OncoSec Medical Inc (ONCS) is a nanocap company with several ongoing cancer trials. After some extremely positive early results, the company's stock price was halved when further trial results didn’t live up to the original hopes. In this article I review the company’s basic technology and then argue that the market has over-reacted to the most recent results; not only dismissing results that are still good but also completely discounting trials in perhaps a more important indication. I then enter much more speculative territory and ask what could the company be worth should future data prove positive? I see significant upside potential.
ONCS cancer treatment is intended to make “cold” tumors “hot” (explanation below) by injecting its pro-inflammatory cytokine IL-12 or Tavokinogene Telseplasmid, referred to simply as “TAVO”, into “cold” tumors and then using its electroporation technology to increase the permeability of the tumor cells’ membranes to get better uptake or distribution of the drug into the tumor. Once the tumors are “hot” they can be targeted by existing checkpoint inhibitors like Merck’s (MRK) Keytruda (chemical name Pembrolizumab) and Bristol-Myers Squibb's (BMY) Opdivo (chemical name Nivolumab).
(source: latest company presentation)
So what are hot and cold tumors? The best explanation I’ve found comes from the Dana Farber Cancer Institute. I’ve extracted the basic explanation below, but I highly recommend reading the whole article as it describes many approaches to this goal (with my emphasis):
Checkpoint inhibitors work best against so-called hot tumors. These are cancers that have been invaded by swarms of T cells, creating an inflamed tumor. This response by the immune army hasn’t killed the tumor, but because T cells are present within the tumor, they are more easily mobilized against the cancer. Checkpoint inhibitors release the brakes the tumor has clamped on the T cells, which are then free to fan a smoldering fire into a cancer-killing inferno.
Hot tumors often have a high mutational load. That is, they have many changes in their DNA code that cause the cancer cells to produce distinctive new molecules called “neoantigens” on their cell surface. These neoantigens make the tumor more prone to recognition by the immune system, and thus more likely to provoke a strong immune response.
“Cold” tumors, by contrast, are cancers that, for various reasons, haven’t been recognized or haven’t provoked a strong response by the immune system. Immune T cells have been unable to penetrate such tumors. The T cells have been excluded by components of the microenvironment. The microenvironment in and around tumor cells comprises blood vessels, structural elements, and specialized immune cells; the latter include myeloid-derived suppressor cells and regulatory T cells, or Tregs. These Tregs turn down the volume on the normal immune response by secreting immunosuppressive chemical messengers like cytokines that impede the movement of T cells into the tumor. The result is what some have called an “immune desert” around the tumor.
“It’s like a castle encircled by a moat,” explains Laurie H. Glimcher, MD, president and CEO of Dana-Farber and a prominent immunologist. The T cells can’t attack the castle if they are stranded outside by the moat. Since a cold tumor has few T cells within it, checkpoint blockers are less likely to be effective than they are against hot tumors.
Herein lies one of the limitations of immunotherapy at present.“Only eight cancers to date are ‘hot,’” says Glimcher. “And even within those, it is a minority of patients who benefit.” Among the cancers generally considered hot are bladder cancer, head and neck cancers, kidney cancer, liver cancer, melanoma, and non-small cell lung cancer, as well as tumors of different types that have a genetic characteristic called high microsatellite instability.
The last highlighted portion of the quote above is critical; most solid tumor cells are “cold” and hence don’t respond to checkpoint inhibitor therapy. That’s why OncoSec believes there’s a large market for any technology that can convert cold tumors to hot and thereby allow the possibility of checkpoint inhibitors working. This slide from its corporate presentation makes the point:
As we’ll discuss below, currently ONCS is working on therapies for the first three types of tumors listed in the slide above.
With this background, ONCS’ slide showing its treatment methodology should be more intelligible:
What we haven’t discussed yet is step 5, the induction of a systemic immune system response. This means that as T cells find the newly hot tumor they become programmed to look for more such tumors elsewhere in the body. When it works, it eventually allows T cells to fight these other tumors even when these tumors haven’t been converted to a hot tumor via injection and electroporation. Such immune response is typically needed to elicit a complete response, because in the sickest patients it’s not normally feasible to access and inject every cancer tumor.
We should also note that this approach of administering TAVO -- because it involves local injection directly into the tumor -- is generally safe and well tolerated versus a more system-wide approach such as intravenous injections into the blood stream.
Currently ONCS’ pipeline is targeting melanoma, triple negative breast cancer (TNBC) and head and neck cancer, with trials in progress on the first two indications:
With that background in place, let’s look at some of the key company events in two indications, keeping this stock price chart in mind as we do.
OMS 102 Study
On November 8 th, 2017, ONCS announced positive results from its OMS 102 study. In particular the company noted (with my emphasis):
The updated clinical and correlative immune-focused biomarker data demonstrated a 57% progression free survival (PFS) rate at 15 months with 100% (11/11) duration of response and median PFS not yet reached. Building upon previously reported data of a best overall response rate (BORR) of 50% (41% complete response [CR] rate), the updated data further demonstrate that the combination of these therapies can prime a coordinated innate and adaptive immune response, and strongly suggests a synergistic relationship with anti-PD-1. The latest findings further demonstrate that this combination approach can reshape the tumor microenvironment, yielding a robust intratumoral and systemic anti-tumor response converting "cold" tumors to "hot," potentially improving clinical outcomes in patients predicted to not respond to anti-PD-1 therapy.
The news was well-received and even Adam Feuerstein was relatively positive. Important details from the study are included in the corporate presentation. Here are the key highlights:
First here’s the treatment protocol of TAVO and Keytruda (drug name Pembrolizumab).
And here are the results:
This slide shows impressive best overall response rates and complete responses of 43% and 38% respectively, with complete responses typically requiring 6 months or more of treatment. The block on the bottom right shows that some of the responders had previously been on checkpoint inhibitor therapy but not for many cycles. Overall, as the next slide details, the patients as a cohort weren’t necessarily ones who failed prior checkpoint inhibitor therapy, rather they had biomarkers which correlate with poor responses to such therapy.
The big question then was what happens when you treat patients who had actually failed such therapy. Which brings us to:
On November 6th, 2018, ONCS announced initial data from its Pisces/Keynote-695 Phase 2b trial. The topline data is summarized as follows in the PR (my emphasis):
- TAVO™ in combination with KEYTRUDA® has shown early signals of reversing resistance in refractory metastatic melanoma patients previously treated and definitively progressed on either KEYTRUDA® (pembrolizumab) or OPDIVO® (nivolumab)
- Of the first nine patients to complete 12 weeks of treatment and reach initial tumor evaluation (by RECIST v1.1), two patients had a partial response, one patient had stable disease (22% BORR and 33% DCR) and tumor responses occurred in both TAVO™ treated and untreated lesions
Both the BORR and the DCR are significantly smaller than the results from the OMS-102 study discussed above and more importantly there were no complete responses — and as a result the stock price was cut in half. I think this is a complete over-reaction, but before turning to that point, let’s look at a summary of this trial (noting that only 9 of approximately 80 patients have even been assessed to this time). (Also, here's the study link to the clinical trials site, though it estimates enrollment at 48 participants, not 80).
The first point to make is that these patients all showed disease progression after extensive treatment by checkpoint inhibitor treatment.
Current 5 year survival rates for melanoma by stage are as follows:
|Stage||5 Year Survival Rate|
|IV||15% to 20%|
But those survival rates include patients who respond to checkpoint inhibitor therapies. Once a patient fails those, the survival rate drops even further. (See this 2017 meta-study for some insight into the therapeutic benefits of checkpoint inhibitors versus other therapies and placebo).
In other words, not only are these patients very sick, but they also don’t have many alternatives left to them. This is why ONCS claims that even a 10% BORR response would allow approval, which I think is credible.
Next, here is a summary of the responses after 12 weeks of treatment for the first 9 patients treated (i.e. this isn't some favorable subset of patients chosen by ONCS):
The first patient on the list, one of two partial responses, note-worthily had a systemic response, with an untreated lymph node tumor shrinking by three quarters after twelve weeks:
And the second partial responder is a good example of how extensive is the failed pre-treatment some of these patients have had:
In my opinion, these results, while perhaps disappointing compared to expectations, are still positive and promising. Moreover there’s only been 12 weeks of treatment, and we see from the durable response slide posted above, that in the initial study 5 of the 11 complete response patients were only partial responses at 3 months and 4 of those were only partial responders at 6 months.
Since this data is for only 12 weeks, i.e. 3 months, there's plenty of time for partial responses to become complete responses and for stable disease to improve to partial responses. In other words, the jury’s still out on ultimate CR data from even these initial 9 patients!
But by beating down the stock so badly after this initial Keynote-695 data, the market is completely discounting the second indication that’s currently in clinical trials.
Triple Negative Breast Cancer
TNBC is also an indication with a large unmet need in non-responders to traditional therapies, and ONCS has partnered with MRK on this as well (after some encouraging results with TAVO as monotherapy in this indication). The companies are currently running the OMS-141 trial which is similar to the melanoma study above, but with patients that may be less sick, or at least have undergone fewer failed pre-treatments (link to clinical trial site):
Given that this indication has been completely ignored/discounted by the market, I see a great reward/risk profile here, hence the idea that ONCS is an enticing speculation. (To be clear, if the trial gives negative or mediocre results, the stock doesn’t have much more room to fall, on the other hand, if results are positive, the stock could take off.) Initial data from this trial could be out by 2Q 2019, and should it be positive could be a significant catalyst for the stock.
As mentioned above ONCS isn't the only company seeking to make cold tumors hot. In its 10-K, the company lists the following as competition:
We face competition from a number of sources, including large pharmaceutical companies, biotechnology companies, academic institutions, government agencies and private and public research institutions. We compete against all other developers of cancer treatments, including other immunotherapy treatments as well as other types of treatments for the cancer indications on which we are focused. In particular, a number of companies, some of which are large, well-established pharmaceutical companies, have development strategies similar to our current focus. These companies include, among others, Bristol Myers-Squibb, Iovance Therapeutics, Syndax, Dynavax Technologies, Checkmate and Idera Pharmaceuticals.
Let's look briefly at a few of these.
And from the most recent NKTR presentation, we see good results from a study treating stage IV melanoma:
But the big caveat here is that the patients were immuno-oncology naive, i.e. they aren't patients who'd previously progressed on multiple courses of checkpoint inhibitors as in the ONCS KEYNOTE-695 study. The data shows that most of the complete responses are from patients who are predicted to respond to checkpoint inhibitors (PD-L1 Positive). Moreover there are a number of serious adverse events from this treatment.
Syndax Pharmaceuticals (SNDX) had disappointing melanoma data earlier this year, in patients both PD-L1 treatment-naïve and pre-treated, though note-worthily it still trades at twice the market cap of ONCS.
Dynavax (DVAX) is also partnered with MRK in its melanoma treatment candidate SD-101 and its most recent corporate presentation shows its results with advanced melanoma that is resistant and refractory to checkpoint inhibitor therapy:
Note that the BORR is 20.7% and only 3% of patients achieved a complete response, moreover the median duration of response was only 2 months. These numbers further validate the conclusion that ONCS' early KEYNOTE-695 data is actually quite promising.
Idera Pharmaceuticals (IDRA) has had good results in refractory melanoma patients with a slightly different approach - IDRA combines its treatment with Yervoy which is a CTLA-4 inhibitor (see this post to appreciate the fine differences between anti-CTLA-4 and anti-PD-L1 therapies, including most notably that anti-CTLA-4 therapies tend to have higher incidences and grades of adverse events).
I won't paste all the figures here, but they can be found in slides 9 through 13. Note that the safety analysis includes 26 patients but the results only include 21, potentially skewing the reported percentages. Also one of two complete responses is "unconfirmed". In any case IDRA is also a stock to keep an eye on as its results look generally very positive.
Finally, Iovance (IOVA) has a more invasive approach which is summarized here and which results in relatively high numbers of adverse events:
So while ONCS has a number of competitors, ONCS' results still appear promising and definitely among the leaders in the field (cross study comparisons are notoriously difficult, hence it's difficult to be definitive in these types of appraisals).
From here let's venture on to a few much more speculative thoughts.
Path to Commercialization
ONCS has suggested that data from the PISCES/KEYNOTE-695 study, along with the very good safety profile could support commercialization, here's the rationale (with my emphasis in red):
While this schedule may seem a little aggressive, not only is it supported by the company having orphan and fast track FDA designations, more importantly Iovance noted that it too could get FDA approval by adding a registration-enabling cohort to their Phase 2 study: (source)
If (and it's a big if) everything went well then the company could see FDA submission by mid 2020 and potential approval in 2021 for melanoma. TNBC approval could come later if all goes well.
In the meantime there are a number of catalysts that could support the stock price.
Given that ONCS was willing to share very immature PISCES/KEYNOTE-695 data after only 12 weeks of treatment, I'd expect it to continue this at quarterly or at worst semi-annual frequency. That means we could have more data by February or March of 2019, with regular updates after that.
Similarly, the OMS-141 trial for TNBC has already begun enrolling, so if the company continues to share early data, then we could have updates on that program by May or June of 2019.
R1. Trial Failure
Obviously the biggest and most likely risk is that both of ONCS' on-going clinical trials show worse results than necessary to support approval and commercial uptake. Early data is promising, but that doesn't remove the risk.
Another big potential risk is competition, but as we've seen above there's nothing on the horizon that is a cure or massively outperforms ONCS' current results in melanoma. But of course one could emerge at any time as it could in the TNBC space.
R3. Balance Sheet, Cash Burn and Market Cap
As of the recent 10K, the annual cash burn is on the order of $6M per quarter and net current assets stand at about $23M which means that the company has less than a year’s cash runway ahead of it. Therefore a financing in the not too distant future is definitely a risk to the stock price.
Valuation and Risk Mitigation
On the other hand, these risks are largely mitigated by the fact that ONCS sports a miniscule market cap of $53M, despite having several important clinical trials on-going.
Now let's further speculate and try to estimate a valuation for ONCS.
Let's begin by noting part of what Adam Feuerstein observed in one of his statnews articles (subscription required), at the time the OMS-102 data was released (i.e. prior to any KEYNOTE-695 data):
The addition of an experimental immunotherapy from OncoSec Medical (ONCS) to Merck’s (MRK) checkpoint inhibitor Keytruda is shrinking tumors in almost half of the skin cancer patients treated in a small clinical trial, according to updated results announced Wednesday.
That’s an encouraging tumor response rate, on par with what Incyte (INCY) has observed when its IDO inhibitor epacadostat is combined with Keytruda in skin cancer patients.
Similar results, so investors — besotted by all things cancer immunotherapy — must be equally enthusiastic about OncoSec and Incyte, right?
Nope, not even close. Incyte carries a $23 billion market value, with the still-unapproved epacadostat accounting for approximately half of that. OncoSec’s total market value: a microscopic $40 million. Shares of OncoSec closed Tuesday at $1.25.
That's definitely one way to look at valuations, so let's consider a few of the competitors we looked at above, and noting of course that full pipelines and product offerings are not comparable.
But by this simplistic metric ONCS looks substantially undervalued.
Another way to gauge the price is to estimate future sales and then apply a price to sales multiplier.
If 20% of these cases progress through the various treatment options to become refractory to checkpoint inhibitors (I'm being very conservative here) and if ONCS ultimately treated 15% of those cases at $5K per month or $60K per year then 2023 sales could be $248M. Let's say there's a 35% chance of approval. Let's also assume (understanding that it's far from an exact science) that if future results are indeed positive, the share price will move up with additional data, and that any future dilution is done at higher prices, like the recent Alpha financing at $1.50. I'm assuming that a total of 50% dilution occurs over the next several years at perhaps an average of $1.95/share. That would equate to ~$58.5M of additional financing which, with current cash on hand, should carry the company through about 14 quarters, i.e. until early 2022, when potential commercialization removes the cash burn.
Using these figure and applying a 8X sales figure in 2020 gives us a target price of:
$248M x 35% likelihood x 8 times sales / (60M shares x 1.5) = $7.72 per share in 2023. Discount that back 5 years at 12% and you have a current share price value of $4.38. Obviously this is all very speculative and depends on many assumptions, but it does give an indication of how beaten down ONCS' share price is, and how much it could bounce on positive data.
Note too that I think this valuation is just an exercise, because if future data comes out positive, I'd expect MRK who's partnered with ONCS on both current trials to buy the company outright, as the cost would be a mere pittance to MRK.
I think ONCS’ stock price has been unfairly beaten down by the market on trial results that overall were positive even if disappointing to expectations. The company has multiple trials in progress in very important indications, and should any of them provide positive results, the company’s stock price could soar. As a result I’m long a speculative position.
A version of this article was previously released to subscribers of Total Pharma Tracker, a Marketplace service with whom I am now collaborating. Some of my work will be available to TPT subscribers either exclusively, or in advance.
Disclosure: I am/we are 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.
Additional disclosure: I actively trade around core positions.