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Tragedy strikes at the heart and lingers in the mind. That statement encompasses, in only 10 words, the embodiment of traumatic aftermath. Certainly, it's far more complicated than that, but in an effort to simplify a considerably intricate behavioral response, it stands to reason that the provided phrase suffices. Certain events can change forever the way that a person, a community, or even a country, perceive the world to be. As a result, a singular action can cause a lifetime of caution. Such has been the case for the American public, following the attacks on the World Trade Center in New York on September 11, 2001. That tragedy struck at the hearts of American's, and has lingered in our collective conscience ever since.
The effects of that day have been systemic. Those attacks not only changed the way we travel and communicate, but also the way that we live our day to day lives. From the way we involuntarily respond to the sound of a plane overhead, to the way that we more guardedly raise our children, the reverberation of that day continues onward. What that day did, perhaps more so than anything else, was forever change the collective consciousness of an entire people, and bring about a surplus of questions. One such question which surfaced was as follows; could this happen again, and if so, how can we be better prepared for it?
This article will introduce readers to a pharmaceutical company whose lead drug candidate is being developed, in part, as a response to that question. That company is Aeolus Pharmaceuticals (OTCQB:AOLS), and their principal compound, AEOL-10150, is a treatment for the pulmonary and delayed effects of acute radiation exposure. In other words, this compound is being developed to better prepare the U.S. government to respond to possible chemical attacks in the future. However, before this article proceeds, further clarity is warranted for all readers. Let it be known that it is not the intention of this article to promote profiteering from tragedy, nor is it the objective of Aeolus to exploit fear for corporate gain. Rather, this article hopes to bring to light an investment opportunity worth supporting, due to the fact that Aeolus is employing capable science, with the intention of proactively seeking to protect, and preserve, the value of human life. If any readers are offended, for any reason, at any point in this article, please note that such a response was certainly not intended.
An Introduction to Aeolus Pharmaceuticals
Aeolus is a small, clinical phase, biopharmaceutical company headquartered in Mission Viejo, California. It has existed, under its current name, since 2004. However, for a decade before that, the company was known as Incara Pharmaceutical Corporation. In 2004, at the time of the company's name change, there were a considerable number of other changes made as well. A new board of directors was established, a new management team was constructed, and a new direction for the company was designated. Since that time, the development and progress of the company has been ongoing. During that process the company has become largely focused on a specific market in the biotechnology sector. That market has been biodefense, and the advancements being made at Aeolus, in that market, have been well supported.
AEOL-10150 as a Biodefense Countermeasure
The "AEOL-10150 Medical Countermeasure Development Program" has been awarded in excess of 143 million dollars for the development of the compound as a dual-use, broad spectrum, medical countermeasure. These grants and awards include a total of 25 million dollars from the National Institute of Health under their "CounterACT" program. This program, which is officially known as the Countermeasures Against Chemical Threats Program, is funding the company's development of the drug as a treatment for chlorine gas, mustard gas, nerve agents, and phosgene. These developments are being completed in conjunction with the University of Colorado, National Jewish Health, and the Institute of Chemical Defense.
The largest and most comprehensive grant awarded to Aeolus however is from the Biomedical Advanced Research and Development Authority. More commonly referred to as "BARDA", this organization has committed 118 million dollars to the company for the development of AEOL-10150 as a countermeasure for severe acute respiratory syndrome, more commonly known as "Lung-ARS". This grant was awarded on February 11, 2011 via a five year agreement between Aeolus and BARDA. Pursuant to that agreement Aeolus was awarded 10.4 million dollars for the period ending in April of 2012. At that time, BARDA exercised two options in the contract, awarding another 9 million dollars to the company. Then, on September 17, 2013 the company was awarded another 6 million dollars for continued research. Thus far, BARDA has exercised every available option in order to support the ongoing advancement of the compound. The final goal of the agreement between BARDA and Aeolus is FDA approval, and the development of commercial manufacturing capability.
Under the terms of this contract, Aeolus is expected to meet the requirements for a Pre-Emergency Use Authorization filing for AEOL-10150 in 2014. An Emergency Use Authorization, or "EUA", is a finding by the Food and Drug Administration, or "FDA", that allows the use of unapproved drugs in the event of an emergency. BARDA has historically made the majority of its purchases for treatments using the EUA prior to FDA approval. Therefore, Aeolus should begin to generate noteworthy revenues from AEOL-10150 in the second half of 2014, long before FDA determination.
The Importance of AEOL-10150
AEOL-10150 is being developed as a countermeasure. That is to say, it is a treatment designed to be administered after exposure to radiation. As it stands, there are no current existing treatments for Lung-ARS available, and AEOL-10150 is the only one being developed with BARDA. In fact, in the company's 10-K for their fiscal year ending September 30, 2013, they made the following statement;
"We are not aware of any compounds in development that have shown efficacy when administered after exposure to radiation. 10150 has demonstrated efficacy in two animal models (mouse and non-human primate) when administered after exposure to radiation. The U.S. government's planning scenario for a radiation incident is a 10 kiloton detonation of a nuclear device in a major American city. It is estimated that several hundred thousand civilians would be exposed to high doses of radiation in this scenario."
For purposes of comparison, the yield of the bomb dropped on Hiroshima in World War II was approximately 16 kilotons. Such an attack would potentially expose hundreds of thousands of citizens to acute, high dose, ionizing radiation, and the lethal effects of Lung-ARS would immediately become the most imminent medical need in modern history. Perhaps the governments proactive planning for such an event is the primary motivation behind BARDA's unrelenting support of AEOL-10150 as the principal countermeasure currently in pharmaceutical development.
Indications Thus Far
So far, AEOL-10150 has shown noteworthy positive data from its ongoing studies and trials. Indications thus far include, but are not limited to the following;
• Optimal doses of AEOL-10150 improved survival by four times over untreated animals
• Treatment with AEOL-10150 significantly reduced lung weights, a measure of inflammation
• AEOL-10150 treatment also improved respiratory function as measured by breathing frequency
• Rapid administration and delivery, allowing large numbers of patients to be treated quickly
• A high safety profile, with no adverse side-effects and no issues with tolerance at high doses
• Requires no non-standard storage conditions (i.e. not photosensitive), and remains stable and usable for up to four and a half years at 0-8°C and one year at room temperature
Commenting on the results thus far, Chief Scientific Officer of Aeolus, Dr. Brian Day, made the following statement;
"Injection of 25 mg/kg of AEOL-10150, 24 hours after whole thorax lung irradiation, resulted in a four-fold improvement in survival in CBA mice and significant protection of the lungs as measured by differences in wet lung weights and breathing frequency. This study confirms previous studies in animals that demonstrate AEOL-10150's protection of the lungs from both the type of radiation exposure one would experience from a nuclear blast, or from radiation therapy for cancer."
Additional Prospects at Aeolus
While AEOL-10150 has been supported in its design and development as a countermeasure for biodefense purposes, it has also indicated additional potential market applications. Most notably, the treatment could have applicable relevance in the oncology space. A statement from the company's website indicates this further;
"We are leveraging the significant investment made by U.S. government agencies to develop this promising compound for use in oncology indications, where it would be used in combination with radiation therapy. Data has already been published showing that AEOL-10150 does not interfere with the therapeutic benefit of radiation therapy in prostate and lung cancer preclinical studies. Based on the work completed under the BARDA contract, we believe that we will be positioned to begin a Phase II study in radiation oncology in 2014. We intend to develop AEOL-10150 concurrently with the BARDA program for use in radiation oncology."
Needless to say, if, in fact, the company did initiate a phase two study of AEOL-10150 in 2014, as it pertained to preserving the health of cancer patients undergoing radiation and chemotherapy, this would represent a considerable step towards additional commercialization of the compound to the medical establishment. The cancer space is, for lack of a better word, considerable.
Furthermore, AEOL-10150 is not the only drug candidate in the company's pipeline. Aeolus is also developing a drug compound called AEOL-11207. This second compound is in the pre-clinical phase and is a potential treatment for Parkinson's disease. Being funded, in part, by the Michael J. Fox Foundation, the development of AEOL-11207 is ongoing and potentially transformational. Being developed as a neuroprotectant, AEOL-11207 is a patent-protected drug candidate with the same chemical core structure as AEOL-10150. Because of this common structural feature, it is anticipated that AEOL-11207 will display the same safety profile in clinical evaluations as observed with AEOL-10150, making clinical trial design and testing of AEOL-11207 an exciting prospect. AEOL-11207 is an orally administered tablet thought to be capable of slowing and/or minimizing the progressive destruction of the nerves that secrete dopamine. It is also targeting better control of the basal ganglia, an area of the brain involved in the regulation of movement. These are key areas of interest for Parkinson's sufferers and researchers.
Back to AEOL-10150, Biodefense, and BARDA
While the possible future applications of Aeolus's drug candidates as treatments for oncological radiation and Parkinson's are worthwhile and intriguing, the basis for the company as a current investment vehicle is based largely in its biodefense applications. The company is currently in the third year of its BARDA agreement, and this is when certain efforts are expected to begin bearing fruit.
As was previously stated, BARDA is not required to await FDA decisions prior to purchasing drug treatments in the event of an Emergency Use Authorization. The FDA has a special "Animal Rule" which enables compounds to be approved for use against chemical and nuclear threats on the strength of animal efficacy studies. The "Animal Rule", in conjunction with Project Bioshield, would enable BARDA to purchase commercial quantities of AEOL-10150 for the government stockpile of emergency relief treatments and countermeasures. As Aeolus is planning to apply for an EUA in 2014, the successful procurement of such would allow for significant sales to begin shortly thereafter. Therefore, Aeolus is likely within 12 months of seeing a significant increase in earnings and share price.
Recent Developments and Financials
In speaking about the fiscal year ended on September 30, 2013, the President and CEO of Aeolus, John McManus, made the following statement;
"Our team made significant progress during fiscal 2013 in advancing AEOL-10150 as a medical countermeasure for radiation and chemical exposure. The additional efficacy data generated in radiation and mustard gas models confirms the effectiveness of AEOL-10150 as a medical countermeasure. Work in the manufacturing segment of our BARDA program has resulted in the filing of new patents, a greater than 80 percent reduction in the cost of goods, and a scale up of our manufacturing process from one kilogram batches to four and a half kilogram batches. 2014 will be an exciting year as we expect to report results from at least eight animal efficacy studies for radiation, and several studies in our sulfur mustard, nerve agent, and Parkinson's disease programs. We also expect to file several IND's, and to file for our pre-emergency use authorization."
He went on to note that progressive steps have also been taken in preparation of filing for the company's emergency use authorization, including the addition of new directors to the board who have considerable experience in government affairs. He also noted corporate enthusiasm surrounding future prospects in oncological radiation applications. All in all, as it pertains to operations and expectations, the company has expressed cautious optimism and tempered excitement.
In consideration of the company's financials however, like nearly all clinical stage biopharmaceutical companies, Aeolus is posting significant losses. The company reported a net loss of 3.2 million dollars, or .03 cents per share (including a non-cash adjustment for increases in valuation of warrants of approximately 510,000 dollars) for the fiscal year ended September 30, 2013. This was compared to net income of 1.6 million dollars, or 0.01 per share (including a non-cash gain for decreases in valuation of warrants of 4 million dollars), for the fiscal year ended September 30, 2012.
Revenue for the fiscal year ended September 30, 2013 was approximately 3.2 million dollars, compared to 7.2 million dollars for the fiscal year ended September 30, 2012. The revenue is from the contract with the BARDA announced on February 11, 2011. Lower revenue in fiscal year 2013 reflects the timing of the initiation of program items under the BARDA contract.
Research and development expenses decreased 48% to approximately 3.3 million dollars for the fiscal year ended September 30, 2013, from approximately 6.5 million dollars for the fiscal year ended September 30, 2012. R&D expenses were lower during the fiscal year ended September 30, 2013 versus September 30, 2012 due to the timing of work related to the BARDA contract.
General and Administrative expenses increased slightly to approximately 3.26 million dollars for the fiscal year ended September 30, 2013, from about 3.19 million dollars for the fiscal year ended September 30, 2012. Consulting stock expense increased by about 287,000 dollars as a result of increased awards for the period. The increase in consulting stock expense was partially offset by a decrease in salaries and benefits of about 172,000 dollars.
Aeolus as an Investment
Without much debate, the argument for Aeolus as an investment vehicle is predicated largely on AEOL-10150. Value in the market has always been predicated on two things; growth and earnings. At Aeolus, the near term driver of growth and earnings is AEOL-10150, and the company's relationship with BARDA. Whereas an EUA filing in 2014, and an exercising of the "Animal Rule", would allow BARDA to add AEOL-10150 to the nations biodefense stockpile, it stands to reason that revenues could begin to be generated for Aeolus and its shareholders the second half of 2014. Assuming that the application for an EUA is granted, this could be significant. BARDA has a multi-billion dollar budget for the nation's stockpile, and could elect to utilize a portion of those funds to purchase mass quantities of AEOL-10150.
However, what BARDA would be willing to pay, and to what extent such a purchase would affect share price at Aeolus, is highly speculative at best. There is no guarantee that BARDA will elect to purchase AEOL-10150, despite their principal funding of the drugs development, and there is no way of knowing what quantity they would purchase. What one must do is simply anticipate possibilities in the most conservative way possible. That is the most responsible method of forecasting in this scenario.
Aeolus, as of the time of this article being written, trades for .235 cents per share. The company is in possession of a market cap of only 30 million dollars. Earnings per share are negative, the net profit margin is understandably abysmal, and the return on average equity is even worse. These are not uncommon circumstances for a developmental biopharmaceutical company. Total shares outstanding are 134 million. Assume that the BARDA budget, conservatively, is about 2 billion dollars for the biodefense stockpile. They are currently funding, in part, no less than 9 different projects, in an advanced stage, designed to provide drugs and treatments for defense countermeasures. For the sake of balance and reason, let us function the assumption that each of those projects were to receive equal purchase agreements, given comparable access and authority, over the next two years. Let's also assume a 30% withholding at BARDA. That would give BARDA a 1.4 billion dollar budget across nine projects. That would give each project, including Aeolus and AEOL-10150, a 160 million dollar purchase commitment for provision of their respective drugs.
So, now one can work from a number of 160 million in potential purchase commitments. Assume that the acquisition of AEOL-10150 would be completed in tranches, similar to the financing of the project, with half of the full value immediately materialized upon emergency use designation approval. That would mean that as early as the second half of 2014 a purchase agreement could be entered into between BARDA and Aeolus for an initial 80 million dollars, with multiple tranches following into 2015 and 2016 with the forward looking options belonging to BARDA. 80 million in revenue, for a company functioning at a substantial deficit, would be significant. EPS would increase by a factor of no less than 11, from a current level of -0.02. The company's market cap would likely grow by a factor of no less than 3.25 from current levels. The company's share price would likely move in line with market cap adjustments as no dilution or splits are expected to be forthcoming.
Given that sort of foundation, it would be reasonable to forecast that by the end of the first quarter in 2015 Aeolus shares could be worth no less than .765 per share, representing a tripling of the current price. Furthermore, continued fulfillment of a purchase agreement from BARDA at a fully matured value of 160 million would enable the price to double from that level in the 9-12 months thereafter, pending, of course, the structure of the purchase agreement. As a result, it would be reasonable to forecast a price for Aeolus shares over the next 12-24 months to reach between .765 and 1.53. In assuming an average of both factors, time and price, it then becomes fair to forecast an 18 month price target on Aeolus shares of 1.15. That is representative of approximately 400% upside.
Beyond that point, further opportunities still exist. AEOL-10150 could be approved with the FDA for uses in oncology, and AEOL-11207 could eventually make an impact in the Parkinson's space. Therefore, long term prospects for the company, although decidedly theoretical, are indeed worthy of consideration.
Despite government funding, foundation support, and reputable research and development partnerships, there still exists significant risk for current or prospective shareholders in Aeolus. The company has always functioned at a profound deficit. These operational losses have largely been a result of expenditures for research and development, for general and administrative expenses, and the company's lack of significant, or sufficient, revenues to offset all of the expenditures. This is likely to continue for some time. Even in the event of a purchase agreement for AEOL-10150 from BARDA, further FDA trials for oncological uses of the drug, and advancing AEOL-11207, would come with disproportionate costs.
In addition to these potential trial expenses, the company also has additional responsibilities which require financial support. Aeolus must also find money to protect their intellectual property, continue to establish their competitive positions, achieve third party collaborations, and manufacture and market their products. Each of those tasks requires noteworthy financial commitments. These are the primary reasons why, by the company's own admission, the registered public accounting firm who audits the company's finances have expressed a "substantial doubt about our ability to continue."
Lastly, the company relies heavily on third parties for development, manufacturing, and marketing. For example, the company's small molecule antioxidant technology currently being employed is licensed to Aeolus from Duke University and National Jewish Hospital. Continuation of these licensing agreements is contingent upon certain milestones and prerequisites. In the event that these were not met, the licensing entities would have the option of withdrawing these rights from Aeolus. While this is, admittedly, quite unlikely, it still remains as a viable concern going forward.
Biodefense is a necessary evil in today's often irrational global climate. The threats of biological, scientific, or chemical attacks are widespread. Unfortunately for many of us, American's are often the most common target of these purported attackers. It can make the world a frightening and uncertain place. For these reasons, companies such as Aeolus are required in order to provide precautionary coping mechanisms as a counter defense strategy. Aeolus takes measures to minimize our vulnerability.
In doing such, the company has procured significant funding and development partnerships, and has managed to keep them despite growing operational deficits. In addition, faith in the company has come from insiders and institutions as well. More than 60% of shares at Aeolus are held by institutional investors, and the average cost basis for shares purchased by insiders over the last two years has been .37 cents. That means that current levels offer a buying opportunity at a significant bargain compared to insider premiums.
The company maintains a stable beta of 1.42, and there is, somewhat surprisingly, minimal short interest for a company whose shares trade at such an inexpensive penny stock level. Thus, when compared to its measurable peers, Aeolus is considerably attractive. There likely will not be significant price action for shares until the second half of 2014, however at current levels the company is worthy of investment consideration immediately. With support from reputable entities, both in the public and private sectors, and with notable institutional holdings, Aeolus is a stock worth considering for investors working from any budget. The assumption of a small position here is recommended for investors willing to wait approximately 18 months for what could be 400% returns. Prospective shareholder attention is well warranted.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: It is advised that all prospective investors complete their own relevant due diligence prior to initiating an investment into any company detailed herein, or on any other web based platform.