected)
‣ In January 2019 ATOS announced that the topline results reported in September are final. Next steps…ATOS expects to retain a clinical research organization as they move into preparing for a Phase II study. The goal of the study is expected to be assessing topical Endoxifen in the reduction or prevention of gynecomastia in newly diagnosed prostate cancer patients to maintain or improve their quality of life.

Sizeable U.S. Target Market
If successful, this planned Phase II study should provide significant insight into the potential utility of topical Endoxifen in treating the ~10M American men that undergo anti-androgen therapy following diagnosis of prostate cancer (and following surgery and/or radiation therapy). As an increase in estrogen levels can result from anti-androgen therapy, ~90% of men that undergo this treatment have symptoms of breast development. Today, the only intervention for male breast development is surgery.

Update on Phase II Study of Oral Endoxifen to Treat Breast Cancer…
In July 2018, Atossa opened a Phase II study of its proprietary oral Endoxifen to treat breast cancer in the “window of opportunity” setting, which is the period between diagnosis of breast cancer and surgery.

The Pilot Phase of the study will initially enroll up to eight newly-diagnosed patients with Estrogen Receptor Positive (ER+) and HER2 negative (HER2-) stage 1 or 2 invasive breast cancer, requiring mastectomy or lumpectomy. Patients will receive Atossa’s proprietary oral Endoxifen for at least 21 days from the time of diagnosis up to the day of surgery. Provided tumor activity reduction is demonstrated in at least two patients, an additional 17 patients will be enrolled for a total of 25.

◦ The primary endpoint is to determine if the administration of oral Endoxifen reduces the tumor activity as measured by Ki-67, which is a marker of cellular proliferation
◦ The secondary endpoints are safety and tolerability and assessment of the study drug on expression levels of both estrogen and progesterone receptors
◦ The impact on additional markers of cellular activity will also be explored

The Phase II study, which is now enrolling, is being conducted on behalf of Atossa by CPR Pharma Services Pty Ltd., Thebarton, SA, Australia. CPR Pharma recently completed the successful Phase I study of Atossa’s oral and topical Endoxifen in women.

Valuation is Attractive
We think current valuation for Atossa shares is very attractive. Our fair valuation for Atossa shares is $9/share.

Based on Atossa’s fundamentals, we think the Company’s shares are undervalued. Currently, Atossa shares are trading at about $1.33 per share which values the Company at ~$7.5 million in terms of market cap based on 5.6M shares outstanding. We think this is a deep discount compared to its peers. For a typical development stage small cap biopharma company, market value usually ranges from $50 million to $2 billion depending on how advanced its pipeline and the market potential of its candidates.

Currently, Atossa has two Phase II clinical candidates with great market potential and another two programs set to move into Phase II. Our target price values Atossa at $50 million in market cap, which is still conservative in our view.

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