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On May 21, Tocagen (NASDAQ:TOCA) announced that the Toca 5 Phase 3 clinical trial evaluating Toca 511 and Toca FC with recurrent high grade glioma (HGG) continues without modification, following the suggestion from IDMC based on the second interim analysis. The shares are down 53% afterwards. But does TOCA deserve a 50% wipe-out? Let us see.
Company and pipeline introduction
Tocagen is a San Diego-based clinical-stage biopharmaceutical company that had its IPO in early 2017. The company's key value is its gene therapy platform utilizing retroviral replicating vectors (RRV) to selectively deliver therapeutic genes into cancer cells. Currently, the company's leading and only products in clinical-stage are Toca 511 and Toca FC, which are under investigation in a pivotal 3 clinical trial treating HGG and a phase I trial exploring the metastatic solid tumors. Currently, Tocagen trades around $5 and has a market cap of $130 million.
Toca 511 is an injectable RRV that encodes prodrug activator enzyme, cytosine deaminase. The infected cancer cells selectively carry the CD gene and produce CD protein. Toca FC is orally administered, extended-release formulation of 5-fluorocytosine (5-FC). It is a prodrug that is inactive as an anti-cancer drug. But 5-FC is converted into the active anticancer drug at high concentrations in Toca 511-infected cancer cells that are producing CD protein.
Based on the Phase I resection study result, Toca 511 extended median survival to 14.4 months compared to 8.4 months for lomustine in rHGG patients. A pivotal phase III trial targeting GBT and AA is ongoing and Tocagen will present the final analysis results by Q4 2019. In addition, the combination is under evaluation in a phase 1b trial (Toca 6) for patients with advanced solid tumors or lymphoma. The most recent update is from October 2018 immunotherapy conference. Based on 20 patients data, Toca 511 and Toca FC showed a favorable safety and tolerability profile with a confirmed vector deposition in metastatic tumors. We expected the company to provide more safety data with additional 10 new patients by Q4 2019.
Toca 5 Phase 3 success probability
The pivotal phase 3 trial is a two-arm, double-blinded, randomized, multi-center trial. The eligible patient population is recurrent Glioblastoma Multiforme and Anaplastic Astrocytoma patients with tumor size less or equal to 5 cm. All patients will have surgery before randomization. In total, 403 patients have been randomized to Toca 511 and Toca FC or physicians' choice of Avastin or chemotherapy with 1:1 ratio. The primary endpoint is the overall survival and the study will be ended when it reaches 257 events. The trial design assumed that the comparator arm would have a survival of 9.8 months and Toca 511/FC patients would live 14.3 months. Two interim analyses were conducted when 50% and 75% of events occurred. Both interims recommended to succeed in the trial with no changes. With the alpha spending of the first and second interim, the alpha level for the final analysis now drops to 0.0307.
After Interim II, Leerink’s Graybosch lowered the trial’s success rate with the arguments that “a great outcome is more likely to show itself early” and “the trial is hard to succeed with lower alpha level.” But we have a different option. The assumption of “great outcome will show early” is unreliable. As we know, the immunotherapy often has delayed effect. A great outcome is more likely to show itself later. In addition, with only 0.016 alpha spending in the second interim, the probability of stopping the trial with success is only around 6% based on the simulation from our biostatistician. The early stop for oncology trial is extremely hard and rare.
We predicted the probability of success of the final analysis using the assumption provided by Toca. With more events and longer follow-up time, the final success rate is still as high as 92% with alpha level 0.030. Therefore, ‘continue without modification’ from the second interim is definitely not an indicator of failure.
Still, there is a possibility that Toca 511 would fail in the end. But the failure rate is not as high as what the investors expect. The market panicked and overinterpreted the interim decision. A run-up would and should happen around Q4 this year.
Potential Market and Stock Valuation
Currently, there is no existing treatment for Glioblastoma patients. Although it is a rare disease, there are around 8,000 recurrent patients around the world.
A successful Phase III trial would make Tocagen stand to earn $760 million in annual revenue, assuming the price is $150k for TOCA 511 (one-time surgery) and 10k for oral TOCA-Fc per quarter with 50% penetration rate. To be conservative, we use P/S=2; the value of Tocagen is 10 times more than its current market cap.
Toca currently holds $80 mm in cash and marketable security and its overall debt is $49 mm. According to 10Q, the cash burn for future 6 months is expected to be $33 mm. If the trial succeeds, the target price for TOCA will rise to $32.8, assuming 10% discount rate and peak sales in 2026. If the trial fails, Tocagen would likely burn out all its cash and the stock price would fall below $1. We believe there is high chance that TOCA will raise additional capital by a seasoned issue during some run-up period before the final data read-out.
This is a subsequent binary event. It is a gamble with huge upside (550%) opportunity and limited downside risk. A run-up before the data read-out is likely to happen in Q4 2019. The target price for run-up would be between $10 and $12. There is still a 40-70% profit margin from the current price. Any price below $7 would be a good entry point. You can either hold the stock until it reaches $11 and only keep the profit for the final binary event. Another strategy is to do long straddle. Purchase the year-end call when the stock price is low and purchase the year-end put during the run-up period.
Disclosure: I am/we are long TOCA. 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.