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Oncolytics (NASDAQ:ONCY), a Biopharma focusing on modified viruses as a form of cancer treatment, has had a rocky start through the beginning of 2013. After what appears to be an overreaction to a public offering, this stock may be at an opportune price for the investor who is looking for a good risk/reward speculative long, that has significant potential in upcoming clinical trial results.

2013 So Far:

Starting the year at $3.85 Oncolytics rose steadily into the middle of February when it published positive phase III results.

Reolysin treatment, in combination with carboplatin and paclitaxel, performed well in a Phase III trial of patients with head and neck cancer. Of 105 patients, 86% exhibited tumor stabilization or shrinkage versus 67% in the control group.

Oncolytics quickly rose to $4.70 on this news where things were looking good, until a common stock issuance was announced at $4.00 a share. As expected, the stock pulled back to 4.00 for a week, and has not recovered, most recently closing at $2.95 on April 5th. A rather drastic pullback with no negative news, it's safe to assume that this is most likely an overreaction by many investors selling off after being burned from the public offering.

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The question now is; Can and will Oncolytics rebound?

A look at the company's prime candidate program.

Oncolytics is best known for its Reolysin treatment, which is a modified Respiratory Enteric Orphan Virus, or 'Reovirus.' This virus is widely found naturally in the environment, and by adulthood most people have already been exposed to it. It is non-pathogenic, which means that infections typically have no symptoms.

Oncolytics has found that this reovirus has been able to infect and selectively destroy cancer cells. When a normal cell is infected with the reovirus, an antiviral response is activated, which prevents the virus from replicating within the cell. However, inside a cancer cell with one or more mutations on a growth pathway called the Ras pathway, there is an aberrant antiviral response that is unable to prevent the virus from replicating. This abnormality allows the reovirus to multiply to an extent that is fatal to the cancer cell.

Current Pipeline:

Oncolytics has taken this modified reovirus and used a shotgun approach by targeting it at many life threatening forms of cancer that are difficult to treat. Any one of potential candidates that successfully passes clinical trials would be a significant milestone, and vastly improve the subsequent patients quality of life. The American Association for Cancer Research has taken note of the potential and provides a large amount of funding and support for many of its candidates.

The current potential candidates in Phase 2/3 are:

Phase 2

  • Ovarian, Fallopian Tube & Primary Peritoneal

  • Pancreatic Cancer (OSU-10045)

  • Prostate Cancer (IND 209)

  • Colorectal Cancer (IND 210)

  • Non-Small Cell Lung Cancer (IND 211)

  • Breast Cancer (IND 213)

Phase 3

  • Head & Neck Cancer (REO 018)

It is Estimated that the global cancer market was $77 billion in 2011, and this is expected to rise to $105 billion in 2016. At least five million new patients per year are expected to develop cancers with a Ras pathway involvement, giving Oncolytics an amazing potential market cap if any of these candidates

Financial

Just recently Oncolytics 2012 Q4/Annual report was released. The company posted that it exited 2012 with cash, cash equivalents and short-term investments totaling $21.3M and its net loss for the year was $36.3M. They also estimate the cash requirements to fund operations for 2013 to be approximately $20M.

The latest public offering is estimated to have brought in around $32M, and left Oncolytics with a current market cap of $250M.

Conclusion

It appears the stock has hit a floor between $2.80-$2.90 and met significant resistance that I believe is finally the bottom of the offering overreaction. Going into next week watch closely to verify if this truly is the bottom, and if so an opportune time to buy in and ride through the next clinical milestones, which include:

  • An unblinded pancreatic study likely be announced in the second half of 2013

  • Ovarian study results expected to be announced in the second half of 2013

  • A large study related to lung, prostate, breast and colon cancer should come out late this year or early in 2014

I feel it's important to stress that this is not a short-term payoff, as this is what many people who bought in on the positive head and neck cancer results thought, before being burned on the offering and subsequent sell-off. This is a speculative long which will see moderate gains over the next few clinical milestones, and has the potential to capitalize on a huge potential market with the approval of any of its candidates.

Source: Oncolytics: A Failing Biopharma, Or An Opportune Buy?