Artelo Bioscience Rounding a Corner with Cancer-Related Therapy

PRIME SERIES

·      Over 10 million people stricken by cancer each year, with as much as 60% suffering from loss of appetite or anorexia and wasting disease or cachexia.

·        With no standard of care available to treat patients with cancer-related anorexia, there is an eager patient population ready for an effective treatment.

·        Phase Ia/Ib clinical trial of Artelo’s ART27-13 compound is fully enrolled and final data could be available for year-end 2022, providing proof of efficacy among cancer patients suffering from anorexia.

·        Capital raise in late 2021, has provided sufficient capital resources to support Artelo through completion of the required Phase II clinical trials for its ART27-13.

·        Using potential competitors and peers with publicly traded stock to provide comparable valuation metrics, ARTL is found to have intrinsic value well above its current stock price.

 

Over 16% of the world’s population has been stricken by cancer.  Indeed, the World Health Organization reports one in six deaths on the planet is the result of cancer.  That is about 10 million people each year.  Cancer is a burdensome disease and few understand it better than those who suffer from a particularly vexing side effect of cancer  -  loss of appetite to the point of inability to eat or anorexia.  Along with cachexia, or muscle wasting disease, cancer-related anorexia effects as much as 60% of cancer patients. 

Unfortunately, there is no standard of care for these patients.  Physicians offer a string of alternative therapies such phytocannabinoids or synthetic THC that had previously been used to help HIV-AIDS patients with anorexia or the wasting disease called cachexia.

Since first introduced here eight months ago, Artelo Biosciences (ARTL: Nasdaq) has made surprisingly good progress with a therapy that could bring relief to cancer suffers.   Its principal therapeutic candidate ART27.13 is aimed squarely at the dynamic of appetite loss and cancer-related anorexia.

 

Clinical Trial Progress

Artelo’s ART27.13 was acquired from AstraZeneca Plc (AZN:  NYSE).  It is a full agonist or chemical believed capable of targeting and binding the cannabinoid receptors CB1 in the central nervous system and CB2 in immune cells.  Research has confirmed that endocannabinoids, acting at cannabinoid receptors, stimulate appetite and influence eating behaviors.   The Company’s scientists believe the compound shows strong potential in aiding weight gain and improved interest in eating among cancer patients.      

The candidate ART27.13 has already been through several Phase I clinical trials involving over 200 healthy individuals.  These early trials clearly established safety and tolerability in healthy volunteers and found dose-dependent increases in body weight among participants.

In April 2021, Artelo began enrolling actual cancer patients in a Phase Ib/2a clinical study of ART27.13 called the Cancer Appetite Recovery Study or CAReS.  The study addresses side effects as well as efficacy.  Clinicians will be measuring lead body mass, weight gain and signs of improvement in anorexia. 

Enrollment in the CAReS study has been completed and the Company is ready to begin preparing data for analysis and submission to regulatory authorities by the end of 2022.  One of the key sign posts for regulators from the data will be guidance on the appropriate size for a Phase 3 clinical trial that will look further at efficacy and side effects.

In the meantime, for Artelo scientists the next step will be another Phase 2b clinical trial to determine optimal dose.  The company is currently planning a trial involving twenty-five patients and one dose level.  Management currently estimates it will take two months to round up the right patients who will participate for a three-month period.  Data analysis could begin as early as November 2022.

The trial will be conducted in Britain where recent regulatory action has relaxed the site license requirements for the cannabinoid compound as a controlled substance.  Delays in past clinical trials related to site licenses will be eliminated in the upcoming trial.  Indeed, the most important rate-limiting element for this next clinical work may be patient recruiting.  Artelo’s scientists have set down strict criteria for patient selection to avoid noise in patient outcomes from other therapies.

Looking Over Corporate Shoulder at Competition

When biotechnology companies round the corner with clinical trials and begin the home stretch to regulatory approval, shareholders start looking over the corporate shoulder at other contenders in the same space.  What prices will consumers tolerate?  How quickly are physicians adopting new therapies?    

The field is not well populated with only two serious contenders.    

Anamorelin is under development by privately-held Helsinn Healthcare.  Called Adlumiz by Helsinn, the candidate is a ghrelin receptor agonist.  Secreted in the stomach, ghrelin is an endogenous peptide that helps regulate body weight, muscle mass, appetite and metabolism.  Helsinn’s anamorelin is under study in a Phase III clinical trial with patient’s suffering from non-small cell lung cancer and have cancer-related weight loss and anorexia. 

Helsinn received approval for Adlumiz in Japan for the treatment of cancer cachexia, or wasting away disease due to cancer.  Reportedly, the drug is sold in Japan for US$2.15 per tablet, providing at least some guidance on what the market will pay for a relief to aid suffering cancer patients.

There is no brand name yet for NGM Biopharmaceutical’s NGM120.  This compound is an antagonist antibody that binds GFRAL (Glial cell-derived neurotrophic Factor Receptor Alpha-like) and blocks GDF15 (Growth Differentiation Factor 15).  It has been demonstrated that blocking the interaction GFRAL and GDF15 helps reduce tumor-related weight loss.    In February 2020, NGM began a Phase 1a/1b study to assess safety and tolerability of NGM120 at 30 mg and 100 mg for patients with metastatic pancreatic cancer.  Preliminary data was made available in September 2021, but NGM has yet to release final results.  

Just like Artelo, NGM had no difficulty in finding a full complement of patients to enroll in its study.  The readiness of physicians and patients to get involved, suggests a keen interest in solving the anorexia/cachexia menace.

Undervalued Against Peers

Scrutinizing potential competitors does not answer one particular question important to shareholders.  What is fair value for ARTL?  A discount of future cash flows from ART27.13 would be the preferred method of determining value from at least this product.  However, even with some clues on demand, a selling price is many months away.  Thus, we are left with the comparable valuation method to provide a possible answer.

As a privately-held company Helsinn Healthcare offers no security market data points.  Shares of NGM Biopharmaceuticals are publicly traded, but the company produces limited revenue, has yet to deliver profits and continues as a net user of cash resources to support operations.  As a consequence, investors can observe in the U.S. equity market only multiples of revenue and book value for NGM:  14.8 times sales and 3.3 times book value.

One peer is not enough, so investors must be creative in assembling a sensible comparable group.   It must be large enough to provide a good read on investor sentiment.  However, the group must also be well enough defined to home in on the anorexia corner of the cancer therapy sector or one of Artelo’s other potential end markets such as anxiety or post-traumatic stress syndrome.  The Company’s focus on the endocannabinoid system could also be the basis for comparison.  

The quest gives us four stocks shown in the table below.  Left out of the group are Energenesis Biomedical Company (6657.TWO) and RaQualia Pharma, Inc. (4579.T), both of which are working on compounds aimed at cancer-related cachexia.  Unfortunately, neither trade on a U.S. exchange so their valuation metrics provide only a view on equity risks of their respective home stock markets.

The group of four averages a multiple of 6.7 times book value, the only metric that can be applied to Artelo Biosciences in its re-revenue stage.  Indeed, the four are all at a very early stage.  Only two have reported revenue and none have yet to achieve profitability.  

The small group price-to-book value multiple of 6.7 suggests Artelo should be valued near $4.48 per share based the Company’s book value of $28.3 million and 42.3 million shares outstanding at the end of November 2021.

It might be prudent to take a more conservative view.  At the present rate of cash usage as reported by Artelo in its most recent quarter filing with the SEC, the Company will use at least $10 million in cash resources by the end of the year 2022.  If the book value of Artelo is reduced by $10 million, the resulting book value-based valuation is $2.90 per share  -  an intrinsic value that is still more than seven times ARTL current share price.

 

Company	SYMB	Therapy	Markets	Clinical Studies	Approvals
AVEO Pharmaceuticals	AVEO	1gG1, monoclonal antibody	Cachexia	Phase I
Cannabics Pharmaceuticals	CNBX	Cannabics SR	Cancer-related anorexia, cachexia	Phase I
Jazz Pharmaceuticals	JAZZ	JZP150, Epidiolex (cannabis)	PTSD, epileptic seizures	Phase II	USA
NGM Pharmaceuticals	NGM	NGM120	Cancer-related anorexia, cachexia	Phase II
Source:  Company Reports, SEC.com

 

Company	SYMB	Price/Sales	Price/EPS	Price/CFO	Price/BkVal
AVEO Pharmaceuticals	AVEO	4.1	neg	neg	2.3
Cannabics Pharmaceuticals	CNBX	nm	neg	neg	19.1
Jazz Pharmaceuticals	JAZZ	2.9	3.6	neg	2.2
NGM Pharmaceuticals	NGM	14.8	neg	neg	3.3
Source:  Bloomberg Ltd., Yahoo Finance, Seeking Alpha

 

Admittedly, this view of ARTL as undervalued is based on quite a small group.  A larger group is composed of thirty companies working on therapies to help cancer patients, including patients with chronic side effects of the disease.  This approach adds to the mix companies like Ipsen, S.A. (IPSEY), which markets its Smecta compound as a therapy for chronic diarrhea and pain and FibroGen, Inc. (FGEN) with its Roxadustat for patients with anemia related to chronic kidney disease.  With similar end-markets these companies offer a good view on valuation of business models similar to Artelo.  The larger group yields the following average valuation metrics:  18.8 times revenue, 11.4 times cash flow, 16.4 times earnings, and 16.2 times book value.  Accordingly, the larger group is pointing to an even higher intrinsic value for ARTL and therefore even deeper undervaluation. 

Market Opportunity

Leaving aside a valuation effort, the merits of Artelo as an investment can be based at least in part by a look at the Company’s market opportunity with its lead candidate.  Analyzing the market for cancer-related anorexia or cachexia is frustrated by the lack of an effective standard of care.  The steroid decadron is the most frequently chosen treatment for increased appetite and weight gain.  Patients often find intolerable the unwanted side effects of muscle weakness, moodiness and blurred vision.  Dronabinols or synthetic THC (TetraHydroCannabinol) is a popular adaptation from the HIV-AIDS patient group.  Unfortunately, the fact that THC can cross the blood brain barrier limits dosage. 

Industry research firm Research and Markets estimates the total incidence of anorexia cases in the top seven markets in the U.S. and Europe was approximately 740,000 in 2020, with Japan accounting for another 197,000.  The market in terms of patients is growing at a compound annual rate of 1.1% through 2030.  Thus, demand for new treatments is likely to grow at least from an increase in the incident population. 

However, a second driver could come from expanding awareness of the problem and the merits of treating anorexia for the sake of improving cancer treatment outcomes.  Indeed, favorable results from Artelo’s clinical trials or even the clinical work of its competitors could have a lubricating impact on market opportunity as oncology physicians seek improved quality of life for more of their patients.

Not a One-Trick Pony

Importantly, Artelo has additional technology under development, lending to its potential value.  The company’s other therapeutic candidates and an interesting cannabinoid innovation called a co-crystal were introduced in the earlier post, “Relief for Cancer Patients in Artelo Bioscience Pipeline” on July 12, 2021.  The Company’s ART26.12 is a Fatty Acid Binding Protein 5 or FABP5 that has potential as a cancer therapeutic as well as long-term prospects for the treatment anxiety-related disorders such as Post Traumatic Stress Disorder or PTSD.  The Company’s ART12.11 is a cannabidiol co-crystal that could be aimed at PTSD as well.  The Company recently received a notice of allowance for a method-of-use patent in the United States for ART12.11.  Protection of its intellectual property is a key to commercialization of the co-crystal as the ‘go to’ technology for various cancer therapies as well as the central nervous system.

That said, Artelo’s leadership has indicated its priority for the time being is ART27.13.  To that end, the Company raised $18.2 million in new capital near the end of 2021, bringing cash and marketable securities to $24.8 million at the end of November 2021.  We estimate the Company is using approximately $2.0 million in cash resources each quarter to support operations.  If our estimate is correct, Artelo appears to have sufficient capital to bring its ART27.13 candidate to regulatory approval in the U.S. 

Indeed, recent conversations with Artelo’s leadership suggest the team is confident in being sufficiently capitalized to achieve a value-elevating milestone with ART27.13.

Positioned as a Market Leader

It appears that Artelo Bioscience is well positioned in a highly receptive target market among cancer suffers and a compound that is showing much promise in making a difference in cancer-related weight loss.  The Company could achieve regulatory approval for ART27.13 in the U.S. before or very nearly at the same time as its principal competitors, raising the possibility of first-mover status that often delivers extra revenue and profits.  Early entry into a market that presently offers no standard of care could also allow Artelo to influence treatment practices among physicians eager to achieve better patient outcomes.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Underwriters of the Prime series may have a beneficial interest in, serve as agents of, or act as advisors to the companies mentioned herein.