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Investors apparently have not quite understood what was said recently in Oncolytics Biotech's (NASDAQ:ONCY) update on their Phase III trial of Reolysin (REO 018). The implications for the head and neck cancer program and how this will affect their company going forward are quite negative, and yet the market has only mildly punished Oncolytics for the greatly disappointing update. Once the market realizes the implications of REO 018's delay, considerable downside should be expected in Oncolytics' shares.

What happened with the interim analysis?

Last week, Oncolytics notified investors that it had conducted an analysis of the blinded combined clinical data for all 80 patients enrolled in the first stage of the study. However, they go to great lengths to disguise the fact that the study was a failure.

At the time of the analysis, 23 patients of the 80 had not yet progressed but were included for the purposes of analysis. The median evolving progression free survival (NYSE:PFS) of the 80 patients, which comprises the combined control and test groups, was greater than expected, as was the best response rate. On further examination, it was observed that patients for whom only metastatic disease was being measured by clinicians, were responding differently to treatment than patients who had local regional head and neck disease.

When biotech companies have positive data, they directly come out and say it. Oncolytics decided to dance around the analysis and give no comparative numbers, trying in our opinion to conceal the statistical shortcomings of the data. The company used an all too common excuse for failed trials: the control arm performed better than expected. With such a high median evolving PFS between the two groups and Oncolytics' surprise at this, it seems abundantly clear that the current study design was unlikely to achieve statistical significance. If Oncolytics had spent more resources on running a randomized trial before REO 018, they might have designed the trial differently.

After Reolysin passed the initial safety hurdle, Oncolytics began enrolling patients into what was supposed to be the Phase III portion of the study, while they conducted the interim PFS analysis. This is no longer the case. The additional 80 patients that were supposed to be enrolled in the second stage of the original study will now be a part of what amounts to a large Phase II study stratified "between patients with local recurrent disease, with or without metastases, and patients with distal metastases." Head and neck cancers are heterogeneous by nature, so this should have been foreseen as a potential issue. It is really grasping at straws to suggest that this was an unexpected development, and investors should be skeptical of the management team's ability to design trials following this blunder.

What's next for REO 018

REO 018 unequivocally failed to meet its objectives that would have led into a pivotal Phase III study. Originally, REO 018 was planned to be a registrational study supportive of a Biologics License Application (BLA) that it would submit to the FDA in order to commercialize Reolysin. However, a careful examination of the press release reveals that this study will no longer be used for that. Specifically, they say that:

Oncolytics intends to treat this expanded first stage of the REO 018 clinical trial as a separate supportive study to a planned registration study that will be similar to, and take the place of, the original second stage of the REO 018 clinical trial. Enrollment in the first stage of the study is complete and no additional patients will be enrolled pending approval of a planned registration study. (emphasis added)

Essentially, the company will wait for the 160 patient dataset to mature and analyze that data to help inform them for a separate Phase III trial of unknown size. Data from this initial group of 160 patients will likely be available sometime in the first quarter of next year. This analysis carries a similar risk of not achieving statistical significance.

During the conference call, executives at the company tried to suggest that they might still be able to file for approval in 2014. This seems implausible for several reasons. First, this is entirely too dependent on the successful outcome of two studies, not one. Oncolytics needs the current 160 patient trial to be indicative of future success in a new Phase III study. Second, there is risk that this future Phase III trial won't work out either. This revised path to approval is fraught with obstacles.

Even under the most optimistic scenario (positive data in the current 160 patients in Q1/Q2-2013), they likely wouldn't be able to begin enrolling patients in a new Phase III study until the second half of 2013. We believe they would be unable to recruit patients quickly enough to have a mature dataset in time to file a BLA in 2014. Oncolytics would likely need 9-12 months to enroll the right number of patients and an extra 6-9 months to allow patient data to mature. The earliest investors will see a BLA for Reolysin would be in 2015, and there is a good chance that even this projection is much too optimistic. Given this new delay, there is a whole lot of cash burn and share dilution on deck before Reolysin could approach FDA approval.

Early lung cancer data

Friday, in a conveniently-timed separate development, Oncolytics announced their single-arm Phase I study had met the primary endpoint in patients with squamous cell carcinoma of the lung (SCCLC). They noted that five of 15 patients (33%) showed partial response (PR) (four confirmed, one unconfirmed), and an additional eight patients with stable disease (SD). Their disease control rate (complete response (CR) + PR + SD)) was 87%. Given the extremely small sampling of patients, it is hard to get excited about these data. Objective response rate (ORR) is a highly variable and subjective endpoint based on investigator assessment. Oncolytics' data look inline with current treatment standards.

Celgene's Phase III trial comparing Abraxane (nab-Paclitaxel) plus carboplatin versus standard paclitaxel plus Carboplatin, revealed objective response rates of 41% versus 24% in patients with SCCLC. 24% is the relevant number for comparison with Oncolytics. Remember, Oncolytics said they saw four confirmed and one unconfirmed partial responses. If you drop the unconfirmed response, their ORR was 26.66%. They barely met the endpoint for moving into the second stage of enrollment, which required four or more partial responses or better. This data does little to add significant value at this point in time. In addition, it is yet another single arm study; as investors have learned already, in the past, favorable single arm studies have not portended great things for Oncolytics' clinical pipeline.

Conclusion

We view Oncolytics' decision to push forward in head and neck cancer as an unwise investment and replete with unnecessary risk for investors. Oncolytics likely has less than $33 million on hand. Oncolytics claims to have cash through next year, but it would be wise to raise cash at some point before the 160 patient efficacy analysis, since failure there would certainly jeopardize Oncolytic's remaining ability to raise any cash whatsoever.

In any case, it is hard to see why investors are still paying $2.45 a share for Oncolytics' shares - nearly what it was prior to the disappointing data release. Following the failure of the REO 018 trial, it seems clear that Reolysin remains a long way from reaching commercialization, if ever, and Oncolytics has nothing else in the pipeline to support its share price should the Reolysin platform fail completely. The REO 018 setback virtually ensures that more dilution is upcoming to fund the new trials. It's hard to justify the $200 million market cap at this point, and we expect investors will substantially discount Oncolytics' shares in the near future to reflect the increasingly perilous road Reolysin faces to toward FDA approval.

Disclosure: I am short 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. Read our disclaimer at apsarabiotech.com/legal-disclaimer.

Source: Oncolytics Sharply Overvalued Following REO 018 Trial Failure