GOSS - Aerovate: Developing An Exciting PAH Drug Initiating With A Buy

Summary

• Aerovate is a SMID-cap biotech developing an inhaled imatinib for pulmonary arterial hypertension.
• AV-101's Phase 2b PAH data is expected in 4Q 2023 or 1Q 2024, which we believe will be positive.
• We believe the data will be positive based on imatinib's robust efficacy data (phase 3 IMPRES trial) and fairly well-understood oral-to-inhaled translation in PAH (better safety and efficacy than oral).
• We initiate with a buy rating.

Background

Aerovate Therapeutics ( AVTE ) is a US-based, clinical-stage SMID cap biotech company focusing on cardiopulmonary conditions. Aerovate's lead candidate, AV-101, is an inhaled version of tyrosine kinase inhibitor ((TKI)) imatinib, which is an oncology drug developed by Novartis (NVS) that was evaluated for PAH previously as an oral therapy. The phase 3 IMPRES PAH study showed robust efficacy of placebo-adjusted 6MWD of 32 m at week 24 and 25.4m at week 48. Also, the PVR data showed a 32% reduction from the baseline, which is highly compelling. However, the discontinuation rate of imatinib was ~30% due to adverse events, and the trial was discontinued down the road.

Therefore, the IMPRES study has established a robust clinical rationale around using TKI in PAH if the safety overhang can be mitigated. To address this, Aerovate plans to deliver AV-101 directly to the lungs through a dry powder inhaler ((DPI)), which may lower the systemic exposure of imatinib, hence improving the tolerability compared to the oral product. So far, Aerovate has generated compelling data from a phase 1 study in healthy volunteers ((HV)) and initiated a phase 2b/3 study in PAH patients around December 2021. We expect the company to report data from the phase 2b trial around Q4 2023 or Q1 2024, which we believe can be a material catalyst that can move the stock price meaningfully (-50/+100%) depending on the degree of PVR and 6MWD data.

Aerovate is steadfast in enrolling patients into its phase 2b/3 trial. The trial design is highly robust: randomized, double-blind, placebo-controlled, and expected to enroll around 200 subjects across four different dose groups (70 mg BID, 35 mg BID, 10 mg BID, and a placebo group), where each group will include around 50 patients. Regarding the enrollment criteria, the trial will enroll functional class II-IV PAH subjects with inadequate disease control with a minimum of two approved therapeutics. This is similar to previous phase 3 trials and well positions the drug for FDA approval. We note that the primary endpoint for phase 2b changes in PVR at 24 weeks time point, and the secondary endpoint will include 6MWD vs. placebo. After Aerovate completes phase 2b enrollment, the company envisages immediately jumping into enrolling more patients for the phase 3 portion of the study.

Why we build a high degree of conviction on AV-101's next data readout

Our conviction is based on i) the mechanistic rationale around imatinib and clinical data that the phase 3 IMPRES trial has shown around efficacy, ii) the robust safety profile shown in the phase 1 trial (no serious adverse event reported), and the consistent trend in safety/efficacy advantages around inhaled dosage form in pulmonary indications vs. oral dosage forms ( Treprostinil’s inhaled DPI formulation’s efficacy was shown to be better than the oral dosage form), iii) Gossamer's (GOSS) seralutinib's TORREY trial showing some degree of efficacy (another inhaled TKI, although sera is a slightly different TKI compared to AV-101).

Our base case expectation is that AV-101 demonstrates comparable or slightly less efficacy (due to a higher degree of combination pre-treated compared to 20 years ago) with clinically significantly improved safety compared to oral imatinib during phase 2b/3. Net-net, we believe this would be enough for AV-101 to receive approval for PAH and generate close to a 1Bn peak sales (total PAH market size is estimated to be ~ 7Bn ), considering that AV-101 will likely be positioned as a third or fourth-line option that can be used after PDE5i and ERAs.

Risks

As the drug is still going through clinical development, potential clinical and regulatory risks remain. Although the company has ~$140M cash which offers a decent cash runway, the company is not yet cashflow positive, and further financing through the public market can lead to unexpected stock price dilution. Unless the company finds a competent commercial partner, the in-house launch may lead to underwhelming commercial print during the launch.

Conclusion

We believe the company's lead candidate, inhaled Imatinib, is highly promising, and we believe the Gossamer's seralutinib setback due to lackluster 6MWD should be a net positive for pure-play imatinib like AV-101 with a more straightforward mechanism of action. We also like the robust balance sheet of the company (~$140m cash) and clear-cut clinical catalyst (phase 2b data) expected in Q4 2023 and Q1 2024, which we build a high degree of conviction around.

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