VolitionRx Limited (OTC:VNRX) is a development-stage company focused on the development of blood-based cancer detection tests aimed at the research, clinical lab, point-of-care, and over-the-counter markets. The suite (currently 15) of tests under development are based on the company's proprietary and patent-protected NuQ technology, which is designed to detect the level and structure of nucleosomes in the blood, a relatively novel approach to cancer detection which may offer the dual benefits of high accuracy and speed. VNRX's platform technology could eventually be expanded to dozens of cancers as well as to other conditions that are related to elevated nucleosomes, such as autoimmune diseases, sepsis, and inflammatory-related diseases.
Characteristic of all cancers is the later the stage, the poorer the patient prognosis. As such, the earlier the diagnosis and initiation of appropriate treatment, the better likelihood of improved patient outcomes. Current cancer diagnosis and screening methods leave substantial room for improvement in terms of accuracy, cost, patient comfort, and in finding cancers at an earlier, more treatable stage. VNRX's NuQ technology aims to marry high accuracy and reliability typically only achieved with invasive and costly diagnostic methods with the convenience, low-cost and non-invasive nature characteristic of many of the current cancer screening tests - a combination not currently available.
Epigenetics: Relatively New Role In Cancer Detection…
VNRX's test technology is based on the field of epigenetics. Epigenetics refers to functional changes in the genome, or the switching on and off of genes, which are caused by something other than changes in the underlying DNA sequence. An example is histone (proteins that order DNA into nucleosomes) modification which regulate gene expression but does not change the underlying DNA sequence. Nucleosomes are the basic unit of DNA packaging, which consists of 146 base pairs of DNA wound around a four histone protein core.
Epigenetics' role in detecting cancer is relatively new with the first real discoveries not culminating until around the mid-1990's. Research has accelerated since, facilitated in part by better DNA sequencing technologies. One of the most significant recent discoveries of epigenetic's role in cancer was how certain epigenetic changes in the GSTP1 gene are a marker for prostate cancer.
The structure of nucleosomes in cancer cells is different than that of healthy cells and it also appears that the structure of nucleosomes is different among types of cancers (e.g. colon vs. breast). VNRX's tests are designed to identify cancer by detecting the level and structure of nucleosomes in the blood. Cancer results in accelerated cell growth and death - when the cells die the nucleosomes are released into the blood and recycled into the body.
VNRX's tests have been developed to identify the presence of cancer and also to identify the type of cancer from the levels of nucleosomes in the blood as well as the different structure of nucleosomes.
And while VNRX's main focus is on cancer, potential derivative applications include diagnosis of other conditions where elevated blood nucleosomes have also been shown to be present. These include autoimmune diseases (e.g. - rheumatoid arthritis, Crohn's disease, etc), sepsis, and inflammatory-related diseases. Patients with some of these derivative-type conditions (along with healthy and cancer patients) will be included in the planned large (2,000+ patient) clinical trial which is expected to commence enrollment during the current year.
VolitionRx is a development stage company and still at the very front-end of initial clinical trials with currently only limited data validating their technology for use as a cancer diagnostic. The company will require a significant amount of additional capital to fund ongoing operations including several already planned and future retrospective and prospective clinical studies which will likely encompass several thousand patient samples and potentially cost several (potentially tens of) millions of dollars. Commercialization via a channel supported with broad distribution and attracting meaningful demand could be years away and is, at the very least, dependent on consistently compelling trial data to support use of the technology in the clinical setting. This, of course, also assumes that requisite regulatory approvals are successfully attained. We provide that paragraph as a run-up disclosure that an investment in the company is not without meaningful risk.
Notwithstanding these risks, we think the risk-reward balance is weighed far greater in favor of an investment in VNRX when considering the following in aggregate…
Initial Trial Data…
Initial trial data from a small 105-patient study indicated NuQ tests detected between 76% and 100% of cancers with specificities between 79% and 90%. Preliminary results from an 800-patient study, an announcement related to which was made shortly following the 105-patient study data, indicated consistency with the earlier data. Data from ongoing studies is expected to be submitted for publication within the next few months, the release of which should provide further insight into the performance of the technology. While way too early to make any concrete conclusions, the initial data is clearly a positive start and was encouraging enough for management to accelerate the clinical programs and initiate other larger studies. Sensitivities/specificities anywhere near the ranges seen in the early data, if confirmed in larger studies, would be highly encouraging, particularly given that many current cancer diagnostic and screening methods and tests have shown significantly inferior performance relative to this preliminary data and are widely used today.
Current Cancer Testing Lacking…
In general, the bar is set fairly low in terms of current cancer diagnostic and screening tests and methods, which leave substantial room for improvement in terms of accuracy, cost, patient comfort, and in finding cancers at an earlier, more treatable stage. This could benefit VNRX as the regulatory (i.e.- accuracy, interpretation, etc.) hurdles and competitive landscape would both favor a relatively high accuracy, easy-to-use, non-invasive and cost effective diagnostic test such as what the NuQ tests potentially offer.
PSA testing (prostate cancer) and mammograms (breast cancer) are two examples of cancer screens that are widely used (annually ~20 million PSA tests and ~40 million mammograms are done in the U.S.) yet have such significant reliability issues that they have been cited as potentially causing more harm than good. Fecal occult blood tests, often used as a front-line screen for colon cancer, is another example of a widely used cancer test with questionable reliability. Worldwide there are about 140 million fecal occult blood tests done every year yet they have significant potential for false positives with sensitivities in some studies cited as low as 30%.
In terms of cost competitiveness, VNRX envisions offering their tests in the range of approximately $10 to $40 each (the specific price could be influenced by various factors including the sales/commercialization channel, geographic location, reimbursement policies, etc.). The end-user price would include a mark-up for margin to the distributor but will still be competitive to almost any of the current least expensive, minimally-invasive tests (many of which are fraught with poor performance and reliability issues) and a small fraction compared to the cost of many of the invasive procedures such as colonoscopy/sigmoidoscopy and endoscopic ultrasound.
As VNRX is possibly the only (or at least one of very few) company in the world pursuing nucleosomes in the blood for cancer detection, they have been able to rapidly build a patent-moat around their technology and intended applications. Most of the current patents were applied for in 2011, with patent protection afforded through 2031. Even in the event that development stalls or is delayed (which we do not expect), their IP would potentially still have substantial value and should provide a buoy to the market value of the company.
Scalable, Platform Technology With Enormous Potential Target Markets…
The NuQ technology is potentially expandable to dozens of cancers as well as other conditions associated with elevated blood nucleosomes. With more than 200 different types of cancer and about 50 major cancer types in existence, the potential market for these tests is enormous. Just the markets of the cancer types that VNRX has indicated may be their initial focus to offer significant opportunity. For example, for colon cancer screening there's over 7 million colonoscopies done in the U.S. and Europe (which cost in aggregate about $7 billion) combined every year and for breast cancer there's roughly 100 million (combined U.S. and Europe, which cost in aggregate about $10 billion) mammograms done. As a screening test (or even as an adjunct to current methods) for just these two cancers, this represents a potential market size of over $4 billion (@ $40/patient test). As a screening test for several more cancers (e.g. pancreatic, lung, cervical, kidney, prostate, etc.) the potential aggregate market could be as much as $10 billion or more.
Industry Standard ELISA Format, Compatible With Standard Instrumentation…
The tests use the ELISA format, which has been in existence for about 40 years and remains the dominant testing format in the clinical lab diagnostics space. As such, the NuQ tests would seamlessly fit with industry standard labs, practices, training, and instrumentation. Initial introduction could be with standard manual multi-well plates with potential to also either partner with an instrument manufacturer (which could include the likes of diagnostic heavyweights such as Siemens (SI), Abbott (ABT), Roche (RHHBY.OB), etc.) as a supplier or to sell directly to the installed instrument base.
Diversifying Risk, Measured and Stepped Roll-Out…
As opposed to an all-or-nothing, swing-for-the-fences, or all-eggs-in-one basket approach, VNRX has several irons in the clinical trial fires and expects to pursue a measured, stepped roll-out, which should both help diversify risk of failure and broaden the potential market opportunities. Relative to current clinical trials, enrollment/patient samples include those of various cancer types, cancer stages and patient backgrounds. This should help them narrow their focus for future larger studies and improve the chances for hitting trial endpoints. Studies will be done through collaborations (i.e. - w/ blood or cancer banks/repositories) where possible to minimize expense and streamline the process.
Relative to the product roll-out, the initial introduction which will be via the RUO channel will provide not only a source of revenue, it will also, perhaps more importantly provide another (inexpensive) mechanism for validation of the technology as well as another conduit for feedback. Assuming requisite regulatory approvals, VNRX would then tap the clinical lab markets - the commercialization game-plan which would likely entail either an agreement with another diagnostic company (instrument manufacturer?) or other third-party distribution (clinical lab?) which could allow VNRX to focus their resources on scaling up production rather than on building a sales force and facing the associated fixed-cost risks of doing so. The European market should afford the opportunity to generate revenue and cash and help fund the U.S. development and regulatory program. And, if and when the POC channel made sense to pursue, VNRX may be in a position to capitalize on that market as well.
Outlook / Valuation / Recommendation
Our Outlook Could End Up Being Conservative…
VNRX's current plan relative to commercialization is to initially promote to the research market, which potentially provides the company with an opportunity to build awareness about the products as well as expands the validation experience of their technology. The company recently brought on a director of sales and marketing to lead the RUO sales effort. The RUO market, which consists of selling to research-oriented institutions such as medical universities for uses outside of patient diagnosis, likely offers only a fraction of the revenue opportunity compared to the commercial clinical market, however.
In the meantime, VNRX will pursue CE Mark in order to sell the tests to the clinical market in Europe (which could happen in 2014) and FDA approval for the U.S. market (potentially by 2015 or 2016). Key to increase chances of successfully gaining regulatory approvals (Europe and U.S.) will be to demonstrate high enough accuracy (sensitivity = true positive cancer rate, specificity = true negative cancer rate). The lingering question is 'how high is high enough?' - which is very difficult to determine at this point. The hurdle for CE Mark may be lower in that regard than for FDA approval. The current lack of a consistently reliable, low-cost, non-invasive cancer diagnostic means that the bar may be at a very achievable level.
VNRX's most recent guidance relative to CE Mark submission is that they expect the NuQ-X test and NuQ-panel products will be applied for by the end of 2013 or the first half of 2014. Our model assumes launch to the clinical lab market in Europe in mid-to-late 2014.
Relative to FDA approval, given that there are no tests currently on the market that would likely be considered "predicate devices" and with cancer tests considered Class III medical devices, we think it's probable that FDA approval would need to follow the PMA pathway. This will almost certainly require U.S.-based clinical studies, potentially including several thousands of patients and taking a number of years to complete. If, however, U.S. marketing approval can be obtained with the much simpler 510(k) pathway - possibly using the tests as an adjunct to current cancer diagnostic methods - this would likely significantly reduce time to the U.S. market launch. As it is now, we model a launch to the clinical lab market in the U.S. in mid-to-late 2016 - which could end up being conservative, particularly if 510(k) clearance is deemed sufficient to sell to the clinical market.
Assuming requisite regulatory approvals, VNRX's commercialization game plan to tap the clinical lab markets will likely entail either an agreement with another diagnostic company (instrument manufacturer?) or other third-party distribution (clinical lab?) which could allow the company to focus their resources on scaling up production rather than on building a sales force and facing the associated fixed-cost risks of doing so. The European market should afford the opportunity to generate revenue and cash and help fund the U.S. development and regulatory program. The POC and OTC channels, particularly as it relates to the U.S., are likely longer-term endeavors.
Over the next ten years our model assumes very incremental (low single-digit by 2023) penetration of the clinical lab IVD cancer markets, which we estimate at approximately $300 million in Europe and $460 million in the U.S., with projected growth rates of 5% - 6% annually. We also model a much smaller contribution (and lower penetration rate) from the POC channels, our assumptions which incorporate the added uncertainty of entering the U.S. POC market.
Data from ongoing and future clinical trials should not only provide more insight into the chances of regulatory approval, it should also help determine the potential diagnostic utility of the tests. Depending on how strongly healthcare practitioners, third party payers (public and private), and influential medical organizations (such as USPSTF, American Cancer Society, etc.) view the utility of the tests, it's conceivable that VNRX's tests could take share of not only the current IVD cancer market, but also penetrate the markets of other cancer screening and testing methods (e.g. - colonoscopy, mammogram, advanced imaging, etc). These markets are enormous and many times the size of the current IVD cancer segments. We note that we currently do not incorporate any assumption of penetration into these other diagnostic markets in our model - which, could provide significant upside to our estimates - which will be updated if and when appropriate. As cancer is VNRX's main focus we also do not include contribution from potential future ancillary applications (i.e. - autoimmune diseases, sepsis, inflammatory-related diseases, chemotherapy efficacy, etc) - which also could provide some upside.
Valuation Very Attractive…
Based on our DCF model which goes out to year 2023 and uses an 11% discount rate (based on CAPM) and 2% terminal growth rate, VNRX is valued at $7.26/share (which we round to $7.25). Our model and assumptions will be updated if appropriate based on news flow which could also influence valuation. As it is now, we value VNRX at $7.25/share. We feel the current market price ($2.50) substantially undervalues the company and recommend accumulating the stock up towards our $7.25 price target. We have initiated coverage of VNRX with an Outperform rating.