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Oncolytics Biotech, Inc. (NASDAQ:ONCY)

  • Product: Reolysin and 360 patents worldwide (including methods for oncolytic viral administration)
  • Stock Price: $3.87
  • Net loss for 2012 expected to be $36 million

Oncolytics Biotech, Inc., is a development stage company that is in the process of developing Reolysin, a virus formulation that can be used in the treatment of cancer. It is undergoing 19 clinical trials, including a Phase III clinical trial. This is a high-risk stock, essentially worth nothing if the product does not achieve FDA approval. The company has 76.69 M shares; equity has been its main route of financing.

This stock is market-indifferent with a high risk, but a great reward potential. The potential for this stock could be upwards of $100/share. If it is approved for one strain of cancer, it will be prescribed off-label for other types of cancers as well. Although this market is competitive, Reolysin works in conjunction with a common therapy, chemotherapy. Oncolytics is currently undergoing a Phase II clinical trial with Pancreatic cancer and a Phase III clinical trial involving metastatic cancer. Since there are no effective treatments for either of these diseases, success in either of these trials could fast-track Reolysin for FDA approval, or approval in other countries (Europe is usually quicker to approve new products to market). Oncolytics would also have no competition in these markets, as there are no other effective treatments. If it is approved to go to market in the next year, Oncolytics has already partnered with Sigma-Aldrich Co. to manufacture the product and seems to be ready for commercialization.

In the following report I discuss the Stock Potential, The Product: Reolysin, The Key Clinical Trials, other viruses being developed and their impact on Oncolytics, Failed viruses, and a Conclusion including some key points about the company and why it is worth buying.

Stock Potential

For Reolysin being approved for metastatic cancer alone, the potential is enormous. The following assumptions have been made:

  • 2.5 MM new metastatic disease patients diagnosed in the developed world each year
  • 50% of those patients go on Reolysin= 1.25 MM patients
  • $18,000/year price for treatment
  • 70% Gross Margin (this is relatively cheap to manufacture)
  • 25% SG&A expense
  • 100MM shares by the time the company reaches profitability

Based on these assumptions, pretax income would be over $10BN and Net Income over $6.5 BN.

With 100 MM shares, the EPS would be $65/share and assuming a 15 P/E multiple, discounted back 5 years required to build the business up after favorable Phase III results at a 25% higher risk equity return requirement, this could have the potential to be a $320+/share current value stock. However, I expect that upon favorable Phase III results, there will more likely be a $100-$200/share buyout by big Pharma.

The Product: Reolysin, a Reovirus

The reovirus is a Baltimore Class III virus. This means it is a double-stranded (DS) RNA virus. Double-stranded RNA viruses do not enter the nucleus and do all of their replicating in the cytoplasm. The Reolysin strand isolated by Oncolytics Biotech, Inc., has not been engineered or modified at all. It is in its original wild-type form and can be found in nature.

Reoviruses are found in nature and it is estimated that 50% of our population has contracted it by the age of 12, and approximately 90% of the world's population has been infected with (and, therefore, built up antibodies for) the reovirus. It also exhibits no symptoms and is not known to cause disease, especially since humans have become so resistant to its effects. It is also widespread in nature and extremely common to be found in water sources and the bowels of humans.

The reovirus is built with its own DS RNA, which is contained in a capsid along with some enzymes that are necessary to its reproduction. The virus binds to cell receptor proteins and enters the body, where it is transported to the lysosome. Instead of the lysosome destroying the virus, it dissolves the outer shell and frees the inner protein shell and its genetic materials into the cytoplasm. This dissolving of the outer shell signals for the virus to start replicating in the cytoplasm. It synthesizes its own mRNA from one of its strands and its own enzymes. When enough protein is made, the genetic material and protein is encapsulated and the cell undergoes lysis. The cell being destroyed releases the virus back into the body, which is how it spreads throughout the body.

The ras gene is controller gene that turns the ras pathways on or off. This pathways are a series of reactions in the cell that result in the cell receiving a signal to grow and divide. It contains a series of reactions, one of the reactions turns off the cell defense for reovirus, so the cell does not recognize the reovirus for destruction when it enters the cell. In cancer, often the ras gene has a mutation and it creates uncontrolled cell division (permanently turns on the pathway). The cells do not have enough time to copy all of the cell materials and this insufficient growth leads to abnormal cells (cancer cells), this is one of the most common causes of cancer.

The reovirus naturally is tumor selective, as it destroys only cancer cells with activated ras pathways. While the immune system's response would normally destroy the reovirus, it is deactivated when the ras pathway is activated, in cancer cells. The reovirus, therefore, replicates in and destroys cancer cell, while in normal cells the body's natural immune response kills the virus quickly leaving no effect on those cells. This is what makes this virus so valuable in cancer treatment. It kills cancer cells naturally and has little or no effect on healthy cells.

This virus is already existent in nature with mild symptoms (at most). Whether or not it is used to treat cancer, it will keep replicating and mutating. It will continue to infect people, as it has for centuries, and people will continue to build up antibodies against different strains. So its use as a cancer treatment does not expose it to any additional risk to the possibility of mutation than it has in nature. It cannot change the DNA of humans because it does not enter the nucleus or use human genetic material to replicate. It has also performed well in regards to safety in all clinical trials. There have been no adverse events during any of the trials.

Clark, Madigan, Martinko, and Stahl. Biology of Microorganisms. 13th ed. San Francisco: Pearson Education, 2012. Print.

Key Clinical Trials

Oncolytics is currently undergoing 19 active clinical trials. The two key ones that I believe will mean the most are the Phase III Head and Neck/Metastatic Cancer trial and the Phase II Pancreatic Cancer trial. The Phase III trial is important because it is the last stage of FDA testing. However, the metastatic and Pancreatic cancer trials are important because there are currently no effective treatments for either of these cancers. If either of these passes their trials, Reolysin could be fast-tracked toward approval. Another fact to note is that on the rare occasion that these clinical trials yielded full recoveries, the patients who stopped taking Reolysin had their cancer come back. This is an important fact to note because it signifies that people who take this virus, would have to take it for their entire lives.

Head and Neck cancer type: Platinum-refractory recurrent and/or metastatic squamous cell cancers

Treatment: Paclitaxel (175 mg/m2) and Carboplatin (AUC 5) every three weeks in combination with the reovirus

Phase II results:

13 patients evaluable for response, four had PRs, for an objective response rate of 31%. Six patients had SD or better for 12 weeks or longer for a disease control rate (SD or better) of 46% compared to 3%-13% historical rates in chemotherapy alone.

Phase III trial:

The Phase III trial is randomizied, two-arm (meaning there is a test and a control group), double blind, multi-center (different places trained to administer virus and perform study), two stage adaptive trial. This trial was designed with an initial phase and an adaptive second phase. The initial stage had 80 patients enrolled and had a requirement to pass an independent safety evaluation after 6 weeks as well as an independent statistical analysis of the probability of success after 12 weeks. The second stage was designed to have a larger number of patients enrolled.

This first stage was analyzed while still blinded and unexpected results were discovered, however, so the second-stage did not continue as planned. A protocol amendment was submitted to the FDA to change the trial after it was noted (while the trial was still blinded) that the patients with metastatic disease had a statistically significant greater progression free survival rates than the patients with local regional head and neck cancers. This signified two separate test groups to be analyzed and the trial was redesigned.

The new study splits the patients into two categories: local recurrent disease and metastasis. Also it increases the number of enrolled patients to 160 in order to achieve statistical significance when separating the groups. While still blinded, these groups will be analyzed both together and separately to determine if further clinical trials will be necessary to determine effectiveness of Reolysin for either groups. This replaced the second stage of trials, though a further support trial may be required to strengthen statistical significance.

In December, an unblinding occurred pertaining only to the secondary endpoint of determining if Reolysin adds tumor-specific differential activity between metastatic and loco-regional cancers. The partial unblinding did not measure the primary endpoints of Progression-Free Survival (PFS) or Overall Survival (OS), all parties remain blinded to this data so as to not invalidate any of the results of these two primary goals when the study is complete. It measured pre-treatment and post-treatment percentage changes from the patients in the study (after 6 weeks of treatment). The data from the unblinding was supportive of the decision to separate the groups in order to highlight the metastatic results. Of all the people in the metastatic test group (with reo), 86% experienced stabilization (no growth at all) or tumor shrinkage, while 71% of those in the loco regional test group experienced this result. The RECIST criteria for tumor stabilization remains blinded and will be measured at the end of the study for both of these groups; however these initial measurements demonstrate promise in the new study particularly with metastatic cancer, which will likely be the focus the company takes in its route to approval.

Also, this unblinding revealed positive results in the effectiveness of Reolysin as a cancer treatment relative to the control groups. It was observed in the test group that 86% of the 50 patients had exhibited tumor stabilization (0% growth) or shrinkage, while only 67% of the control group (chemo only) experienced it. At a p-value of .025, this is a statistically significant result. This shows promising evidence for the success of the Phase III trial that is currently in progress. However, the criteria for RECIST was not unblinded, so it can not be known if this data will translate to positive PFS and OS rates (primary study goals) for Reolysin at the end of the study.

Figure 1: Results of a 3rd party study on Reolysin on different strains of Head and Neck cancers in the lab. It was done on the cells in lab, it is not a clinical study.

This new Phase III trial looks promising for Oncolytics. Changing the trial was a good move for getting FDA approval due to the potential it has for metastatic cancer. More than 2.6 million people die of metastatic cancer every year, this is a large amount of people who would need this treatment. Because there is no cure for metastatic cancer, nor very effective treatment options, this would make Reolysin one of the only effective treatments for this type of cancer.

However promising the virus looks in the lab though, problems may arise in clinical trials with the actual effectiveness of the virus. Because our immune system's response to this virus is already so strong, it is possible that the immune system will seek out and destroy this virus before it can infect the cancer cells. This problem, however, has been addressed by the use of chemotherapy as a way to suppress the body's immune system, which had not been done in previous oncolytic virus trials done by other companies. Reolysin has also been effective in the earlier clinical trials, and the unblinding of the secondary goal data in the double-blinded Phase III trial is encouraging as well.

While this virus seems to be on track to getting FDA approval, it must perform in this phase III trial. However, there could be problems arising with Reolysin's effectiveness on head and neck cancer, due to the variability of these particular types of cancers. Figure 1 above is the results of a study done testing the effectiveness of Reolysin on different types of head and neck cancers in lab (not on humans). As the graph shows, different types of head and neck cancers respond differently to the virus. This could be an issue with the performance during the clinical trial on head and neck cancer. Depending on the composition of the cancers in the test & control groups, Reolysin may perform more poorly than it has in other trials.

There could also be problems arising with the metastatic cancer test group in this trial. Metastatic cancer is also extremely variable. The mechanisms and properties of metastatic cancer cells are generally the same as the cancer cells from the place in which it originates. For example, if cancer in the lungs spreads to the pancreas, the cancer cells in the pancreas would have characteristics of lung cancer, even though it is in the pancreas. The problem with a trial that is for metastatic cancer is that it is a combination of different kinds of cancers. These different types may have different compositions of the types of cancer cells. Because this virus works through mutated ras pathways, it would depend on the compositions of cells with this mutation in the metastatic cancer. So the results could be much better than expected in this trial if most of the cancers being tested are caused by mutated ras pathways, or they could be much worse due to the composition of the test group having cancer with a low percentage of ras mutations.

There have also been issues in clinical trials with the control group performing better than expected. This can be an issue when the drugs (virus in this case) need to have a better response in the test group than the control group. I do not view this as a problem, however, because I believe that the test group will perform at a much higher rate than the control group. In late-stage cancer, the placebo effect should not be as effective due to the disease's advanced & widespread progression. In addition, the chemo in the control groups should be fairly predictable given a deep pool of data (they have been in use long enough to be in generic forms).

If this Phase III trial is unsuccessful, the company would need to undergo another. The expenses relating to continuing these trials for another 9 months would be: Clinical trial expenses + manufacturing and related process development expenses + other R+D expenses + Operating expenses= $27,379,185 for 9 months in 201. The available cash was $27,976,546 at September 30, 2012, which indicates that additional financing would be necessary if this phase III trial was to fail. If it were to succeed, Oncolytics Biotech, Inc. would have the ability to access funds needed to take reolysin to market. I still suspect that they will have another public offering to raise such funds.

Some other cancer-selective viruses in process

OncoVex is a modified Herpes (cold sore) virus. It was being developed by GenVex, which was recently acquired by Amgen after it entered into a Phase III trial. Amgen then shut down this trial and has made changes to improve it. This new Phase III trial is currently going on.

OncoVex is a manipulated virus. This lowers its side effects and causes it to only target cancer cells. It exhibits granulocyte and macrophage colony stimulating factor (gm-csf) which encourages the immune system response to attack cancer cells. This drug combines the virus's effects on the cancer cells with the immune system boost of gm-csf. Because gm-csf can be isolated and used on its own, the Phase III trial has a control group receiving gm-csf and the test group receiving OncoVex gm-csf. This virus has not focused on metastatic cancer, but has shown promise in locoregional cancers.

JX-594 is a Vaccinia Virus; it is a modified smallpox vaccine. This virus is considered safe because genetic material for mutation is removed, making it impossible to change once in human bodies. This virus is in Phase II trials. Phase I saw 6/8 high dose patients have stabilization or shrinkage of tumors in primary liver cancer. With the one Phase II trial completed, the 10 patients (small clinical trial) saw positive results.

The mechanism that JX-594 uses to kill cancer attacks cells with modified ras and EGFR pathways, which are two common causes of cancer. It relies on these pathways to replicate, which is what kills the cancer cells. However, it can only kill cells if these pathways are replicated. This virus works independent of chemotherapy and can be injected intravenously, as it is stable in the blood. The symptoms patients experience with this virus are mild and flu-like.

The large amount of oncolytic viruses being developed shows that the researchers in this field are still hopeful that the FDA will start accepting viral therapy as a valid and safe way to battle cancer. The FDA has also been working with Oncolytics Biotech, Inc., to design the trials. In combination with the recent legislature that has been passed, I believe the FDA will be receptive to approving this form of treatment as long as the safety ratings stay high. The involvement of big pharmaceutical companies, like Amgen, show that there will be a lot of money put into getting at least one of them approved. Once one is approved it will open up many doors since there will be a precedent. I believe that OncoVex will be the first virus to pass Phase III testing, which would help Oncolytics Biotech, Inc., in two ways: It will set a precedent for oncolytic viruses, which I believe Reolysin will exceed, and bringing this virus to market will be using many of Oncolytics' patented methods, this will bring in royalties to the company. Despite OncoVex being the first virus to pass Phase III trials, it could still have additional requirements to fulfill before being brought to market, due to the FDA being uneasy about manipulated viruses, since they are a new technology. This would not be a bad thing because it would leave the market for this type of treatment open. However, the metastatic cancer trials give Reolysin a monopoly in that area since OncoVex cannot spread through the blood.

Failed Viruses in the Cancer Field

Onyx-015 was a modified Adenovirus, meaning it has double-stranded DNA. It must be integrated into cell's nucleus in order to be transcribed into RNA and sent out into cytoplasm to be translated into a protein. Onyx-015 is a modified virus, which means it has a gene deletion from the naturally occurring virus. These modifications make the FDA uneasy since the effects of mutations and further mutations of viruses and DNA are unknown.

Onyx-015 failed for a number of reasons, one of them was that there were problems with research. It was found to be successful when directly injected into the tumor, it only had local efficacy and did not seek out cancer cell (it did not work on metastatic cancer). Then it was found to have some validity issues behind the basis of their patent and research. They had thought that the virus worked through the p53 absence in some cancer cells; however, it was found that concentrations of the virus in infected cells was irrelevant to the amounts of p53 in those cells. This virus also was slow to replicate; it was slower than the wild-type and could not keep up with cancer cell reproduction. On top of these issues, Onyx-015 experienced disappointing clinical results. Also, although there was promise with a combination of the virus with chemotherapy, this route was not explored further.

On top of the problem this virus had with its research, there were problems with the circumstances that Onyx-015 found itself in as well. An adenovirus gene therapy experiment was in the news at the time; a teenager died in a clinical trial from an adenovirus, which put a negative light on that specific type of virus. Also, their partner pulled funding before trial with chemotherapy could be seen through, when they were bought out.

Reolysin is different from Onyx-015 in many ways. The first is in the way that reoviruses infect a cell. Reoviruses have DS RNA, this means that they do not need to enter the nucleus of the cell and are translated in the cytoplasm. This means they cannot integrate into the human genome. It is also a wild type virus that most of the human population has already been infected with and has developed an adapted immune response to.

Reolysin is currently in trials with chemotherapy and have shown promising research in the delivery of the virus into the cell (with chemotherapy) and survival rates in the Phase II clinical trials. It shows great promise in the research with metastatic cancers (in Phase III trials) because of its ability to travel in red blood cells (which do not have any genetic material at all, no chance for blood infection) and it shows to have had improved (PFS) rates in Phase II trials. One concern to note is that the control group in double-blind trials sometimes will have greater survival rates and PFS rates than has been historically shown due to a "placebo effect;" however in the case of late-stage cancer and chemotherapy treatment, the historical data has a long and stable track record since it is an older treatment.

TnFerade is a gene therapy virus, which is different than oncolytic viruses. It failed due to a combination of less than impressive results and a very risky premise from which it was based. It infected the genome of the cancer cells directly to cause apoptosis. If mutated, this could be very risky and cause mutations in the human genome. This could not happen for a reovirus, since it stays in the cytoplasm and has no interaction with the human genome. The oncolytic viruses work parallel to the mechanisms destroying the cell. It causes the mechanisms that destroy the cell, but it is not the direct cause, as is the case in a direct change in the human genome. These two viruses are not really on the same level when it comes to safety and potential for manipulation.

Conclusion:

The Good

Reolysin is a wild-type virus, has not been manipulated in lab, making the FDA more comfortable about its use as a treatment. This is especially important given that it is a new type of treatment.

The control group is well known in the trials; Carboplatin and Paclitaxil have long track records and the late stage nature of the patient population should make the patients less susceptible to the placebo effect, which has been a problem in many drug trials.

The metastatic cancer market is very large (2.5 million or more per year) and has no effective treatments, meaning there would be no competitive treatments. This also makes the treatment more likely to be approved by the FDA, considering there is nothing else that can help metastatic disease patients.

The potential Reolysin has for annuity-like revenue streams has a huge impact on its future revenues, upon approval. Given the fact that this appears to be a life-long treatment (if treatment stops, the cancer seems to return), it would be an extremely valuable buy-out for big Pharma. Life-time prescriptions are the most favorable products to those companies.

The potential of Reolysin for pre-surgery treatment can also expand its market. If it is approved for neo-adjuvant use, metastatic cancer treatment and loco-regional cancer, then its market is very large.

The large intellectual property portfolio for viral therapy methods is a huge bonus for Oncolytics Biotech, Inc. Since they own many patents in this field and many other companies trying to break into the field, this has the potential to be a very fruitful area.

Because Reolysin seems to be inexpensive to manufacture and has the ability to be manufactured in bulk, it can have large Gross Margins. Oncolytics Biotech, Inc., has also already outsourced the commercial production to Sigma-Aldrich.

Reolysin has a very good safety profile. It is not toxic on its own (although chemotherapy is) and well-tolerated by the body. It has no adverse events in trials.

The ability for Oncolytics to conduct more clinical trials, even if this first one is not passed, is a huge advantage. Because of Reolysin's diverse uses for treatments, if head and neck cancer fails, then there are still other types of cancers that could be set up with a Phase III trial, such as Pancreatic cancer.

The Bad

The FDA is slow and careful with unknown fields, such as this, viral therapy. It has a huge disadvantage considering that it is in completely unknown territory with no precedents set.

The trial sizes have been small and difficult to fill up for Oncolytics Biotech, Inc. The company is not well-known and has not gotten very much press to help get its name out.

This current Phase III trial is the first double-blinded, two-arm study. As with all first tries, it is the most likely to fail. Also, many of the patients in the trial are in Europe, which might make the pre-screening and/or results more questionable. Phase III trials have also have ~90% failure rates.

The intellectual property rights are unclear right now, given that this is such a new field. Only time can really tell if the patents hold up.

With the performance of this product in previous clinical trials and the potential it has to treat most types of cancer, Oncolytics, Biotech, Inc., is a good buy. In my opinion, it has about a 50% chance to either pass the Phase III testing or be fast-tracked to approval after the Phase II Pancreatic Cancer trial. This is due to its strong preliminary performance in the one double-blinded, two-arm test and its potential to reach patients with fatal conditions and no other effective treatments. This company has had a lot of support from large cancer institutions and the biology of this drug is sound. It avoids a lot of the problems that other failed companies have had. It has the support of the FDA, which worked with the company to design and refine the current Phase III trial. It is less risky due to its strong safety profile and the natural state it is being administered in. It also has enormous potential if approved and because of this, the reward far outweighs the risk.

Disclosure: I and my family members are long ONCY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Oncolytics Biotech, Inc.: An Intro To These Next Few Crucial Weeks