A few months ago a Canadian friend of mine told me about a small-cap biotech stock with huge growth potential. Calgary-based Oncolytics Biotech (ONCY) is a development stage company primarily engaged in creating a cancer drug that would address a broad range of the disease.
In February, the company raised capital amounting to $32 million via public offering of 8 million common shares at a price of $4.00 per share. I was waiting for some correction to enter the counter, and the stock corrected almost 50% from the top, post the offer. Currently it's trading around $2.75. Now I'm invested and going to share with you my investment thesis.
Company Overview
Oncolytics focuses on the discovery and development of cancer drugs for the treatment of a wide array of human and companion pet cancers. The company was formed to explore the oncolytic capability of the reovirus, a virus that preferentially replicates in cells with an activated Ras pathway, one of the most common families of genetic defects leading to cancer.
The company's lead product, REOLYSIN, a proprietary formulation of the human reovirus, is currently in late stage (Phase III) clinical testing in head and neck cancers. REOLYSIN has been utilized in nearly thirty clinical trials including translational, Phase I, Phase II (single arm and randomized), and Phase III studies in a broad range of cancer indications. Positive results involving REOLYSIN and colorectal cancer were presented in January at the ASCO Gastrointestinal Cancers Symposium in San Francisco. (Source: Company Website)
Why the Company is Worth Looking Into?
I think the strongest argument in favor of the investment thesis is that REOLYSIN is expected to work on some of the most prevalent forms of the disease including lung, colorectal, prostate, ovarian, breast and pancreatic cancers.
Oncolytics has advanced its product manufacturing and intellectual property initiatives in parallel with its clinical development program to support development of a commercial product. It seems to me that the company is confident about winning the necessary regulatory approvals before going commercial.
Financially, the company looks sound with sufficient cash on balance sheet for daily operating activities as well as funding clinical trial programs till end of 2014, or early 2015. Since Oncolytics is a development stage biotech company, it doesn't have revenues to cover cash burn costs. The company maintains a cash balance for at least a year, apart from maintaining an ongoing financing activity. But don't worry; this is how biotech companies operate until they actually start commercial production.
One more thing I'd like to tell you, the company is very late in the development stage of its manufacturing process, which I feel, is a major strength of the company. I expect its commercial operation to begin within two or three years from now.
Background: Oncolytic Capability of the Reovirus
In November 1998, Science published a report by Dr. Matt Coffey (currently the Chief Operating Officer of Oncolytics) et al. on reovirus therapy of tumors with activated Ras pathway, which said:
Human reovirus requires an activated Ras signaling pathway for infection of cultured cells. To investigate whether this property can be exploited for cancer therapy, severe combined immune deficient mice bearing tumors established from v-erbB-transformed murine NIH 3T3 cells or human U87 glioblastoma cells were treated with the virus. A single intratumoral injection of virus resulted in regression of tumors in 65 to 80 percent of the mice. Treatment of immune-competent C3H mice bearing tumors established fromras-transformed C3H-10T1/2 cells also resulted in tumor regression, although a series of injections were required. These results suggest that, with further work, reovirus may have applicability in the treatment of cancer.
In March 2009, Nature published an article that claimed oncolytic reovirus that induces regression of human breast cancer primary tumor samples xenografted in immunocompromised mice also effectively targets and kills CSCs (cancer stem cells) in these tumors. The article concluded that oncolytic reovirus has the potential to induce tumor regression in breast cancer patients.
Two years ago a small study was carried out by researchers from the St. James's University Hospital in Leeds, the universities of Leeds and Surrey, and other institutions throughout the UK, Canada and the US to investigate whether the reovirus could reach cancer cells if injected into the bloodstream without affecting human immune system. The study was not designed to examine whether the virus was capable of fighting cancer. The study concluded that the reovirus can enter cancer cells without targeting healthy cells, indicating that it may have potential as a cancer therapy. But for confirming the potential, larger controlled clinical trials were needed. Oncolytics finally took the initiative to conduct large-scale clinical trials for investigating the potential of the reovirus as a cancer-fighting agent.
Analysis of the Clinical Trials
Reovirus, which stands for Respiratory Enteric Orphan Virus, is widely found in the environment and most adult people have been exposed to the reovirus. Human reovirus can infect and selectively destroy cancer cells. REOLYSIN, a variant of the reovirus, has been developed in labs for commercial use in cancer treatment.
When a normal cell is infected with the reovirus, our body activates an antiviral response. As a result, the virus can't replicate itself within the cell. However, when a cancer cell with one or more mutations on a growth pathway (Ras pathway) is infected with the reovirus, an aberrant antiviral response fails to prevent the virus from replicating. The reovirus then multiplies itself to an abnormally large extent, which can cause serious damage to the cancer cell.
The reovirus is non-pathogenic, which means that infections are typically asymptomatic. REOLYSIN is currently available exclusively in a clinical trial setting. In clinical trials, REOLYSIN has been proved to be well-tolerated. In most of the cases, patients only develop mild, flu-like symptoms. REOLYSIN has been used as standalone monotherapy, delivered via local and/or intravenous administration, and in combination with chemotherapy or radiotherapy for various cancers.
In an ongoing Phase III clinical trial of head and neck cancers, a double-blind, placebo-controlled study (where neither the patients nor the researchers know who is getting a placebo and who is getting the treatment) revealed the following interim outcome: In the control arms, there have been 67% (n=55) of the patients in their metastatic disease, which is 12% better and in the test arms the number is 86% (n=50). That indicates a pretty big increase in percentage, which is statistically significant. However, final data analysis hasn't yet commenced, and the company expects to start it very soon.
In another trial, the company reached the stage 1 endpoint of the US Phase II clinical trial in patients with metastatic melanoma with 14 patients enrolled. REOLYSIN was administered in combination with Bristol-Myers Squibb's (BMY) Taxol (paclitaxel) and carboplatin, which are widely used in chemotherapy treatment. The primary objective of this trial was to assess the antitumor effect of the treatment regimen in the study population in terms of objective response rates. The secondary objectives were to assess progression-free survival or PFS and overall survival for the treatment regimen; the disease control rate (complete response (or CR) plus partial response (or PR) plus stable disease (or SD)) and duration, and to assess the safety and tolerability of the treatment regimen in the study population. Three of the 14 patients exhibited a PR, and an additional seven patients had SD for a disease control rate of 71.5%. Dr. Brad Thompson, President and CEO of Oncolytics, said:
We are pleased to continue to demonstrate positive clinical results with the recent announcement of a disease control rate of 71.5% in our metastatic melanoma study. We are ready to commence the data analysis of stage 1 of our head and neck trial as soon as we can and we continue to enroll patients in our six other randomized trials.
Potential Catalysts for the Stock
- Oncolytics has six more trials coming up in metastatic cancers with patients enrolling, which include breast, colorectal, lung, ovarian, pancreatic and prostate. If any one or two of these trials show promising results, the stock could skyrocket.
- REOLYSIN could be especially promising for patients with lung cancer and even pleural mesothelioma, the cancer involving the thin membrane surrounding the lungs. A Phase II trial involving squamous cell carcinoma of the lung and the chemotherapy regimen of carboplatin and paclitaxel resulted in tumor shrinkage in 95% of the patients, which suggests that REOLYSIN may have potential in pre-surgical settings.
- According to older studies, the best way to get cancer-fighting viruses into cancer cells is by directly injecting the virus into the tumor. But this would be effective only for easily accessible and identifiable tumors. Trials are therefore going on for developing a method that allows the virus accessing cancer cells throughout the body, by injecting the virus into the bloodstream. On successful completion of the trials, REOLYSIN could emerge as an effective monotherapy in treating almost all types of cancers. Unlike chemotherapy or radiotherapy, REOLYSIN monotherapy would hardly have any serious side effects.
Should You Buy Oncolytics at the Current Price?
Oncolytics is a zero revenue company, primarily engaged in R&D for developing new drugs. A declining trend in R&D expenses may be indicative of the fact that the company is nearing completion of clinical trials. REOLYSIN is expected to be available commercially by 2015-16.
ONCY data by YCharts
It's not possible to value Oncolytics based on common metrics like P/E or P/S. In terms of P/B, the stock is currently trading at 7x. But for a company developing a pathbreaking cancer drug, P/B is not an appropriate method in absence of any sales. However, if Oncolytics is able to successfully commercialize REOLYSIN, its stock price could see a multiplication effect, as its sales figure could be comparable with that of a large-cap biotech company.
Buying Oncolytics means buying an emerging technology that can usher in a new era in cancer treatment. Oncolytics could be a lucrative takeover target even before the company starts commercial production. The stock could start rising anytime; so many triggers are there, as I discussed above. It's a potential multi-bagger, currently available below $3.00 and far below its latest public offering price.
Potential Risks
- The company may not get final regulatory approvals for commercialization of REOLYSIN due to technical reasons.
- Going forward, there could be delay in completing the clinical trials due to cash crunch, or other unknown reasons.
- The company could be a hostile takeover target, which may lead to an irrational valuation of the stock.
The Bottom Line
Most good biotechnology is found by accident, and REOLYSIN is no exception. Oncolytics could revolutionize the way cancers are treated. Buy the stock and then forget it.
Disclosure: I am long ONCY. 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. (More...)
0 comments:
Post a Comment