AtheroNova: Undervalued, Underappreciated, And Underestimated

| About: Atheronova, Inc. (AHRO)
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Initially, the thought of establishing a long position in a developmental stage biopharmaceutical company, currently trading at a penny stock level, seems reckless. In the vast majority of instances, just considering such an investment could lead to an analyst being declared "audaciously hopeful" or "irresponsibly naïve". Such an opinion wouldn't be unreasonable. The list of biopharmaceutical entities that have failed to deliver on expectations and promises is not only long, but is adding new names to its collection on a near daily basis. Biotechnology is, after all, a high risk endeavor.

However, every once and a while a company long on potential and short on resources does something inexplicable; it succeeds. In recent times, the biotechnology company most revered for its rise from obscurity was Pharmacyclics Incorporated (NASDAQ:PCYC). Only four years ago the company was trading at less than a dollar. Recently, shares have seen prices well north of 100 dollars. These rags to riches stories aren't exclusive to the biotech sector. Take for example, data-management company, Concur Technologies (NASDAQ:CNQR). In March of 2001 the company traded for as low as 31 cents per share. Today, shares of Concur hover around 100 dollars per share. Then, of course, there is the story of True Religion Apparel (NASDAQ:TRLG). Once considered by penny stock guru Timothy Sykes to have been a "pure Vancouver spam fraud that turned into a 'real' company", True Religion eventually grew to be a nearly 700 million dollar entity with a considerable Wall Street following. So, while such stories are indeed the exception, they are not, by definition, impossible.

This highly improbable rise from anonymity to icon is the dream of nearly every biopharmaceutical start-up company. The theory being that with hard work, breakthrough science, and real world medicinal solutions, a pre-clinical or developmental stage entity can't go unnoticed forever. What these companies depend on, in part, is a bit of publicity, that turns into momentum, which translates into investment, which supports further development. In the beginning though, what aspiring biotech entities need more than anything is one great idea. They need that one idea that successfully makes the transition from theoretical concept to practical application. After all, great companies are built on great products.

One such company is AtheroNova Incorporated (OTCQB:AHRO). At first glance, the company's fundamentals can appear less than impressive. Their currents assets are minimal. Their current liabilities are unattractively proportional. Their net revenue is non-existent. Their income statement shows significant operational losses. Their cash flow is, on the surface, substandard. Furthermore, they currently have only one drug in clinical stage development. As can be seen, these measurable statistics appear to leave much to be desired.

However, as the saying goes, looks can be deceiving. In fact, this article is being written with the intention of providing readers with enough information to prove that AtheroNova is not only worthy of investment consideration, but that the company's goals are deserving of such as well. In context, AtheroNova may very well be the most enticing, long term, penny stock investment, that this economist has ever seen.

How I Got Here

My professional embodiment exists in an unorthodox space. In the simplest terms, I am a behavioral economist. I study and theorize the social implications on capital markets and advise fund managers and institutional investors in their equity endeavors. However, I also occasionally work with retail investors and commodity pools. In those instances, I offer more traditional research and analysis as needed. More often than not, those services are restricted to friends and family only. I have worked for major domestic entities, consulted for private offshore equity funds, and even manage the individual finances of some people close to me. I enjoy the work, and don't accept or deny projects based on their size or scope. If something is of interest to me, and if I have the time, I do it.

Recently, an associate of mine decided they wanted to invest a small amount of capital into, what they called, a "long shot". They were tired of slow growth value stocks paying inconsistent dividends and wanted to diversify further. They wanted something they could support, be excited about, and feel connected with. They sought to have a position in a company that they could feel good about, both in terms of business model, and potential long term profitability. They wanted something new, and they wanted me to help them find it.

Finding a long shot is never a difficult task. They are everywhere. However, finding a long shot actually worth betting on is an entirely different undertaking. One must possess the ability to look beyond data, statistics, and empirically measurably criteria. They must be willing to embrace risk, endure volatility, and maintain their faith in the presence of doubt and uncertainty. They must be willing to examine company after company, product after product, and executive after executive. It can be exhausting. Therefore, one must enjoy doing it in order to be capable of bringing such a task to fruition.

This task, for me, started months ago. It ended November 11, 2013 at approximately five o'clock in the evening. That was when I got off the phone with Mark Selawski, the Chief Financial Officer of AtheroNova. That was when I became fully convinced that AtheroNova was the entity I would be endorsing to my associate.

Who is AtheroNova?

AtheroNova is a development stage biopharmaceutical company located in Irvine, California. The company was founded by two Italian brothers; Giorgio and Filiberto Zadini. Their objective, in having founded AtheroNova, was to further advance the commercialization of a new class of lipid management compounds specifically designed for treating atherosclerosis, a specific form of arteriosclerosis. This initial objective has since grown to encompass the development of a clinical phase compound capable of becoming the most effective, efficient, and revolutionary treatment of cardiovascular disease available anywhere on the planet.

Cardiovascular disease is the most prevalent terminal condition in the western world. Moreover, the disease is becoming a growing concern in developmental countries as well. As a result of this unrelenting illness, the current drugs and treatments available have become the best selling drugs in the history of medicine. These drugs are renowned for their ability to reduce serum cholesterol levels. However, despite the success of these drugs, the market has yet to see a significant decrease in the occurrence of the disease. In other words, these treatments have proven to be effective management tools for patients, but have not made a measurable impact in prevention or incremental recovery. Nobody has, as of yet, managed to break through that treatment wall.

Therein lays the ambition of AtheroNova's initial trial candidate, AHRO-001. This clinical stage compound represents the company's first significant step towards breaking through the treatment wall surrounding cardiovascular disease.

AHRO-001 is a proprietary compound administered via oral tablet, the method of administration unanimously preferred by patients and doctors alike. Through a process called delipidization, the compound is designed to dissolve plaque within the walls of the arteries and, subsequently, safely remove the plaque from the body through natural metabolic processes. At the risk of over simplifying the science here, the process is similar to using a liquid or tablet agent for removing clogs from a drain or pipe. The agent is introduced, the soft blockage is broken down and dissolved, and the circulatory process is restored to healthier levels.

AtheroNova is developing AHRO-001 to directly compete with statins that lower cholesterol and stabilize plaque, but not systematically break down and remove the newer and vulnerable plaque. Furthermore, AHRO-001 significantly improves lipid panel numbers, and has a positive effect on HDL efficiency. These assertions are not strictly speculative or hypothetical.

In pre-clinical studies completed at both UCLA and Cedars-Sinai Hospital, use of AHRO-001 led to a 95% reduction in innominate arterial plaque formation versus the control group. The same studies also showed no adverse side effects, even at high dosage. Most impressive however was the rate of regression in existing plaque. Current cardiovascular disease treatments, both in development and on the market, merely stabilize the disease, not promote healing, regression, and recovery. These results have led AtheroNova to position AHRO-001 within the market as a breakthrough treatment for atherosclerotic plaque.

The company's ambitions however do not end there. Additional patents are pending, including applications for obesity, lipomas and adiposities. The positive results indicated thus far, attributed to the science being developed at AtheroNova, have also led the company to target future treatments for hypertension and diabetes.

A Conversation with Mark Selawski, CFO

Cursory research into AtheroNova showed a tremendous amount of potential. In fact, it was more than enough to warrant additional inquiry. However, it wouldn't have been enough to simply look though financial reports and scour the web for trial results. That never tells the whole story. In truth, most researchers openly admit that data is useless, but information is priceless. Therefore, in order to effectively build a bridge from "data" to "information", with the goal of creating legitimate insight, I wanted to reach out to the company and speak to someone informally. I wanted to get an instinctual feeling about the company, its objectives, its plans, its finances, and its future from someone on the inside. I didn't want to "interview" someone simply to procure recordable answers. I wanted to speak with someone, to have a conversation, to get to know not only the company but the people in charge of it.

Below you will find the details of my conversation with AtheroNova CFO Mark Selawski. Please note, that as the objective of my contact was to converse with, not interview, Mr. Selawski, that the answers given may appear informal. Furthermore, be advised that in the interest of keeping this article at a manageable and readable length, some of the answers have been condensed. Thus, not all responses from Mr. Selawski will appear verbatim.

The parts of the conversation spoken by myself will be identified by this regular and unaltered font. The parts of the conversation spoken by Mr. Selawski will appear in italics. The conversation (post introductions of course) is found directly below;

The first thing that jumps out at a prospective shareholder when they examine the history of AtheroNova's stock performance is the presence of a significant spike in price per share in 2010. This of course leads one to ask, what was the catalyst for that spike, and why was it so significant and so short lived?

Sure. That was our first pre-clinical study. We had folks doing research for us, analysts crunching data, and we had gotten really good results. It was completed using the LDL Knockout Model in mice. This is, of course, a widely accepted and preferred method for such trials. When the first leg was done, people were made aware of the results, and there was a fair amount of enthusiasm. We then settled into the process of development, and began to build our clinical profiles around that. Over time, things leveled off. The results were still good, and the enthusiasm was still there, but at the stage we were at in the process, it had to level off. But, due in part to the quality of those results, we were able to forge a relationship with a licensing partner in Russia going into our phase 1 clinical trials.

In Russia - really. Now, is that advantageous for you, and is the trial being conducted at just that one site in Russia exclusively?

It is just in Russia exclusively, but it is at two sites. Now, they have rights to marketing and distribution of the drug in Russia and 9 other nearby countries when it gets to market, but will pay us royalties from those revenues once they can start selling and distributing there. We're preparing to make a statement in the near future about those results from the P1 trial, but let's just say for now that the trial went according to plan.

The second thing I noticed, when conducting a cursory overview of the company, was that there are only about 42 million outstanding shares. For a developmental stage biotech company this number is relatively conservative. Is there a reason why AtheroNova has elected to keep this number so manageable?

It's a confluence of two things really. First, we have a low amount of money spent thus far on development. We've managed our costs very well to ensure efficiency, and to be accountable for where every dollar goes. Some companies, they would have spent over 50 million, maybe even 100, to be where we are at this stage. For us, as of June, we had spent only about 17 million. We've been very judicious in our use of funds. In being so fiscally responsible, we don't have to dilute shareholders and can take an incremental approach to fundraising. Secondly, we're not building a massive commercial organization. We are, mostly, what we call a virtual company. We don't have expensive offices, or take on exuberant and unnecessary costs. The advantage of that, again, is that we only pay for things that we absolutely need. So, we don't need to have half a billion shares outstanding. We're building in small, cost efficient pieces that are well managed, and well planned. We raise money as we need it, in order to be as financially responsible as possible. We're raising money and taking on tasks one year at a time, not three, four, or five years at a time. We're really being judicious.

Alright, this brings us to the centerpiece of AtheroNova's pipeline; AHRO-001. As a treatment for cardiovascular disease, it sounds, on paper, like a complete game changer. How confident and excited are the members of your team at AtheroNova about this treatment in comparison to treatments already available, and what is the addressable market for cardiovascular disease domestically and abroad?

We're extremely excited because we know that our science is very good. You know, there are about 83 million folks in the U.S. alone that suffer from cardiovascular disease. If you take into account all related complications of the disease, it is estimated that the U.S. Healthcare system pays for 500 billion per year in cardiovascular disease and cardiovascular disease related complications. Even if we look at just the direct market, without complications, it is 33 billion. If we narrowed it even further, and considered just the number of people who cannot cope with the side-effects of other available statin treatments, that is about 15%. So for those 15%, those that have adverse side-effects to existing treatments, that still is an enormous market - almost 5 billion. Even if we only pulled down that market, it would represent huge market share potential for us.

In terms of the other pipeline candidates at AtheroNova, the addressable markets are enormous. Your website lists diabetes, hypertension, and peripheral artery disease as target markets. However, what jumped out at me was the fact that you recently filed a patent application for what AtheroNova called a "potentially revolutionary obesity treatment". Can you tell me anything further about that treatment specifically?

Yes, it's an orally administered compound, an off-shoot of the already completed pre-clinical studies for AHRO-001, which is proven to positively affect LDL levels and glucose levels. What we noticed during the trials for AHRO-001, was that the treatment wasn't just producing stellar results for reducing and preventing atherosclerotic plaque, but was also leading to statistically relevant weight loss when compared to the control group. So, we filed for intellectual property rights and protections for the compound to be used not only in cardiovascular disease, but also as a treatment for obesity.

These addressable markets we're discussing; they're not only enormous, but highly ambitious. How do you manage to keep your ambitions growing at a responsible rate with so much potential there, and how are you coping with those ambitions financially? The costs associated with development, late stage trials, and eventual manufacturing and commercialization are inordinately high. How do you balance all that?

We're very good at focusing on the task in front of us, day by day, and doing the best job possible with that task. We know that we have to move forward from phase 1 to phase 2, but we know that we first have to do the best we can at phase 1. It's a step by step approach. We know that when our results are verified, documented, and announced that people will start to see us as much more than just a pre-clinical stage company. They will see our potential moving forward. Co-development agreements, licensing agreements, research and development agreements; all kinds of options will be in play at that point. We know we have the intellectual property needed to move forward in the sector. With our plan, we're doing very well right now, but that isn't to say that if we had 20 million in the bank that we wouldn't be moving at a slightly faster pace. But we're moving deliberately and with purpose. We know that we will see reward and recognition of our true value in the future.

Now, for potential investors, a lot of their interest is weighted in companies who are committed to creating value for shareholders. Is that sort of financial partnership between your company and your shareholders a priority for you guys? Other than your research, development, and commitments to science, where does your relationship with shareholders fall on your list of priorities?

It is, absolutely, a key priority. In our view, with everything going on in the markets, the reason we've handled things so much different than many other companies is that we know we have blockbuster potential that isn't yet reflected in our market cap. It will be though. We say here sometimes, jokingly, that we have "flat heads" from banging our heads against the desk, asking ourselves what else we can do at this stage for shareholders. We want to show our shareholders more value. But we know that if we continue to execute our development plan, that in the long run, in the future, our market valuation will more accurately represent our true enterprise value, our true value, and our true value to our shareholders.

For me, as a behavioral economist, I place considerable value on the relationship between the social construct and the financial markets. Therefore, I believe in the relevance of instinct. Given the fact that you have served in an executive capacity at various other pharmaceutical entities, what is your instinctual feeling regarding the potential of AtheroNova compared to what you have been privy to in the past?

Absolutely this is different. It is like comparing a three story brownstone to the Empire State Building. Other companies, they have good products with good value and good intentions. There are people who need them, and they are great companies. But they have the potential to bring a single product to the market for a specific purpose. This place has the potential to bring products to market by an increased factor of about 200. The potential here is huge. As much as we all like to say that significant strides in health care have been made, and they have, cardiovascular disease is still the number one killer in America. More than cancer. More than diabetes. It's number one. Even though medicine has done a great job addressing the theoretical obstacles, those theories have yet to translate into overall treatment. You know, Peter Libby, a gentleman from Harvard, presented a paper called The Forgotten Majority; Unfinished Business in Cardiovascular Risk Reduction. It describes this fight we're in. It's more complex than just reducing LDL levels. That doesn't do it. At AtheroNova, we've hit the next level, which is the efficiency of the prevention of plaque as well as the treatment of plaque, by addressing the problems and causes of how and why it forms.

So then, do you consider AHRO-001 to be a drug designed to treat cardiovascular disease, or to prevent cardiovascular disease? Or really, is it a drug capable of doing both?

Both. No question about it; both. Say your father had a heart attack at age 52, and your doctor knows this. He wants to look into a preventive treatment free from side effects and complications. That isn't really available right now. There is a need in that space; just as there is a need for the treatment of already formed atherosclerotic plaque in patients with cardiovascular disease. Since our drug indicates the ability to do both things, effectively and safely, it could serve as preventive to the disease and as a treatment for the disease.

So, you're managing your costs with pinpoint efficiency, and your principal pipeline candidate, AHRO-001, has shown every indication thus far of being a blockbuster. You're raising money only as you need it, and you're refusal to dilute shareholders shows a commitment to returning value and profit to your shareholders down the road. The next question is, obviously, how long is that road, and where is it going?

On our website actually, we detail what we call our 'dual pathway to approval'. Our active current trial is going for positive LDL treatment because that is a known and well defined road. The FDA has clear, decisive, established guidelines for what needs to be done to get an LDL treatment approved for distribution. We're confident we can and will meet those requirements. The second pathway, which is long, is the regression, treatment, and prevention of atherosclerotic plaque. Now, this is less clear cut. It is not a known process for what we'll have to do because we're the first to do it. Is it a five year and 15,000 subject study? Is it two years? It's not known. We know it will be longer term, one, two, three or more years, but that isn't defined yet. What is most likely to happen is that after our phase two trial is complete, assuming success, we would likely consider everything from a major biopharmaceutical partner, to licensing agreements, to co-development agreements, to even acquisition with royalties. Phase 2, or should I say after phase 2, will be the key point that allows us to opt for either a partner, get into co-development, or any number of things to offset costs at that point going into phase 3. We're open to all prospects at that point as long as it is good for us, for shareholders, and for sufferers of cardiovascular disease. As long as we maintain our intellectual property rights, and the ability to develop our other treatments in the pipeline, or pre-pipeline phase, then we are willing to examine all options at that time.

You know, as analysts, investors, and economists, it's in our nature not to get too excited over potential. Promising biotechnology companies are as common as snowflakes in a blizzard, but I have to admit, your willingness to talk informally and directly, coupled with the verbiage on your website being written in a such a way where you really want people to understand what you do, it's refreshing and impressive. Is your transparency a reflection of your confidence and direction moving forward?

It is. You know, and thanks for saying that. We really believe in what we're doing here. Whether the analysts and investors and experts out there have acknowledged it yet or not, really can't be something that affects us. We would, of course, enjoy more support and encouragement, but we know we have something here that is a blockbuster. So, in the meantime, we focus on doing what we do; controlling costs, raising money only as needed, keeping our shareholder interests in mind, and developing our pipeline in such a way where it is step by step and in line with what the FDA expects.

Thank you for your time, your candor, and your willingness to speak with me today. These discussions, in combination with the research I have conducted privately, really make me a proponent of your company and your mission. Thanks again, and best of luck.

You're welcome and thank you for your interest. You have my number, and please contact me at any time in the future if you have any additional questions or needs.

The Conversation in Hindsight

I have worked with, for, and alongside a number of corporate executives in my life. Nearly all of them project a cagey, defensive, albeit positive and confident demeanor. Mark Selawski was different. Mark Selawski was better. He wasn't afraid to laugh, he was candid and forthright in his answers, he maintained professionalism at all times, and he was unwaveringly confident. He was open with struggles and short comings, and motivated about the future at AtheroNova. He was realistic. He was transparent. He never hesitated in his responses. He was sure of himself, without being arrogant. He was excited, without losing his composure. He was everything a leader and executive should be. He was everything that an investor should look for in a company's financial spearhead.

AtheroNova, like Mr. Selawski, appears to be self-assuredly pragmatic. In other words, they believe so much in their science and innovation, that they aren't pressured to rush the process at the expense of diluting shareholders or risking financial misconduct. They approach their financial needs one at a time, as they come. Once that is understood, the company's financial position appears far less daunting. In fact, in the context provided by Mr. Selawski, the company's financials appear not only healthy, but in line with the company's objectives. Whereas nearly all developmental stage biotechnology companies operate with a deficit, AtheroNova understands, manages, and copes with theirs on an exemplary level. They manage to use the knowledge of their situation as an applied instrument for their operational process.

For the Prospective Investor

As is the case with all biotechnology companies and penny stocks, there exists a significant amount of risk for the AtheroNova investor. The company has a long road ahead, and by their own admission, since the FDA doesn't have a designated trial protocol in place for AtheroNova's second leg of their "dual pathway to approval", that road is currently indefinite. Furthermore, while AtheroNova has done a remarkable job in managing their expenses to date, future stage developments will undoubtedly come at a substantial cost. At some point, between now and then, agreements, partnerships, buyouts, or even private placement offerings will have to be considered. Of course, then there is the elephant in the room; pre-clinical and early stage trial achievement does not always translate into late stage trial success. In fact, the failure rate is greater than the success rate. Therefore, statistically, the odds are against them.

However, as has been previously mentioned, statistics aren't always correct. There is continuously a larger picture to consider. When framed in the right context, the picture for AtheroNova could in fact become a masterpiece.


When I set out on this task of uncovering, or rediscovering, a potential "long shot" investment for my associate, my expectations were quite tempered. I put tremendous value on all relationships in my life, professional and otherwise, and do not embrace the idea of jeopardizing them with reckless council. Therefore, I was not entirely confident that I would find an investment vehicle that met both my associate's ambitions, and my own rigorous specifications. However, in AtheroNova, I found just that.

Consider for a moment the potential that exists just in AHRO-001 on its own. As Mr. Selawski disclosed, the addressable market for cardiovascular disease and corresponding complications in the U.S. alone is 500 billion dollars annually. The direct market, aside from related complications, is 33 billion dollars by itself. The 15% of that 33 billion dollar population with adverse reactions to currently available statins equates to a 4.95 billion dollar addressable market for AHRO-001 almost exclusively. Even if their future market cap was reflective of only 60% of that niche, it would be representative of a market capitalization equal to 3 billion dollars. Assuming that AtheroNova does take on a co-development partner, enter into a licensing agreement, or take on an equity partnership in between the phase 2 and phase 3 trials, lets forecast retention of profits equal to 20%. That would give AtheroNova, in the event of successfully bringing AHRO-001 to market, a true market cap reflective of its enterprise value, equivalent to about 600 million. Based on current outstanding share estimates being around 42 million, that would give AtheroNova a conservative PPS of 14 dollars. Currently, the stock trades at or around 40 cents per share. That potential certainly would be on par with my associate's ambitions.

In terms of my own criteria, AtheroNova has addressed all of my concerns. They are practical, focused, determined, well versed, calculated, transparent, experienced, and ambitious. They acknowledge their obstacles, and have plans in place to address them. That level of accountability and responsibility is refreshing in a capitalist system just now beginning to recover from a complete lack of accountability and duty.

Lastly, of course, was my associate's desire to be part of a company capable of making one "feel good". While morality and good will is hardly a criterion for most investors, in this case, it was important to my associate. Investing in a company that is attempting to break through the treatment wall of America's most frequently fatal disease would certainly meet that objective. However, there is another facet of the AtheroNova story that exceeds that point further.

In 2010, one of the founding brothers of AtheroNova, Filiberto Zadini, passed away. This loss was, undoubtedly, significant to Giorgio. As part of the company's mission today, every member of the AtheroNova team continues to pursue project success in honor of the decades of tireless research conducted by Filiberto. He was, in the words of his brother Giorgio, the "most inquisitive and scientifically gifted person" he ever knew. AtheroNova's continued commitment to the memory of their beloved co-founder is further validation of the company's character and intentions.

Potential investors in AtheroNova must possess significant constitution and patience. Undoubtedly, the short term volatility will test the resolve of even the most fervent long term investor. Dormancy, or delayed progress moving forward, will cause angst in even the most disciplined of shareholders. These reactions are nearly inevitable. However, in three to five years' time, the true significance and potential of AtheroNova should be fully materialized and reflected in the company's enterprise value. For investors out there with a high risk tolerance, who are looking for a long term investment capable of substantial returns and significant social impact, AtheroNova is well worth further consideration.

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: Please note, that in the interest of keeping this article at a manageable and readable length, that not all itemized details could be included in their entirety. I would encourage prospective investors to conduct their own additional due diligence prior to rendering an investment decision. The AtheroNova website is very thorough and worth visiting.