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Zacks Initiates on Pulmatrix (NASDAQ:PULM)


Pulmatrix (NASDAQ:PULM) is a Lexington, MA based clinical stage biopharmaceutical company developing innovative inhaled products to address unmet medical needs in serious pulmonary diseases.  The firm has developed an engineered novel dry powder delivery platform, which is designed to improve drug delivery to the lungs and reduce systemic side effects for pulmonary medications.   READ THE FULL RESEARCH REPORT HERE

The firm's product candidates utilize their proprietary iSPERSE™ (inhaled Small Particles Easily Respirable and Emitted) technology resulting in formulations that are small, dense and easily dispersible.  The iSPERSE technology allows efficient pulmonary administration of large therapeutic doses, which presents a highly compelling opportunity to effectively treat many pulmonary diseases. Pulmatrix’s most advanced product PUR0200 is a branded generic once daily long acting muscarinic antagonist (LAMA) bronchodilator in clinical development for chronic obstructive pulmonary disease (COPD).  The product is following the expedited pharmacokinetic (PK) bioequivalence (BE) path for European Union (EU) approval.  The firm is also pursuing a 505(b)(2) path for US approval. Pulmatrix’s pipeline is focused on developing treatments for respiratory diseases: PUR1900, an inhaled anti-fungal for patients with cystic fibrosis (CF) and severe asthma, and additional product opportunities for pulmonary disease facilitated by the iSPERSE technology.

The company was founded by Dr. Robert Langer (MIT) and Dr. David Edwards (Harvard), both of whom have a history of biotech successes including developing the AIR inhaled technology which was acquired by Alkermes and later was the basis of the Civitas acquisition by Acorda Therapeutics.

 iSPERSE: A Leap Forward in Inhalation Drug Delivery

Traditionally, orally inhaled drugs have been delivered to the lung in liquid or dry powder formulations.  While these approaches have been used successfully for pulmonary drug delivery, they have a number of limitations associated with patient use, drug compatibility, dose ranging, and delivery efficiency.

Liquid inhaled drug products include nebulizers, pressurized metered dose inhalers (pMDIs), and soft mist inhalers.  Nebulizers are low efficiency, require routine maintenance, and can be cumbersome in terms of dosing duration and portability.  pMDIs and soft mist inhalers are dose limited and require coordinated actions of the patient to effectively deliver the drug.

The majority of inhaled dry powder products that have made it to market are lactose blend dry powders, which rely on a lactose carrier to deliver micronized drug into the airways.  These dry powder inhalers (DPI) are limited to potent small molecule drugs that require small lung doses for efficacy.  Lactose blends have limited delivery efficiency, are flow rate dependent, and can cause significant side effects based on high throat deposition (i.e. much of the drug deposited in the throat instead of the lungs). Figure 1A illustrates the limitations of lactose blend DPIs, which principally derives from the poor dissociation of the drug from the lactose carrier particles.

The Pulmatrix iSPERSE technology overcomes the limitations of traditional lactose-based DPIs.  iSPERSE formulations contain no carrier and the particles are highly dispersible requiring very little inhalation energy for aerosolization.  The combination of these factors translate to very high delivery efficiency and consistent delivery across a range of patient inspiratory flow rates. Figure 1 shows the improved delivery characteristics of iSPERSE formulations where in the absence of carrier particles, respirable iSPERSE particles are highly dispersible and readily deagglomerate (disperse or break up ) resulting in a high fraction of drug delivered to the lungs.


Figure 1.  Lactose-based DPIs are comprised of micronized crystalline drug particles (red) blended with lactose carrier to reduce cohesive forces between drug particles and enhance the dispersion of micronized drug.  During inhalation, a small fraction of the drug dissociates from the lactose carrier and is inhaled.  In contrast, iSPERSE particles are created by spray drying, a process that incorporates the drug into a dry, respirable particles that are readily dispersible and result in a high fraction of inhaled drug.  

These advantages in inhaled delivery support much higher dose thresholds than lactose blend DPIs; iSPERSE can deliver tens of milligrams of drug in a single inhalation versus microgram drug quantities for lactose blends.  The particles, which are made by spray drying, can have a wide range of drug loading, with <1% to 85% of the individual particles being comprised of drug.  The manufacturing process for iSPERSE also resolves issues of drug chemistry and solid state allowing for formulation of virtually any drug class ranging from highly insoluble small molecules to peptides, proteins, nucleic acids and even antibodies.  The technology can also be modulated for site of delivery in the lung allowing considerations of both local and systemic therapeutic targets.

iSPERSE is manufactured via spray drying, a process where the drug is dissolved in a solution with excipients and forced through a jet nozzle to form droplets, which are then quickly dried and collected.  Manipulating process conditions allows for the optimization of powder properties and performance, including aerosolization behavior and dispersibility, which potentially allows for reduction of the API dose while maintaining the amount delivered to the target site.  Because the drug is formulated directly into the dried particle in a size that can be inhaled into the lungs, there is no need for additional blending or carrier particles resulting in highly efficient delivery to the lungs and an expanded range of drug classes and doses to consider (Figure 2).


Figure 2. iSPERSE Technology

- iSPERSE: A Next Generation in Inhalation Engineering

iSPERSE is not the first engineered approach to dry powder inhalation drug delivery, but is a further progression in the field.  Several other particle engineering approaches have been developed in the past to overcome the limitation of lactose blend DPIs and expand the potential classes of drugs that can be stably formulated and delivered to the lung. These technologies, many of which emerged in the late 1990’s and are either in late stage clinical development or have been successfully used in approved products, include Nektar PulmoSphere TM Technology,  the Acorda Therapeutics ARCUS® technology, and the Aradigm AerX® Drug Delivery System.

iSPERSE provides the same formulation and delivery advantages of these earlier technologies but in a differentiated intellectual property estate built around the density profile of the formulations.  The earlier engineered dry powder technologies were built around the concept of low density, high diameter porous particles resembling microscopic whiffle balls or crumpled pieces of paper.  The low density profile allowed these large, porous particles to have high aerodynamic efficiency and deliver higher drug loads than lactose blends.  In contrast, the iSPERSE technology has a small particle diameter and a high density profile yet shares the same aerodynamic efficiency as the large porous particle technologies.  The hallmark description of the iSPERSE technology, small, dense, and dispersible, differentiates the platform from other engineered approaches providing a robust and new intellectual property estate.


Pulmatrix is building a robust pipeline around the iSPERSE platform. PUR0200, a lead clinical stage once-daily bronchodilator for COPD, is under development via the Guideline on the Investigation of Bioequivalence in the European Union and the 505(b)(2) path in the U.S.  PUR1900 is an orphan designated inhaled anti-fungal designed to treat pulmonary fungal infections in CF and asthmatic patients.



PUR0200 is a once-daily, inhalable iSPERSE reformulation of tiotropium bromide for COPD patients.  PUR0200 is under development as a substitutable product for Spiriva HandiHaler in the European Union (EU) and as a branded alternative to Spiriva HandiHaler in the U.S.

PUR0200 Clinical Development

PUR0200 Trials for PK BE: Pulmatrix has completed two Phase 1 clinical trials of PUR0200 in support of PUR0200 bioequivalence to Spiriva HandiHaler.  Bioequivalence is achieved when the plasma concentrations (Cmax and AUC0-t) of the drug after administration of the test formulation (PUR0200) are equivalent to the plasma concentrations after administration of the reference product (Spiriva HandiHaler).  The completed clinical trials focused on identifying the necessary PUR0200 strength and aerosol properties to define a formulation that will achieve bioequivalence in a pivotal PK study.  A two-part Phase 1b study was designed to determine the PK, PD and safety and tolerability of PUR0200 compared to Spiriva HandiHaler 18 μg in COPD patients.  In the first part of the study, subjects were randomized to receive placebo or PUR0200 at one of 4 dose levels. The goal of the Part 1 study was to evaluate safety and tolerability of PUR0200 and compare the PK of PUR0200 to historical data to select dose levels to be tested in Part 2 of the study.  Data from Part 1 of the study supported the selection of 3, 6, or 9 μg of PUR0200 for Part 2.  Part 2 of the study was a randomized, placebo-controlled, dose-ranging, five period cross-over study to test the PK and PD of PUR0200 and Spiriva HandiHaler.  In the study, 38 subjects received placebo, three different dose levels (3, 6, or 9 μg) of PUR0200 or Spiriva HandiHaler 18 μg in each of the five study periods.  Each study period was separated by a seven-day washout period.  PK and Forced Expiratory Volume in 1 second (FEV1, a measure of lung function) were evaluated over the 24 hour period after dosing.  From a safety and tolerability perspective, PUR0200 was well tolerated with mild adverse events reported in both parts of the study. PUR0200 improved pulmonary function compared to placebo.  Administration of PUR0200 resulted in increase in plasma drug levels that was proportional to the delivered dose.  Further, inhalation of 3µg PUR0200  (PUR0200 dose that is 80% less than Spiriva HandiHaler) resulted in similar PK and PD as 18µg Spiriva. 

A second clinical trial completed in March 2016 to further study the PK profile of PUR0200 compared to Spiriva HandiHaler towards a PK BE approval in the EU.  Bioavailability is a measure of the rate and extent to which the active ingredient (tiotropium) is absorbed and becomes available in blood.  In this PK study, 42 subjects were randomized to receive a single dose of one of five PUR0200 formulations or two administrations of Spiriva HandiHaler in a 7-period crossover design.  The goal of the study was to assess the PK, safety and tolerability of PUR0200 and its bioavailability relative to Spiriva HandiHaler.  The five unique PUR0200 formulations varied in aerosol properties and strength.  Of the 42 enrolled subjects, 41 completed all dosing periods.  There were no serious adverse events and the safety profile of PUR0200 was comparable to that of Spiriva HandiHaler. The trial defined key criteria – dose and aerosol particle size – for demonstrating PK BE and identified the target product profile of a bioequivalent PUR0200 formulation.

PUR1900 Program: Inhaled Itraconazole to Treat ABPA in CF and Asthma
PUR1900, a dry powder formulation of itraconazole using the iSPERSE platform technology, is being developed as the first known inhaled antifungal medication for CF and severe asthma that will provide a superior product profile to current oral therapy (Figure 8).



The anticipated product profile of PUR1900 should provide significant advantages over the current oral version of the drug.  Oral dosing requires much higher plasma concentrations for achieving therapeutic levels of drug in the lungs.  PUR1900 may reverse this profile by delivering high lung concentrations while limiting systemic exposure as demonstrated in Figure 3.
Figure 3.



PUR1900 Clinical Development
In August 2016, the FDA granted orphan drug status to Pulmatrix for PUR1900 for the treatment pulmonary fungal infections in CF patients.  Orphan drug status provides for a relatively quick regulatory path to market. In the U.S., an orphan indication is given to the condition that affects less than 200,000 people or has a prevalence rate of less than 5 in 10,000.  Pulmatrix may receive R&D tax credits on clinical testing expenses during development, PDUFA fees waiver, access to government grants and seven years of market exclusivity post approval.  The FDA also granted the program Qualified Infectious Disease Product (QIDP) status in January 2017.  QIDP status provides five additional years of marketing exclusivity for the product post-approval.  If PUR1900 is ultimately approved by the FDA, the seven-year period of marketing exclusivity from orphan designation combined with an additional five years of marketing exclusivity provided from the QIDP designation allows for a total of more than a decade (12 years) of potential guaranteed protection from competition.  Pulmatrix management is planning to file a Clinical Trial Application (CTA) in 2H 2017 in the EU to support a Phase 1/1b trial in healthy volunteers and asthmatics in 1H 2018.  The goal of the trial is to establish the safety and tolerability of PUR1900 in healthy volunteers and a target patient population, while gaining a greater understanding of the single and repeat dose pharmacology of itraconazole when delivered to the lung.  The company anticipates favorable safety and tolerability data as well as PK information from the Phase 1/1b trial in 1H 2018.  Pulmatrix plans to use the Phase 1/1b data to support initiation of a Phase 2 program in patients with ABPA initiating in 2H 2018.


Pulmospheres™ (Novartis AG) and the ARCUS™ (Acorda Therapeutics)
: were developed as first generation spray dried porous drug particles with low density and small aerodynamic size.  These technologies helped overcome several major limitations of lactose blended DPIs, removed the need for lactose blending, allowed delivery of high drug loads and improved delivery efficiency to the lungs.  Pulmospheres were the basis for the development of TOBI Podhaler, a dry powder version of tobramycin for treating Pseudomonas aeruginosa.  In clinical trials, TOBI Podhaler's efficacy was comparable with the inhalation solution, but in portable and more convenient product configuration.  Ciprofloxacin DPI (Bayer HealthCare Pharmaceuticals) for treating P.aeruginosa and AeroVanc (Savara Inc,) for methicillin-resistant Staphylococcus aureus (MRSA) are other dry powders in clinical development for treating pulmonary infections.

Nektar Therapeutics - Pulmosol and PulmoSpheres: The PulmoSphere (tobramycin) capsule formulation contains 28mg of drug per inhalation.  PulmoSphere particles are manufactured by incorporating an oil-in-water emulsion and stabilized by the phospholipid distearoylphosphatidylcholine (DSPC).  During spray drying, the drug diffuses into the center of the atomized droplet and the excipient forms a shell at the surface, forming a sponge-like morphology.  The particles have geometric sizes between 1-5µm.

MannKind Corporation - Technosphere: MannKind Biopharmaceuticals’ (MNKD) design comprises of a drug carrier that captures and stabilizes peptides or proteins in small precipitated particles.  During the precipitation process, the peptides/proteins are micro-encapsulated and freeze-dried to form a light powder.  Clinical studies have demonstrated efficacy, reliability and short-term tolerability of this drug delivery system.

Acorda Therapeutics - AIR/ARCUS technology:  Acorda is developing an inhaled L-dopamine formulation for Parkinson’s disease based in the ARCUS technology that uses a novel, breath-actuated inhaler.  The drug is formulated into large, porous particles that help in effective lung delivery at much lower energies while maintaining aerodynamic size.  Natural inhalation delivers a consistent dose.

iSPERSE Versus Competitors: In contrast to Pulmospheres and ARCUS particles, iSPERSE-formulated particles are both geometrically and aerodynamically small and have high density. Drug particles with a diameter greater than 5μm deposit in the oropharynx, and those between 1 and 5μm deposit in the airways and lung surface.  iSPERSE formulations contain particles that range from 2-5μm and respirable fine particle fractions are typically greater than 50%. The iSPERSE particles are highly dispersible across a wide range of flow rates (15-60 liters per minute) in spite of their small geometric particle size.  Therefore, they should be able to  deliver drugs to the lung efficiently with much less effort from the patient. The higher density profile of iSPERSE compared to other engineered particles allows for greater processability during manufacturing and for the powders to be developed in a wide range of inhalation devices including capsule-, reservoir- and blister-based systems.

Potential Systemic Applications: Since iSPERSE also could be targeted for systemic delivery as well via the deep lung, there are many indications to consider for which drugs formulated with iSPERSE technology could help patient outcomes  Examples include erectile dysfunction, sleep induction, acute pain (migraine), panic attacks, nausea, heart attacks, Parkinson’s disease,  diabetes, growth deficiency, osteoporosis, fertility treatment and endometriosis.

Pulmatrix has two clinical stage candidates for respiratory indications in its development pipeline – PUR0200 is being developed as a therapeutic (branded generic) for patients suffering from COPD and PUR1900 as an anti-fungal treatment for patients with CF.

Based on NPVs:  We use a sum-of-the-parts valuation for Pulmatrix by calculating net present value (NPV) of future projected cash flows for PUR0200 and PUR1900.  In the company’s investor presentation (September 2016) management estimated the product opportunity to be around $8 billion from the worldwide COPD market and ~$250 million from CF market in the U.S.  We think this is reasonable given that it is largely corroborated by estimates from ReportsnReports market research which pegged the global COPD drugs market at $5 billion in 2012 with expectations that it reaches $8 billion by 2020 (CAGR of ~6%).

Data from the Phase 1b bioequivalence study comparing the bioavailability of PUR0200 with that of Spiriva (which contains the same active ingredient) demonstrated significant bronchodilator activity at all PUR0200 doses.  In fact, PUR0200 demonstrated that it matched the maximum plasma concentration of Spiriva at a lower dose while providing the same clinical benefit with considerably lower systemic exposure.  Based on successful PK BE studies in COPD, European regulatory authorities allow marketing in that territory.  Even though several COPD products are already in the European market, including the recently approved Braltus Zolda, we think the iSPERSE technology offering the potential for lower efficacious doses, has the potential to gain market share in the COPD market segment.

GSK’s Anoro (umeclidinium and vilanterol) was the first LAMA/LABA to reach the U.S. market (in 2014) and captured nearly $120 million in sales in its first full year (2015) on the market.  Analysts forecast Anoro to generate almost $1 billion in annual revenue by 2020.  If PUR0200 is launched around 2020 (assuming approved), we think it has the potential to achieve peak sales of ~$650 million in ten years' time.  Meanwhile, Spiriva will lose exclusivity in the U.S. by 2019 which should also help PUR0200 capture additional market share.



As a reformulation of a drug with established clinical data, PUR1900 has the potential to provide a viable treatment option for pulmonary fungal diseases.  In early 2016 a marketing study (sponsored by Pulmatrix) was conducted by ClearView Healthcare Partners with 5 CF KOLs and 25 pulmonologists who treat ~2,000 CF patients (~150 patients treated annually for ABPA and ~100 for aspergillus bronchitis) in the U.S.  From the study, management attempted to determine willingness to utilize an inhaled antifungal with steroids as first a first line therapy.

The result of the survey showed a potential favorable utilization environment and high acceptance.  Physicians responded favorably to PUR1900’s outlined target product profile. The primary research also consisted of 5 interviews with payor experts.  Payors were receptive of PUR1900 noting that an inhaled antifungal directly addresses an insufficiency in the current treatment armamentarium which could facilitate a shift towards PUR1900.  Increased efficacy and improved patient compliance could be strong drivers of uptake as well as support premium pricing (similar to TOBI Podhaler).  Payor research suggests that six months post-approval is a reasonable estimate for when reimbursement could be obtained.  
The current treatment for ABPA includes oral azoles.  CRESEMBA, an azole antifungal, from Basilea Pharmaceutica International Ltd.and marketed by Astellas Pharma US, Inc. launched in the U.S. in April 2015 and yielded revenue of $22 million in that year. However, these azoles are required in high doses in order to get sufficient quantity of the drug to the lungs which can cause severe side effects including liver toxicity and must be managed and monitored.
PUR1900, an inhaled dry particle technology could satisfy this unmet need for the treatment of ABPA, an indication which has a sparse development pipeline. As per CDC, ABPA affects approximately 5M people worldwide including about15% of patients with CF and 2.5% of those with asthma and tuberculosis.  Assuming the median cost for treating APBA with an antifungal is roughly $3k per patient per month and the average time of treatment is roughly six months , we think that PUR1900 could potentially achieve peak sales of $500 million in ten years’ time.  



Pulmarix has addressed the challenges of operational expenses from several angles. The firm’s strategy has been to maintain a small management team with the required expertise to carry its business operations. Further, the company decided “not to reinvent the wheel”, meaning they improvised on drug delivery technology rather than on the delivery device.  Pulmatrix’s drug candidates utilize an already existing DPI device for delivering the required dose. Additionally, management has decided not to own any manufacturing facilities to formulate, manufacture, fill or package PUR0200.  Currently, the firm works with third party manufacturing agencies to deliver robust, scalable and economical processes for clinical as well as commercial supply of PUR0200.  Additionally, Pulmatrix's cost-of-goods may be relatively low given the lower dosing requirements of PUR0200 (~20% of Spiriva in clinical studies) which, combined with (potential) premium pricing (relative to Spiriva) could result in very healthy gross margins.  And while Spiriva is supported by significant marketing resources, we think that could actually benefit awareness and eventual uptake of PUR0200 given the potential spillover effects related to all inhaled COPD therapies.  

Based on the above factors, we have modeled OpEx to increase from the latter half of 2017 reflecting additional preparations to support commencing clinical trials. Management is of the opinion that the current cash balance of $10 million should provide a working capital runway for the current year by which time the firm hopes to achieve certain milestones.  We have estimated the cost of developing PUR1900 and PUR0200 in the table shown above. We believe the company may secure the required funds after presenting data from the trial readouts.  We believe there are a number of potential inflection points over the next year which could trigger a partnership deal for PULM.
Other key variables to our financial modeling include assumption on the probability of trial success and discount rate.  Based on historical averages we have assumed a 30% probability of success for PUR0200 and  10% for PUR1900 given the early stage nature of the program.  With a 15% discount rate, we are initiating coverage on Pulmatrix at $150 million with a price target of $6.00/share.


Any substantive progress of drug development would increase the likelihood of eventual approval and benefit the target price.

Based on Comps: We also look at valuation using M&A comps.  In 2013, AstraZeneca (AZN) acquired Pearl Therapeutics for $560 million - additionally, the deal called for $450 million in potential development/regulatory and $140 million in sales milestones - aggregating to a potential  acquisition cost of up to $1.15 billion.  Pearl’s PT003,  a fixed dose LABA/LAMA combination that is delivered by inhalation using a pMDI, was in late-stage clinical development at the time of acquisition.

In 2014, Acorda Therapeutics acquired privately-held Civitas Therapeutics for $525 million in an all-cash deal.  The acquisition also included rights to Civitas' pulmonary delivery technology and a manufacturing facility in Chelsea, MA.  Civitas’ main asset, CVT-301,  an inhalable drug levodopa, which is used as a rescue therapy during OFF episodes in Parkinson’s disease, was a Phase 3 trial candidate.

Generally, acquisitions are based on potential commercial synergies and value of the product in the market.  In the case of Pulmatrix, two of its candidates are in early clinical stages.  Since the outcome of any given clinical development stage is a binary event, the probability of being acquired will increase as the candidates advance towards commercialization resulting in a higher valuation.  Our current valuation of PULM is $150 million.  Factoring in the current share count (18 million basic) plus warrants and options, we believe the shares are fairly valued at $6.00.  Institutional investors currently hold around $14 million or ~36% in PULM stock.  The top three institutional owners include Polaris Venture Management Co. V, L.L.C. (69% ownership), Polaris Venture Management Co Iv Llc, and Glenmede Trust Co Na.  Although the shares currently trade at 121% below fair value, we believe there are several catalysts that would help investors realize this price in the coming years.


Regulatory Approvals: Pulmatrix’s products have yet to undergo extensive clinical trials and be approved by regulatory agencies in the target regions.  The evolving regulatory landscape may cause delays that could negatively impact the company’s business.
Market Adoption: Since direct head-to-head double-blind comparisons of the different LAMAs are not available, choice of LAMA inhaler depends on patient and clinician preferences.  Adoption could be very different from our assumptions primarily driven by  reimbursement and market dynamics.
Underlying assumptions for our model could be inexact: We assume a steady growth contribution from Pulmatrix’s drug candidates.  However, actual product sales could vary significantly from our projections and potentially prove our model as too optimistic.  Our assumptions are made using best-guesses based on clinical trial completion, regulatory approval and market penetration of the product.