Atossa Genetics — Update 16 February 2016

Having raised $46.4m (net) in equity since its incorporation in 2009, Atossa Genetics initially developed medical devices and laboratory services dedicated to breast cancer and related health areas, before transitioning to pharmaceutical development more recently. It obtained the rights in 2015 from Besins Healthcare to AfTG, a proprietary formulation intended to provide selective ER antagonism topically in the breast area while reducing the adverse events associated with oral drugs such as tamoxifen, by providing the drug locally rather than systemically. Atossa also acquired an IDMC device that is intended to selectively introduce drug to breast ducts, potentially improving drug targeting for chemotherapy applications. Atossa intends to combine the IDMC with established cancer drug fulvestrant for a Phase II clinical study in H116.

Our rNPV-derived equity valuation of $14.2m (including $5.3m estimated Q415 net cash), or $0.47 fully diluted, applies a 12.5% cost of capital and assumes a 25% probability of success for AfTG, and a 15% probability for IDMC-fulvestrant. We project peak AfTG global sales of $1.0bn in 2026, with Atossa entitled to a 12.5% net royalty. In comparison, branded tamoxifen (Nolvadex, Astra Zeneca) had peak global sales of $618m ($462m in US) in 2002 before its genericisation. Positive clinical trial data and/or securing partnerships could raise our probability estimates and valuation.

On 30 September 2015, Atossa had $8.1m in cash and equivalents, and its trailing nine-month cash burn rate (operating cash flow minus net capex) was $10.1m. We expect the burn rate to rise to $15.5m in 2016 and $14.8m in 2017 given our forecasts for the costs needed to run the planned Phase II studies. Third-party (eg National Cancer Institute) funding for an AfTG study is under consideration, which would reduce our burn rate assumption. We model $20m in financing each year between 2016 and 2018, after which we expect partners to fund both therapeutic programs. For modelling purposes, we assign these financings to long-term debt.

Atossa’s funds on hand last into Q216, and its imminent need for financing needs to be addressed. Gaining cancer product approval remains challenging, although the regulatory risk is somewhat offset by both candidates being paired with an existing approved active pharmaceutical ingredient. For both AfTG and the IDMC-fulvestrant programs, development may hinge on future FDA guidance on whether the projects can fall under the 505(b)2 development pathway, which we assume in our model, and which reduces the breadth of required clinical data needed to support a marketing application. For AfTG, commercialisation success may depend on the educational and marketing efforts needed to convince at-risk patients of the benefits of local therapy for breast hyperplasia or DCIS, which could require larger and longer-duration studies than those required for registration under 505(b)2. Atossa recently started legal action against Besins Healthcare, given Besin’s intent to advance AfTG to treat elevated breast density (possibly infringing Atossa’s rights in hyperplasia). This lawsuit adds uncertainty over the strength of Atossa’s AfTG rights.

Atossa’s strategy is to develop locally administered pharmaceuticals for treating breast (fibroglandular) hyperplasia and early-stage breast cancer. The lead product candidate is AfTG, which is slated to start Phase II studies in mid-2016 and is initially intended as a treatment for breast hyperplasia in high-risk patients. Atossa is also planning a Phase II trial using its proprietary IDMCs to deliver fulvestrant, an approved metastatic breast cancer drug marketed by AstraZeneca, to treat ductal carcinoma in-situ (DCIS), and potentially other breast cancers. Before engaging in these areas, Atossa developed medical devices relating to breast health, including breast aspirators, and operated a laboratory that performed cytology testing and pharmacogenomics tests. These businesses generated revenue but were not consistently profitable.

In May 2015, Atossa acquired the worldwide exclusive rights from Besins Healthcare (the developer of AndroGel, a topical testosterone gel) to develop and commercialize AfTG, a proprietary transdermal afimoxifene gel formulation, for the treatment and prevention of breast hyperplasia, a precancerous condition. Atossa would be obligated to pay Besins a royalty of 8% to 9% of net sales for the first 15 years of commercialization. Atossa also has non-exclusive AfTG rights for breast cancer and other breast diseases (such as DCIS). To obtain exclusive rights, Atossa must pay $5m for each new indication, plus a $20m milestone upon starting Phase III studies for each indication.

Afimoxifene (4-hydroxytamoxifen) is an active metabolite of tamoxifen. Orally dosed tamoxifen is metabolized in the liver by a cytochrome P450 isoform into active metabolites including afimoxifene.1 These molecules work as ER antagonists, thus blocking circulating estrogen for binding to this receptor and inhibiting the transcription or expression of estrogen-responsive genes. Afimoxifene has 30-100 times more affinity for ER than tamoxifen itself. The rationale for AftG development is to provide the local ER antagonistic therapeutic activity associated with tamoxifen, while reducing the risks of systemic effects associated with oral tamoxifen.

Most breast cancers are preceded by hyperplasia (increase in the number of cells) in breast lobules (the parts of the breast that produce milk) or ducts (pipes of the breast that drain milk out to the nipple). Hyperplasia is usually discovered by mammography or after a biopsy to evaluate a suspicious area identified on a mammogram or during a clinical breast exam.

In usual hyperplasia, the pattern of cells is very close to normal. Atypical hyperplasia (AH), also called hyperplasia with atypia, refers to cases where cells are more distorted or abnormal looking. Patients with AH have a 3.5 to 5 times higher lifetime breast cancer risk (vs those without hyperplasia)2. AH is generally treated with surgery to remove the abnormal cells and to make sure no in situ or invasive cancer is present in the area. AH is found in about 10% of the one million breast biopsies with benign findings performed a year in the US.3

Following surgical treatment for AH or non-invasive breast cancer (such as DCIS), additional treatment with a SERM drug, such as tamoxifen or raloxifene (Evista), is often recommended. A large-scale randomized study (IBIS-I), where over 7,000 women (aged 35-70 with elevated breast cancer risk) were randomized to five years of tamoxifen vs placebo, found that tamoxifen reduced breast cancer incidence in high-risk women by 30-50% over five years of treatment, for ER-positive cancer and DCIS. Approximately 75-80% of breast cancers are ER positive4 (ie they grow in response to estrogen). IBIS-I found that after a median follow-up of 16 years, tamoxifen-treated patients had a 7.0% risk of developing breast cancer, versus 9.8% in the placebo group. The reduction in ER-positive invasive breast cancer was maintained for at least 11 years after cessation of tamoxifen.5

Despite evidence of reduced ER-positive breast cancer risk, SERM use has been limited to under 1% of AH patients.6 The low uptake is believed to be attributable to patients’ fear of adverse effects (AE) of SERM drugs,7, 8 which include increased risks of thromoboemoblic events (including blood clots, stroke), menopausal symptoms, and endometrial cancer. Chemoprevention use (the use of drugs to reduce cancer risk) remains low even though raloxifene, a newer oral SERM approved by the FDA in 2007, has a more advantageous AE profile vs tamoxifen. 9, 10 Some research suggests that women may be reluctant to add new risks to their health when oral SERM drugs tamoxifen will not eliminate their risk of breast cancer completely.11

The rationale behind AfTG would be to attempt to generate the local efficacy of SERM drugs at desired target sites (eg estrogen receptors in the breast) while limiting systemic distribution to lower risks of associated AEs. The well-developed internal lymphatic circulation of the breast could provide a mechanism of preferentially targeted local drug delivery to the region12.

An alternative preventative option for postmenopausal women would be aromatase inhibitors (AIs), such as exemestane (Aromasin), anastrozole (Arimidex) and letrozole (Femara). The enzyme aromatase normally converts androgen into small amounts of estrogen, and its inhibition decreases estrogen production, reducing the amount of hormone available to stimulate the growth of ER-positive cancer cells. A disadvantage of AIs is that they do not block estrogen production from ovaries, so they can generally only be effective in post-menopausal women. Some studies suggest that AIs are more effective than tamoxifen/SERMs in preventing cancer in postmenopausal women. AIs tend to cause fewer pro-thrombotic side effects than SERMs, but are more likely to cause cardiac problems or bone loss and osteoporosis than tamoxifen.

A Besins-sponsored study recruited 27 patients (including both premenopausal and postmenopausal) with DCIS (which is normally treated with surgery) and randomly assigned them to take oral tamoxifen and placebo gel, or oral placebo and AfTG (also transdermally applied to the breast) once daily in the weeks (at least six weeks) leading to surgical removal/treatment of a breast with DCIS; 26 patients completed the study (n=12 in the AfTG arm; n=14 in oral tamoxifen).

The study aimed to show whether AfTG can provide comparable effectiveness as oral tamoxifen in reducing Ki-67, a protein marker for cellular proliferation whose density level correlates with cancer growth and progression. Ki-67 has prognostic significance in several tumour models including breast cancer.13 A Ki-67 reduction from AfTG therapy comparable to oral tamoxifen, may lead to similar reductions in breast cancer risk. The study also aimed to evaluate AfTG on a number of systemic endocrine plasma markers14 and coagulation proteins known to be affected by oral tamoxifen, to determine whether topical therapy could reduce the potential for systemic effects.

The data showed that both oral tamoxifen (20mg/day) and AfTG (4mg/day) had statistically significant reductions in Ki-67 (61% and 52%, respectively). Although the reduction in the oral tamoxifen arm was higher, the difference between both arms was not significant. However, the small sample size limited the statistical power of the comparisons and separations between both arms in most of the measures.

Systemic measures clearly showed less absorption in the AftG arm. Breast adipose tissue concentrations of (Z) 4-OHT (afimoxifene) were equivalent in the oral and AfTG groups (over 5ng/mg tissue in both arms), but plasma concentrations of this active ingredient in the gel group were c 20% of those in the oral arm. In endocrine parameters, there were significant increases in IGF-1 (p=0.003) and decreases in SHBG in the oral tamoxifen group (which have also been shown in other studies15), but changes in the AfTG arms were not significant. Post-treatment levels of factor VIII and von Willebrand factor (both proteins associated with blood clotting) were significantly increased post-therapy in the tamoxifen but not the AfTG group. Thus, AfTG could avoid the changes in the clotting cascade that contribute to the pro-thrombotic effects of oral SERMS.

The study was limited in that it did not reach the target accrual of 112 patients (presumably due to recruitment challenges). The authors concluded that AfTG and oral tamoxifen had equivalent anti-proliferative effects (based on Ki-67 measures), but that systemic effects on endocrine and coagulation parameters were reduced given AfTG’s transdermal delivery. This study’s recruitment challenges could be indicative of the possible difficulties in engaging women to undertake prophylactic treatments to prevent breast cancer. AfTG was previously studied in 15 other Phase I and Phase II studies conducted in a variety of indications with over 365 patients.

Mammary DCIS accounts for 20% of new breast cancers,16 with 57,000 newly diagnosed patients in the US in 2011.17 Although 10-year DCIS-specific survival rates are 96-98%,18 the risk for the development of subsequent invasive breast cancer is up to 30% following local DCIS treatment.19 For AH, Hartmann et al reported a cumulative incidence of breast cancer of 30% within 25 years following diagnosis. This rate was calculated from a 698-patient cohort of women with AH, who were followed for a mean of 12.5 years, and of these 143 developed cancer (81% developed invasive disease, 19% developed DCIS).20 These rates justify a role for preventative therapy. There may be a commercial opportunity for AfTG if it can show comparable efficacy benefits to oral SERMs while demonstrating a clear safety advantage through a significantly lower AE profile.

The National Cancer Institute (NCI) approved a Letter of Intent submitted by a university-affiliated US cancer research center, to study AfTG in patients with DCIS. Proposed study design details have not been made public. If the clinical protocol is approved, the majority of this Phase II study’s costs could be funded by NCI, although our model assumes that Atossa will fund these costs. As Atossa only has non-exclusive rights in DCIS, it would need to pay additional funds to Besins to obtain exclusive DCIS rights (which we assume would be necessary for a viable commercial path). Atossa plans to finalize the next AfTG study indication and protocol in H116, with the goal of enrolling a first patient in mid-2016. We assume the study will track drug pharmacokinetics (PK) and measure relevant breast cancer markers such as Ki-67, and systemic thromboembolic markers.

Atossa had previously developed or acquired proprietary medical devices directed towards breast cancer and health diagnosis, including an IDMC. Its second therapeutic strategy involves using its IDMC to deliver therapeutics for breast cancer and/or pre-cancerous conditions, with lower systemic exposure vs established therapies or delivery approaches. The IDMCs are designed to irrigate each of the five to seven breast ducts and can also collect the lavage fluid, which can then be analysed by a laboratory for biomarkers. The IDMCs are now being developed to deliver drugs to the breast region. Dr. Susan Love and collaborators conducted a Phase I study in China on the feasibility of intraductal chemotherapy drug administration into multiple ducts within one breast in patients awaiting mastectomy for invasive breast cancer treatment. Carboplatin or pegylated liposomal doxorubicin (PLD), was administered into five to eight ducts, and results showed that both drugs were absorbed into the bloodstream. The investigators concluded the study was supportive of the safety and feasibility of intraductal therapy.

While this targeted delivery approach could potentially apply to many pharmaceuticals, Atossa’s initial therapeutic approach is with fulvestrant (marketed as Faslodex by AstraZeneca, and FDA approved for ER-positive metastatic breast cancer). Atossa is planning a Phase II (n=30) clinical trial at Columbia University using its proprietary IDMCs to deliver fulvestrant as a pre-operative therapy in patients with DCIS or invasive breast cancer, who are scheduled for mastectomy (full breast removal). Fulvestrant is a complete ER antagonist (with no agonist effects), which also accelerates the proteasomal degradation of the ER. Fulvestrant administration is generally intramuscular (IM) via a monthly injection of two shots (into the buttocks).

In the open-label PK study, six patients will receive IM fulvestrant, and 24 will receive IDMC administration. Subjects will undergo serial blood draws to determine fulvestrant blood concentration levels. Through this study and follow-on studies, Atossa aims to show that its proprietary IDMCs can provide more targeted treatment with fewer side effects than IM administration. Study results are expected in H217. Atossa indicates that one of its internal analyses suggests that the drug levels in breast tissue might be over 20,000 times more concentrated with IDMC versus systemic administration.

Atossa believes the IDMC-fulvestrant program may qualify for designation under the 505(b)(2) application status. This is in contrast to the conventional FDA 505(b)1 application approach, typically employed for most new molecular entities (NMEs), or the premarket approval (PMA) process often employed for invasive medical devices. Under 505(b)(2), Atossa may be able to rely on much of the existing safety, efficacy, and preclinical data already established on fulvestrant, including what was submitted under the drug’s original NDA. Since fulvestrant is generally used systemically (IM dosage) and the safety profile is well understood, depending on the outcome of its discussions with FDA, Atossa may only be required to complete Phase I pharmacokinetic equivalency studies (and potentially only a relatively small Phase III study), to gain regulatory approval, if the 505(b)2 pathway is accepted (as we forecast in our model). If the FDA instead requires the PMA process, more comprehensive, costly and lengthy dose-ranging and pivotal studies may be required.

Atossa had developed medical devices relating to breast health, including breast aspirators which collect of nipple aspirate fluid, or NAF, for cytological testing. In late 2011, the firm established The National Reference Laboratory for Breast Health (NRLBH), a laboratory subsidiary performing NAF cytology and pharmacogenomics (PGX) testing. From then to year-end 2015, Atossa’s revenue was fully derived from NRLBH. NRLBH 9M15 revenue was $5.3m, substantially all of which was from PGX testing. An adverse mid-2015 Medicare coverage decision reduced the conditions covered for PGX testing and their reimbursement rates. Q315 NRLBH revenue was $0.78m, down from the $4.57m run-rate from H115. Atossa divested NRLBH in late 2015, and is not actively marketing its breast aspirators; the firm is now devoting substantially all of its resources to pharmaceutical development.

Atossa believes that as tamoxifen has a long-established history of systemic use, and as afimoxifene is a metabolite of this drug (and with a similar “active moiety”21), AfTG could be eligible for the 505(b)2 registration pathway. FDA draft guidance for 505(b)2 class applications indicate that product candidates which are active metabolites of existing approved drugs can in some cases be covered under this registration pathway.22 Under this scenario, a clinical trial demonstrating AfTG’s efficacy may not be necessary for approval, and regulators may only require safety and PK studies. Atossa has obtained FDA guidance on the regulatory pathway.

We assume that AfTG will start a Phase II study in either DCIS or AH in mid-2016, with data available in H217. We expect Atossa will out-license its AfTG rights to a biopharmaceutical partner, and the partner will fund the pivotal study, conduct all subsequent regulatory activities, and would be responsible for all commercial activities upon regulatory approval. As Atossa anticipates a 505(b)2 approach, we expect the registration-enabling trial to be a relatively short (100-200 patient) safety study, leading to potential approval and launch in 2019. We expect the partner will fund the remaining milestone obligations to Besins for the attainment of exclusive AfTG rights in DCIS, as well as provide the 8-9% royalty payment obligation to Besins on future sales. Given these concessions, we model that Atossa will receive a blended 12.5% maximum net royalty on commercial sales (by the partner), and will not be granted the possibility to receive any milestone payments from the commercialization partner. Although there is an ongoing legal dispute between Besins and Atossa (as highlighted in the Sensitivities section), there is a possibility that their deal terms (8-9% royalty obligation on net sales to Besins) could be renegotiated, which could lead to Atossa receiving a higher net royalty (on net sales) than what our model currently assumes.

We believe that meaningful AfTG commercial success would require strong clinical evidence that the product can reduce cancer risk similarly to oral SERMs, and that the studies needed for 505(b)2 class approval would not be powered to demonstrate such efficacy. We assume the partner will start a large-scale (in line with the average recruitment size of over 600 patients for Phase III cancer pivotal studies23) study in 2018 comparing AfTG to an oral SERM drug, for non-inferiority in breast cancer recurrence rates. We assume study completion in 2022, and its data will be used to strengthen the AfTG commercial case. Hence, we only model modest sales upon AfTG’s approval ($13.4m in 2020 and $24.0m in 2021), but which will start to rise materially after 2023, as supportive efficacy data hits the market. We define the target US AfTG market as the 100,000 US women diagnosed with AH and the 57,000 diagnosed with DCIS each year. Having had an actual cancer diagnosis, we project that DCIS patients will be more receptive to preventive therapy.

We assume a peak market share of 20% of AH and 30% of DCIS patients will undertake three years of preventive daily AfTG topical therapy. A tablet of oral tamoxifen, offered by different generic drugmakers, can cost (wholesale) as little as $0.08 (10mg) or $0.15 (20mg) (ZenRx). Given AfTG’s advantages, we assume a yearly US treatment price of $4,800 (in line with many topical hormonal products such as testosterone gels). We forecast peak US sales of $570m and EU sales of $469m in 2026, leading to $1.04bn in global sales and $130m in royalties to Atossa in that year.

AfTG’s core US composition patents (7507769, 8048927) in breast hyperplasia expire in 2024. The FDA allows for five years of market exclusivity for NMEs, irrespective of the expirations of supportive patents. However, this criteria may not apply to AfTG as the active moiety of a product candidate is required to differ from an existing approved product. As a metabolite of tamoxifen (the main change is a hydroxyl group addition), afimoxifene may be viewed as sharing the same “active moiety” as tamoxifen. The FDA allows for three years of exclusivity under “Other exclusivity criteria”, which can be “granted to a drug when application or supplement contains reports of new clinical investigations…essential for approval”. We expect that the pivotal studies would support the attainment of three years of exclusivity, and model full generic erosion (zero sales) by H228.

We assume that the 30-pt Phase II PK study versus IM fulvestrant (start H116) will be completed in H217, and it will show competitive PK in the tumor region (areas slated for mastectomy) for the IDMC-administered drug. We model the product will qualify under the 505(b)2 pathway that the FDA would require a larger (200-400 patient) study before approval. We expect the company will partner the IDMC-fulvestrant program with oncology-experienced medical devices and/or pharma firm, with Atossa entitled to 20% royalties on net IDMC sales. AstraZeneca would be an ideal partner, but to date, there is no indication of material interest on their behalf.

We expect the start of pivotal studies in 2018, leading to potential launch in 2021. Patients and payers will need to pay for both fulvestrant (which currently costs $10,000-12,000 for a monthly dose of two injections), and the IDMC device, a single-use product that we estimate will be sold for $3,500 per monthly application. IM fulvestrant generated $720m in global revenue (2014) and we anticipate that the IDMC device, given the propensity for reduced undesired systemic exposure, can increase this market size by 20-30%. We are modelling IDMC-fulvestrant device revenue peaking at $132m in 2026, with Atossa royalties of $26.5m. The IDMC technology’s patents expire in 2030 and we expect commercialization through this year. While the IDMC device can be potentially extended to other breast cancer drugs, we currently are only modeling the fulvestrant application. Developments towards other anti-cancer drugs could generate upside in our model.

Our valuation includes the prospects of AfTG for breast cancer prevention (in DCIS and AH populations) and IDMC-fulvestrant for breast cancer. We apply a risk-adjusted net present value (rNPV) model, with a 12.5% cost of capital. For AfTG we apply a 25% probability of success, which considers the efficacy signals (Ki-67 effects) and reduced systemic effect markers as shown in earlier studies. We assign a 15% probability for IDMC-fulvestrant, given that it has not yet been tested in humans, although the IDMC device has been used with other drugs. After including $5.3m estimated Q415 net cash, our equity valuation of $14.2m equates to $0.47 per share fully diluted. This valuation represents fair value for the stock, in our estimation, ahead of a number of potential catalysts. These include improved clarity on FDA acceptance of planned 505(b)2 pathways, or the start of clinical trials, and could raise our probability forecasts. Raising the AfTG success probability to 35% would increase our equity valuation to $26.0m, or $0.86 per share fully diluted.

Development and regulatory risk: To gain approval, AfTG and IDMC-fulvestrant must deliver efficacy in pivotal studies without any notable safety concerns. The development strategies for both programs also depend on whether the FDA agrees to the firm’s proposed regulatory pathway (505(b)2), rather than the standard (505(b)1) NDA application process (for AfTG), or PMA for IDMC-fulvestrant. Should the FDA require the standard application processes (needing more exhaustive clinical data), the additional resource and time requirements could impact the firm’s ability to continue such programs and/or weigh on our valuation. For IDMC-fulvestrant, in particular, given that Atossa has yet to establish the safety of the IDMC device and the drug dosage PK through this unique mode of administration, the FDA may require more in-depth assessments than a 505(b)2 application typically entails. We anticipate the hurdle rate for approval or clinical success would be lower for these products than for NMEs, as both fulvestrant and tamoxifen are already approved drugs. The potential for drug transference risk (gel rubbing off on clothing and the possible risk of AfTG exposure to family members) may also be considered by the regulators.

Commercial and competition risk: Even if AfTG obtains regulatory approval, much of its success will hinge on the marketing capabilities of a would-be partner. Currently tamoxifen’s share for breast cancer prevention in at-risk patients remains very low, due to concerns of systemic side effects. AfTG’s success will depend largely on the marketing and educational efforts of the partner to persuade healthcare providers and patients of the drug’s potential uses and benefits. Further, the product will need to compete with other preventative cancer products, most notably aromatase inhibitors in post-menopausal women, as well as other potential emerging products. Commercial success will depend on relative performance (in reduction of recurrence rates, safety, etc).

Partnership risk: We believe that Atossa will require development partners to advance AfTG or IDMC-fulvestrant through pivotal studies and to support the marketing activities required to raise a sufficient profile for these products. Challenges to securing viable partnerships could lead to unnecessary development delays and/or unfavourable terms.

Financing risk: Atossa expects its funds on hand to be sufficient to fund operations into Q216 and we expect it will need additional financing to complete the Phase II studies planned for AfTG and IDMC-fulvestrant. We model $20m in financing each year between 2016 and 2018, after which we expect partners to fund the therapeutic programs in fulvestrant and AfTG. While our model accounts for these financings as long-term debt, the firm may need to issue equity instead, at a pricing that may not be favourable for current shareholders and could lead to significant dilution. For instance, raising $60m in equity at today’s market prices could dilute shareholders by about 80%.

Intellectual property and litigation risk: The success of Atossa’s programs (particularly IDMC) will depend on its ability to defend the IP assets surrounding its technologies. In January 2016, Atossa began legal action in the state of Delaware against Besins, claiming that Besins’ intent to develop AfTG as a treatment for high breast density infringes Atossa’s rights in hyperplasia. Atossa is seeking injunctive relief and damages, but this dispute may strain its resources, particularly if there is a countersuit by Besins. The IDMC-fulvestrant program may also need to contend with legal challenges from AstraZeneca, if it does not support or enter a partnership with Atossa on IDMC-fulvestrant. AstraZeneca could perceive the IDMC-fulvestrant program as a competitive threat and could seek legal action to impede its development.

In December 2015, Atossa entered a transaction to sell NRLBH to a private firm (NRL Investment Group) for $0.05m, while retaining 19% ownership through preferred shares stock. Starting in December 2016, Atossa will receive earn-out payments equal to 6% of gross NRLBH revenue, up to a total of $10m. Atossa also has the right in four years to sell its preferred stock to the buyer for the greater of $4m or fair market value. Despite generating revenue, NRLBH burned cash overall for the firm (ie after removing COGS and selling/marketing costs, NRLBH had negative 9M15 operating income).

On 30 September 2015, Atossa had $8.1m in cash and equivalents, and its trailing nine-month cash burn rate (operating cash flow minus net capex) was $10.1m. Despite the reduction of cash expenditures towards NRLBH following the sale of this unit, we expect the burn rate to rise to $15.5m in 2016 and $14.8m in 2017 given our forecasts for the costs needed to run the planned Phase II AfTG and IDMC-fulvestrant studies. If NCI or other funding is secured for an AfTG Phase II study, then our R&D forecasts for 2016 and 2017 could be lowered by $4-7m per year. We model $20m in financing each year between 2016 and 2018, after which we expect partners to fund the therapeutic programs in fulvestrant and AfTG. For modeling purposes, we assign these financings to long-term debt. Atossa raised $9.5m (net) in equity financing in 2015 and $13.2m in 2014.