(Editor’s Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)
OncoSec Medical (NASDAQ:ONCS) has broken out with gains of nearly 100% in the last month, now giving it a market cap of $150 million. Furthermore, in the last year it has rallied 344%, as Wall Street's newfound interest in electroporation coupled with its own catalysts have led to a magnificent year. However, in looking at this small company, and from an investor's perspective only, are there still reasons to believe it can go even higher?
A Quick History Recap
It has been almost one year to the day that I initiated a small position in a tiny company called OncoSec Medical. Like others, I had heard of the company, though it wasn't until after an interview with immunologist/analyst Dr. Rahul Jasuja that I became interested, but was still skeptical, in the upside with shares of this company. Then, at $0.20 I initiated a small position, and the stock has since soared as The Street has taken notice of electroporation and as the headlines continue to pour in for the industry's two most covered players: OncoSec and Inovio Pharmaceuticals (NASDAQ:INO).
Inovio and OncoSec are two companies developing very different products, but using the exact same technology, which is the backbone of what creates the investment upside. Inovio uses synthetic vaccines while OncoSec uses proven immunotherapies, but then both use a delivery technology called electroporation, proven to increase an agent's uptake while decreasing its side effects by using electrical pulses to create temporary pores.
In the last six months alone, both Pfizer and Roche have partnered with small electroporation companies (including Inovio) to license this technology in creating cancer therapeutics. A recent interview with OncoSec Chief Medical Officer, Dr. Robert H. Pierce, -- who was a leader in Merck's anti-PD1 development team -- might provide a reason for the recent excitement and big pharma interest, as he believes that electroporation holds the key to turning the 60%-80% of anti-PD1 non-responders into responders, something he calls "the greatest unmet medical need in immune-oncology today".
What Really Matters to Investors?
With that said, we are still many years from knowing whether Dr. Pierce is right or wrong, and during those years, winners and losers within the space will naturally appear. Therefore, the biggest and most important question to biotechnology investors right now is whether the stock has room to run higher after such large gains. To answer that question, we must look at valuation and upcoming catalysts.
I am not about to make definitive claims or statements regarding whether electroporation will or won't work, as my sole purpose is to determine the direction of the stock. Yet personally, I am enlightened by the interest shown by big pharma and the words spoken by Dr. Pierce and Dr. Jasuja. However, as an investor in this stage of biotechnology, our job is to assess risk versus reward and to take into account all known information in order to make a wise investment decision. Essentially, whether or not Inovio or OncoSec earn an FDA approval in the next three to five years is irrelevant as to how the stocks trade in the next 16 months… and it's that period where investors are trying to capitalize. Therefore, given OncoSec's recent performance combined with known catalysts and a little speculation, I believe OncoSec can trade significantly higher over the next 12-16 months.
Can OncoSec Go Higher?
To explain "why" from an investor's perspective, let's look at a few things that will likely continue to push shares higher, relative to Inovio and in general.
First, the most basic of reasons: valuation. Inovio and OncoSec are very much equals. Sure, each company has its own trials in treating different diseases, but for the most part, the fundamental difference (electroporation) between either of these companies and the rest of biotech is what Inovio and OncoSec share (electroporation). With that said, OncoSec has far fewer trials, but all three are Phase 2 studies, meaning its studies are more advanced. Thus, with all things considered, there is a massive valuation disconnect with Inovio being valued at $800 million and OncoSec at $150 million; might be why OncoSec has traded higher.
Second, OncoSec naturally carries a low amount of risk. In today's biotech, $150 million is pennies, and for a company with three Phase 2 trials and very solid data to-date, such a valuation is a bargain. Furthermore, everyone already knows biotech has been the hottest space within the market over the last year, and in the process there have been countless IPOs of companies that lack human data, but trade at four to six times the valuation of OncoSec. A good example is Dicerna Pharmaceuticals (NASDAQ:DRNA), which has a $600 million market capitalization after nearly tripling in price during its IPO; Dicerna is yet to enter clinical trials. Given this fact and the demand present, the risks involved with investments like OncoSec is very low, which has likely aided in its rally.
Third, OncoSec naturally has a high amount of upside if electroporation works. As previously discussed, big pharma is taking big bets on electroporation, meaning there must be some reason for the interest. OncoSec uses IL-12 in combination with electroporation, which is a rather toxic, but highly effective, immunotherapy. If electroporation really works and OncoSec can eliminate the harsh side effects while capitalizing on the benefit of IL-12, then it will succeed in clinical trials. With a $150 million market cap, even if it earns just $200 million in treating Stage III melanoma, OncoSec could be worth $700 million using a standard 3.5 times sales valuation multiple. It's worth noting that this is not accounting for the rest of its pipeline; Inovio needs far more fundamental upside to support its already high valuation. The realization of this upside is likely in part responsible for the stock gains.
Fourth, OncoSec doesn't have much to prove. OncoSec doesn't have to prove that IL-12 works -- it's already used as a treatment -- just electroporation. On the other side, Inovio not only has to prove electroporation effective, but also its synthetic vaccines. As interest in electroporation continues to spike, this will likely be realized and could attract new investors.
Fifth, Merkel cell carcinoma (NYSE:MCC) is still very much unrealized. Last year, OncoSec's melanoma program stole the show, as 61.1% of patients treated saw tumor shrinkage greater than 30%; OncoSec has already tested 47 total melanoma patients. However, in the next six months or so OncoSec will present data on MCC, a rare and aggressive cancer with no FDA approved treatments and no ongoing or planned trials other than OncoSec's program. Thus, it is an orphan disease, meaning if data is solid then OncoSec could gain an accelerated approval, fast-track designations, etc. by the FDA. Already, all MCC patients to-date have seen an uptake of IL-12 in excess of 100-fold, some up to 1,000-fold, in OncoSec's trial. If this continues, MCC would serve as a $300 million opportunity for the company. In my opinion, this is the most promising study in OncoSec's pipeline because of its potential orphan indication, lack of competition, and the amount of upside and interest a successful study could create in the stock; a successful trial would be a major catalyst this year.
Sixth, Dr. Pierce and CEO Punit Dhillon have already discussed new trials using a "new" agent, likely an anti-PD1, which would serve as a nice catalyst to the stock.
Seventh, OncoSec does not yet have a partner. Inovio and Ichor have both earned partnerships in the last six months. So while speculative, OncoSec could find a partner relatively soon.
Eighth, and lastly, OncoSec is still an OTC stock. If all pieces continue to fall in place, and the stock continues to soar higher, it shouldn't be long till it joins a larger exchange. In that event, OncoSec would appeal to a much larger group of investors, those who won't invest in OTC stocks.
Ninth, OncoSec is not at immediate risk for dilution. A public offering is one of the retail investor's most dreaded events, although it is necessary for companies in this stage to continue operations. For OncoSec, it has been much more financially responsible than most, spending just $6.3 million in the last 12 months and having $15 million in cash. Granted, the company's cash burn will accelerate as it rolls out new trials, but still, its balance sheet looks rather healthy. Therefore, OncoSec will at some point have to raise money, but does look secure for at least a year.
In my opinion, there are several reasons to believe that OncoSec's magical year can continue. It is still so cheap relative to Inovio, and it's that valuation relative to its peer that really attracted me to the stock. And for whatever reason, Wall Street, big pharma, and retail investors really like electroporation right now. Though I don't know how many, if any or all, of Inovio and OncoSec's combined programs will eventually be FDA approved, but right now, both have the power of momentum on their side. And with more catalysts ahead, that power can take a cheap stock like OncoSec significantly higher in an overinflated industry. Consequently, the past year and month could very well be a preview of much larger gains may be ahead.
Disclosure: I am long ONCS. 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.