Why You Should Put Aeglea Biotherapeutics On Your Watchlist: An Investment Thesis

| About: Aeglea BioTherapeutics (AGLE)

Summary

Aeglea Biotherapeutics is developing arginine-depleting enzymes for cancer therapy.

Its lead candidate is differentiated from similar enzymes, like asparaginase, by being fully human and less likely to cause allergic reactions.

In-vitro findings suggest potent efficacy for the depletion of arginine in cancers like glioblastoma and AML.

The company expects to report top-line data for its early trial in solid tumors in 2016, and it has cash on hand to fund operations for over a year.

Anticancer therapy development has reached a fever pitch, with novel immunotherapies leading the vanguard. But new treatments can come from a variety of places. Today, we're going to consider the prospects of Aeglea Biotherapeutics (NASDAQ:AGLE), which is developing a novel anti-metabolic enzyme that has shown promise in early studies of both solid tumors, blood cancers, and a rare congenital metabolic disease.

Its lead compound, AEB1102, is an engineered form of human arginase, a naturally occurring enzyme we use to make the amino acid arginine within our own cells.

How does arginase work in cancer?

The amino acid arginine is required by all human cells for growth and division. However, many forms of cancer modify their metabolism in a way that allows them to balance their increased energy requirements and synthesis of proteins. The side effect of this "metabolic remodeling" is that cancer cells often lose the ability to make certain nutrients and rely on the microenvironment for their supply. Arginine is one such nutrient.

Scavenging of arginine outside the cell has emerged as a promising therapeutic strategy for cancer. When deprived of this amino acid in-vitro, normal cells will put a halt on cell division, a process called growth arrest. However, cancer cells continue to divide under these conditions, refusing to put the brakes on. As a result, instead of arresting division, arginine depletion in tumor cells leads inexorably to activation of cell death because of unbalanced growth. Basically, the cell has to start eating itself to continue making proteins, and eventually it cannot survive this attrition.

In-vitro data suggest that arginine depletion using this enzyme is selectively toxic to acute myeloid leukemia (AML) and glioblastoma cells.

Clinical trials

In 2015, Aeglea received approval from the FDA to initiate three clinical trials: one in solid tumors, one in hematologic malignancies including AML and myelodysplastic syndromes, and one in arginase 1 deficiency.

Of these trials, the solid tumor study has moved furthest, having initiated in October 2015. The company expects to provide some kind of top-line data in 2016.

Is there competition?

Arginine depletion is currently in late-stage clinical trials through the use of a microbial enzyme called arginine deiminase. This enzyme differs from AEB1102 in several key ways.

Being microbial in origin, arginine deiminase is more likely to elicit severe allergic reactions in patients, similar to what we see with asparaginase in ALL treatment.

It relies on specific deficiencies in tumor cells, without addressing the arginine outside the cell. Thus, I feel that AEB1102 is quite differentiated from arginine deiminase. Because it is human in origin, AEB1102 is much less likely to elicit severe immunologic toxicity. What's more, we have not had any results from the arginine deiminase trial since 2009, so it is difficult to judge where it is headed with this therapy.

Filing

In its first quarterly finding after a $50 million IPO, Aeglea reported that it had $24 million in cash and cash equivalents on hand, with total assets running over $35 million. Its total quarterly loss from operations was nearly $4.6 million, most of it coming from research and development.

Operational expenses have almost doubled over the last year, which is not surprising given its recent move into clinical trials. Coordinating even small studies is a major, expensive endeavor, and investors should expect the expenses to continue growing as the company moves forward.

Overall, Aeglea experienced a net loss of cash of $5.3 million, when accounting for other forms of cash flow. Should this burn rate hold, then the company can continue operations for a little over a year before it'll need money again.

The company has a grant from CPRIT for $19.8 million that began in June 2014, which will end May 2017. This represented quarterly revenue of $859,000 in the Q1 filing.

Revenue forecast

At this stage, it is very difficult to forecast what kind of earnings Aeglea could realize should AEB1102 make it to market. However, I believe we can look to the approved agents like Oncaspar and Erwinaze for some guidance. These are only approved in ALL, and they are less complicated than the engineered arginase.

Erwinaze currently commands worldwide revenue of between $150 million and $200 million per year. It should be noted, however, that Erwinaze is only approved for patients who develop a hypersensitivity to Oncaspar; thus, not all patients will receive it.

So it seems reasonable to expect that annual revenues could grow into the hundreds of millions for AEB1102, assuming it pans out as a legitimate therapy. The study in AML is particularly interesting here since standard treatment options are limited to a few agents that have been around for decades.

There's also the convenient fact that arginase can be used to treat a condition other than cancer. Arginase 1 deficiency is a metabolic disorder that can lead to endothelial and immune dysfunction. It is quite rare, occurring in 1 in 300,000 in the US population.

This may not sound promising from a revenue-generating perspective, but remember that the FDA places a special priority on orphan diseases, which it defines as those afflicting fewer than 200,000 patients. Orphan drug designation would provide tax incentives, as well as an accelerated clinical pathway that can facilitate approval on the basis of smaller clinical trials. Proof of principle in metabolic disease could help to establish the safety and efficacy of arginase in cancer clinical trials, as well.

Should you buy?

As with all developmental biotechs, Aeglea represents a high-risk investment since its therapeutic candidate could fail clinical trials. In early-stage trials like the ones it is conducting, this is an even greater risk.

However, investors who can identify the therapies that will make it are well positioned to find a major diamond in the rough. I believe that Aeglea could represent such a company. Amino acid depletion as a treatment strategy has been studied extensively in certain forms of cancer, and this treatment is effective.

The way that Aeglea has differentiated its product helps to ensure that the allergic reactions common to other forms of amino acid deprivation are minimized, which will hopefully translate well into safety.

The company also has a further safety net in that it is studying its therapy in a rare disease, which could facilitate its passage through the regulatory channels.

Of course, the company will undoubtedly need more cash to fund its ventures after this year. The question for investors is where this cash is to come from. Dilution seems like an obvious choice; the company has over 500 million shares authorized to sell. Financing arrangements or loans would be another source of operating funds.

However, as with so many promising programs, if Aeglea can show strong early results, they may be able to form a lucrative partnership to fund development of AEB1102. This is obviously highly speculative, but potential partners could include big players in the asparaginase space like Baxalta (BXLT) or Millennium (OTCPK:MHCC).

Overall, it is difficult to speculate on where Aeglea will be in 12 months concerning cash. However, I feel that, for an early-stage biotech, this company has significant promise as a long-term investment. If it can bring this therapy to clinic, it will provide an important treatment option for a variety of solid and hematologic cancers.

Disclosure: I/we 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.

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