Aptose Approaching The Clinic With 2 Very Interesting Assets

It has been a long road, but Aptose (APTO) is closing in on getting its two lead drugs into clinical trials. The company still has to resolve a manufacturing-related clinical hold for APTO-253 and finish its pre-IND work on CG806, but Aptose should have both compounds in human testing in 2019 with initial results from at least APTO-253 before the end of 2019.

Aptose remains an exercise in weighing significant market potential against significant risks and a long road to travel before commercialization. Both APTO-253 and CG-806 have produced intriguing, arguably exciting, pre-clinical data suggesting that they could both be real players in hematology, but the entire point of the clinical trial process is to weed out those drugs that look good in pre-clinical testing but cannot deliver the goods in real-world testing. I believe Aptose shares are undervalued, but investors need to understand and appreciate the significant risks involved and the near-certainty of meaningful future dilution.

APTO-253 Inching Back Toward The Clinic

Aptoses drug APTO-253 has long looked like a high-potential cMyc inhibitor for acute myelogenous leukemia (as well as high-risk MDS and some other hematological cancers), with an attractive potential efficacy/safety profile for AML patients that cannot tolerate current treatment options. The problem has been a formulation/manufacturing issue that has taken literally years to resolve.

Management announced that they had identified the root cause of the problem back in 2017, and the company has since proceeded with the required work to test the new formulation/manufacturing processs stability and sterility, as well as mock infusions and animal bridging studies. That work has gone well, and the drug seems to no longer be clogging up drug pump filters.

With that, Aptose intends to file for the lifting of the clinical hold of its Phase Ib study before the end of the second quarter. If that request is granted, the company would be in position to reactivate over a dozen clinical sites relatively quickly and restart its study in AML/MDS patients. As the company might be using a different dosing plan, it could take a little longer to get the FDAs permission and get the clinical sites back up and running (different sites have different policies about monitoring/approving such changes).

In the meantime, Aptose has reported additional mechanism of action data on APTO-253. Apparently, the drug can stabilize certain quadruplex DNA structures and causes DNA damage to cancer cells through loss of BRCA1 and BRCA2 function.

CG806 Looking More And More Exciting

While I believe APTO-253 is a very worthwhile drug (albeit probably not a blockbuster), CG806 could have blockbuster potential in hematology. Additional mechanism of action studies have shown it to be active against all relevant forms of FLT3, one of the most frequently mutated genes in people with AML. Not only does CG806 appear broadly active, it seems more effective than other FLT3 inhibitors (in assays, and thats an important detail), and it also seems to be effective in cancer cells that are/have developed resistance to Imbruvica.

More recently, Aptose also presented data regarding the BTK targeting side of CG806. Apparently, CG806 can inhibit both BTK and AURK pathways in B-cell tumors, increasing the likelihood that it will demonstrate efficacy in B-cell diseases like chronic lymphocytic leukemia. I also want to note that, thus far, the animal toxicity testing has been encouraging, suggesting this could be a very tolerable drug.

The plan now is to complete the pre-IND work for CG806 and submit an IND with the FDA before year end and then began Phase I studies in AML and CLL, most likely early in 2019.

But Its Gonna Take Money

Aptose ended the quarter with $16 million in cash after selling over 3 million shares to Aspire Capital and raised another $6 million after quarter-end by selling an additional 2 million shares. That level of cash is enough to get the company into Phase I testing for APTO-253 and CG806, and management said they have sufficient cash into Q22019.

What happens next will depend upon the clinical results, the markets enthusiasm for early-stage biotechs, and competitor results. It takes around $5 million to run a Phase I oncology study, $11 million to run a Phase II study, and another $22 million (on average) to run a Phase III study. While some of those costs can be reduced by running trials together (like AML and CLL studies), Aptose is probably looking at something in the neighborhood of $125 million in trial costs and likely at least another $100 million in general corporate costs before commercialization, not to mention ongoing R&D costs.

How much dilution Aptose will incur is a major question but also very hard to model. Strong Phase I results (and then strong Phase II results) should allow the company to launch additional equity financing rounds at more favorable prices, but there are obviously no guarantees raising funds in the future at $10/share and $20/share obviously has massively different dilution consequences than raising funds at $3-4/share.

The Opportunity

I continue to believe that APTO-253 can generate $500 million to $600 million in peak sales even with a relatively limited pool of targeted patients (those who cannot tolerate current treatment options). I believe CG806 could address over a $1 billion opportunity but, obviously, the size of the market will have a lot to do with what the clinical trials show in terms of efficacy and safety and what competing therapies offer.

These remain risky projects. The average oncology drug entering Phase I has a roughly 5% to 15% chance of making it through to approval (different studies come to different conclusions, with 5% to 10% as the conclusions of more recent and rigorous studies). I have boosted my APTO-253 odds to 7.5%, given the progress in pre-clinical manufacturing work, and Ive raised my odds on CG806 to 15%, given the differentiated mechanism of action and safety data that have been presented thus far. If and as these drugs progress, the approval odds (and the value per share) will move up meaningfully.

The Bottom Line

My fair value moves to $4.75 on the basis of the pre-IND progress the company has made, as well as some revised assumptions regarding future dilution. While I normally do not bother with pre-clinical biotechs (when the odds of failure are 90%, I tend to stay away), Aptose is an exception. Although still only suitable for very risk-tolerant investors, management has continued to make progress on pre-clinical milestones, and investors could have actual human data to evaluate in 12-18 months.

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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