By Jake King
Update: This article was penned and published at PropThink.com prior to ONTX's Thursday IPO.
On Thursday, July 25th, Onconova Therapeutics (ONTX) made its debut on the NASDAQ Global Market as the 27th biotech IPO of 2013. It's been a booming first half for drug developers going public (Mr. Timmerman over at Xconomy sets the backdrop), and we expected Onconova to make no less of a splash. Onconova's lead candidate, rigosertib, joins a burgeoning host of phosphoinositide 3-kinase (PI3K) inhibitors in clinical development. But Onconova's lead candidate is set apart due to its dual-inhibition of the Polo-Like Kinase (PLK) and PI3K, in addition to rigosertib being one of just three PI3K-targeting therapies in Phase III development across the publicly traded biotech landscape.
What makes it an interesting play, however, is that Onconova planned to list at a valuation of $320 million, sharply lower than competing and public PI3K developers like Gilead (GILD) and Infinity Pharmaceuticals (INFI). Although the space is crowding, we believe Onconova is worth significantly more, particularly as the release of key overall survival data in rigosertib's ONTIME trial approaches towards the end of 2013. While the offering was over-subscribed and, we believe, undervalued at $320M, the stock opened at $25 and closed its first trading session at $20 -- a market capitalization of just over $400M. For the reasons outlined below, ONTX offers significant upside if its lead candidate continues to perform. And compared to oncology peers, the stock is still conervatively valued, particularly considering that it carries a $250M enterprise value.
Another PI3K Inhibitor
Onconova's lead drug candidate is rigosertib, an inhibitor of both the PI3K and PLK pathways. Rigosertib is currently being evaluated in myelodysplastic syndrome (MDS), pancreatic cancer, and head and neck cancer, among other hematological diseases and solid tumors. The PI3K and PLK pathways have been shown to play a significant role in the development and activity of various cancers, evidenced in-part by the biotech sector's recent infatuation with the oncology target.
Classified under the umbrella term myelodysplastic syndromes, MDS are a group of blood-related medical conditions that affect bone marrow function. Typically impacting patients over the age of 65, these disorders of the hematopoietic stem cells in the bone marrow result in blood cells that are defective, typically necessitating frequent blood transfusions. To make matters worse, MDS is a progressive disease -- in the latter stages, immature blood cells leave the bone and enter the blood stream, resulting in acute myelogenous leukemia in one out of every three patients with MDS.
Onconova filed an IND with the FDA for single-agent rigosertib in MDS in July 2008. Since then, the drug has been tested extensively in clinical trials in over 850 patients and is currently being evaluated in two Phase III and two Phase II clinical trials for myriad indications.
ONTIME Rigosertib in 2nd Line Higher Risk MDS
Onconova's leading trial (in terms of pipeline progress) evaluates its IV formulation of rigosertib as a 2nd line treatment for Higher Risk MDS. Onconova is testing rigosertib as an option for patients who have failed to benefit from hypomethylating agents (more on this further down) such azacitidine or decitabine. The ONTIME trial is a randomized, controlled study in which eligible patients have failed azacitidine/decitabine treatment, have excess blasts (5-30% immature blood cells), and have at least one cytopenia. For patients at this stage of MDS, there are currently no other approved drugs -- the standard of care consists simply of support, amelioration of the symptoms of MDS. Enrollment of 270 patients (>95% powered to detect a statistically significant difference in overall survival at 223 deaths) was completed in May of 2013, and the multi-center trial should report top-line overall survival results in 4Q13/1Q14. The FDA has agreed to a Special Protocol Assessment for the Phase III protocol.
Previous Phase I/II studies (Two Phase I, One Phase II, and One Phase I/II) demonstrated rigosertib's efficacy in MDS. For comparison, Onconova suggests that the current median overall survival for MDS patients who have failed treatment with hypomethylating agents is less than 6 months (<24 weeks). Research conducted by Prébet et al and Jabbour et al substantiate the poor outlook for patients that have failed hypomethylating agent therapy, with reported median overall survivals of 5.6 months and 4.3 months for azacitidine and decitabine failure, respectively. Of 79 patients enrolled with MDS/AML in the four trials above, 39 had previously failed treatment. Median survival of these refractory MDS patients according to Onconova was 35 weeks; 23 patients survived at least 6 months; 11 patients lived over a year; 3 patients lived over 2 years; and one was still alive at 142 weeks. The graph below compares survival for these 39 patients on rigosertib treatment to the historical median OS of last-line patients.
Follow-up bone marrow biopsy proves even more interesting, where of 30 evaluable patients, 21 had a reduction in BM blast count -- 12 demonstrated an objective response (>50% reduction in BM blasts) and five patients had a complete BM blast response (blast count reduced to under 5%). Biopsies taken over the course of treatment suggested that rigosertib is selectively targeting BM blast counts while being nontoxic to normal bone marrow cells.
This appears to correlate with safety data for the 79 patients in the four trials, where rigosertib IV was generally well tolerated, the most frequent drug-related adverse events (>10% of patients) being nausea, diarrhea, fatigue, anemia, dysuria, and hematuria. Grade 3 or 4 AE's included anemia, thrombocytopenia, neutropenia, decreased white blood cells, urinary frequency, dysuria, decreased blood sodium, increased clotting time, fatigue, fever and diarrhea.
ONTRAC Rigosertib in Metastatic Pancreatic Cancer
The Phase III ONTRAC trial tests IV rigosertib in combination with gemcitabine as a first-line treatment for advanced pancreatic cancer. The FDA actually authorized Onconova to move directly from a Phase I trial to a two-tiered Phase III trial. ONTRAC is a multi-center, open-label, randomized and controlled clinical trial with patients having confirmed metastatic pancreatic cancer with no prior chemotherapy -- overall survival is the primary endpoint. The study compares rigosertib IV in conjunction with gemcitabine to gemcitabine alone. Patient enrollment of 150 was completed in March 2013. The first tier of the trial completes at 100 deaths. An independent data safe monitoring committee may recommend an increase in enrollment for the second tier of the study (currently planned for 364 in aggregate) or early termination.
The genesis? Of 37 patients with measurable disease in a previous Phase I trial of IV rigosertib, one patient with metastatic pancreatic cancer previously treated with gemcitabine achieved a partial response; one patient with gemcitabine-naive pancreatic cancer had an unconfirmed partial response; and nine patients with metastatic pancreatic cancer had an overall response of stable disease. With interim analysis for overall survival for the first tier of the trial expected in 4Q13/1Q14, positive data could support an NDA for advanced pancreatic cancer in 2014.
ONTARGET Rigosertib in Lower Risk MDS
Following its IND for higher risk MDS in 2008, Onconova filed another IND for rigosertib for lower risk MDS as an oralformulation in early 2009. Although median survival for lower risk MDS is typically over five years, Onconova believes that its oral formulation has the potential to answer a significant unmet medical need by meaningfully improving quality of life for this patient population by reducing transfusion needs.
Referred to as the ONTARGET program, this open-label Phase II study is currently enrolling transfusion-dependent lower risk MDS patients. Onconova presented an interim analysis of response and safety data at the June 2013 annual meeting of the American Society for Clinical Oncology. Interim data indicated that the oral formulation was well tolerated. Initial response results showed that 13 of 26 evaluable patients in an intermittent dosing arm (560mg rigosertib twice daily for 14 consecutive days of a 21-day cycle) and two of eight evaluable patients in an uninterrupted dosing arm (560mg rigosertib twice daily for 21 days of a 21-day cycle) achieved transfusion independence, defined as a period of at least eight consecutive weeks without any red blood cell transfusions. Bear in mind, this is an open-label trial lacking a control arm. Nevertheless, the results are encouraging.
Onconova expects to report overall results from this trial at the American Society of Hematology meeting in December.
Rigosertib Head and Neck cancer
Finally, Onconova is evaluating rigosertib oral in advanced Head and Neck Cancers. Although early stages (30-40%) of the disease are typically treated with surgery or radiation, later stages of head and neck cancers are exponentially harder to treat, typically requiring combinations of surgery/radiation/chemotherapy. Extremely late stage cancers are treated with platinum-based chemotherapy, which typically carry significant side effects. For patients that have failed platinum-based therapy, expected overall survival is about six months.
Following the IND in November 2012, Onconova conducted a Phase I trial in 48 patients with various advanced solid tumors (that have resisted standard therapy). Of these patients, six with head and neck cancers had previously failed platinum-based therapy. Two of these six patients achieved durable responses: one patient had a confirmed complete response where chest and lung disease disappeared, and the other had a partial response where liver metastasis decreased by 53%. With head and neck cancer established as the primary focus, rigosertib is currently in a Phase II trial for metastatic squamous cell carcinoma. The study is also evaluating human papilloma virus within the patient population, in light of new scientific evidence highlighting HPV's role in certain cancers. Enrollment of 80 patients is expected to complete in the second half of 2014.
The Rest of the Pipeline
Onconova also develops, in collaboration with the U.S. Department of Defense (DOD), recilisib (Ex-RAD), a potential treatment for acute radiation syndromes (ARS). In pre-clinical studies, cells treated with the small molecule drug sustained less DNA damage upon exposure to ionizing radiation when compared to untreated cells. With the intent of creating a medical countermeasure to treat the effects of ARS, specifically radiation-induced cytopenia, the DoD contributed $10.2M to recilisib's development, and Onconova is pursuing further funding from governmental organizations.
Recilisib's protective benefits have been demonstrated in irradiated mice, including increased overall survival and an enhanced rate of recovery of the hematopoietic system and cells lining the gut. Furthermore, three Phase I trials withsubcutaneous recilisib (50 healthy adults) and one Phase I trial with oral recilisib (9 healthy adults), confirmed that recilisib is safe and well tolerated, with injection-site reactions being the only adverse event noted with the SC formulation. Oral recilisib was well-tolerated and has demonstrated quality oral bioavailability and pharmacodynamics. Onconova plans to pursue approval through the FDA's Animal Efficacy Rule, which permits approval for new medical countermeasures for which human efficacy studies are not feasible or ethical by relying on evidence from animal studies. The company plans to conduct nonhuman primate studies to demonstrate recilisib's safety and efficacy once it secures further funding for the program, presumably governmental. We consider recilisib a free call option on Onconova, as the go-forward plan is yet unclear.
In addition, Onconova develops ON 013105, a suppressor of cyclin D1. Over-expression of cyclin D1, which is essential for normal cell division, has been linked to tumorigenesis in some cancers, specifically some hematological cancers including B-cell lymphomas. Onconova began a Phase I study in patients with mantle cell lymphoma (MCL) and acute lymphoid leukemia (ALL) but halted the study in 2011 due to slow enrollment. The company plans to pick up the trial again in the fourth quarter of 2013, but cyclin D1 degradation isn't a particularly sexy target in B-Cell lymphomas given that Pharmacyclics' (PCYC) ibrutinib has become the clear front-running candidate for the treatment of this patient population. We also consider ON 013105 a free call option on ONTX. Finally, Onconova has a fairly robust war chest of six pre-clinical candidates, including a non-ATP dual Inhibitor of Janus Kinase 2 (JAK-2) and the Bcr-Abl Kinase that caught our eye. Nevertheless, we add no value for these pre-clinical compounds.
What It Means
Per Onconova's amended S-1 registration statement on July 24th, the company is registering a total of 5,941,667 shares (including underwriter's over-allotment) at $15 per share for gross proceeds to the company of $89.125M with full exercise of the over-allotment. The offering was significantly oversubscribed, as Onconova had intended to sell 4,615,385 shares at $12-$14, and following the IPO, Onconova will have 21,389,278M shares outstanding. At $15 then, ONTX is going public at a valuation of $320.8M. By no means do we anticipate ONTX will remain close to its $15 IPO price.
We believe that, aside from the late-stage and lucrative nature of its pipeline, large milestone payments from two key collaborations are, in our view, more than enough to justify the IPO valuation. Baxter International (BAX) made an upfront payment of $50M in September of 2012 to European rigosertib rights, and ONTX is eligible to receive pre-commercial milestone payments of up to $512.5M, including $175M simply for the completion of studies andsubmission of approval applications. The agreement also includes $250M in sales milestones, and Onconova receives royalties in the low-teens to the low-twenties on Baxter's net sales of rigosertib -- an impressive royalty rate for an oncology candidate. SymBio, meanwhile, picked up the rights to commercialize the drug in Japan and Korea. Onconova received upfront payment of $7.5M and is eligible to receive milestone payments of up to $33M upon the achievement of certain development and regulatory milestones. Onconova is eligible for $30M in milestones based on SymBio's annual net sales of rigosertib, and royalty payments in the mid-teens to 20%.
All in all, ONTX is eligible for over $750M in milestone payments from Baxter alone, $810M with SymBio, not including highly favorable royalty rates on sales in Europe and parts of Asia. And bear in mind, Onconova retains full rights to the compound in the United States. We use Infinity Pharmaceuticals as the closest comparator to ONTX due to the similarities of its lead candidate, the Phase II PI3K inhibitor IPI-145. INFI carries a market capitalization of $930M. ONTX is listing publicly at a market capitalization of $321M, an enterprise value of $165M considering the company's lack of debt and $156M in cash following the IPO. In our view, it would not be unreasonable to see ONTX trade into the $800M+ range, or $37+ per share, following its public debut given the market's current infatuation with biotech IPOs. In fact, ONTX tripling to the $900M-1B range should not come as a major surprise; the market has been willing to attribute high valuations to early- and mid-stage oncology companies going public -- see Stemline Therapeutics (STML), Agios Pharmaceuticals (AGIO), and OncoMed (OMED). In addition, below is a chart outlining a number of PI3K inhibitors in development, their developer, IC50 profiles (concentration of drug needed to inhibit a given biological process by 50%) and their current valuations.
Onconova burned $15M in the first quarter of 2013 and will have $150M on the balance sheet following this public offering. Assuming some consistency in burn, the company should have enough capital for another two years of operations, long enough to take rigosertib to market in high-risk MDS. It's also worth noting that Baxter already owns approximately 9% of Onconova. Baxter held 3,030,030 shares of preferred stock before this offering, which converted into common stock at .75 per preferred for 2.3M shares in total. In addition, Baxter expressed an intention to purchase additional shares in the IPO. Considering its sizable stake in ONTX and the significant potential milestone and royalty payments ($750M+) owed to ONTX as rigosertib progresses, it might make sense for Baxter to simply fold in the oncology developer. In our view, ONTX trading below $500M is a bargain, and even below $800M the stock is a compelling holding as Phase III MDS data from the ONTIME trial rolls in at the end of this year. Of note: a $1B valuation only just eclipses ONTX's potential milestone payments from Baxter and SymBio.
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