Viralytics — Update 5 May 2016

Checkpoint inhibitors have markedly improved the treatment prospects for a number of cancers. Responses to the approved ICI drugs Yervoy (ipilimumab), Keytruda (pembrolizumab) and Opdivo (nivolumab) are frequently long-lasting, but response rates to single agent ICI therapy are relatively low, typically in the range 10-30%, meaning that the majority of patients do not respond to ICI therapy. Investigators are seeking combination therapies that can increase the response rates to ICI therapy. For example Merck is undertaking more than 80 trials that combine Keytruda with other cancer treatments. The combination of the two ICI drugs Yervoy and Opdivo has already been approved for use in melanoma, but while 60% of patients responded to therapy, 69% of patients experienced grade 3-4 (serious) adverse reactions.

Cavatak combines a high (20-39%) response rate with a favourable side effect profile when used as a single agent either intravenously or as an intra-tumoural injection, making it an ideal candidate to “prime” or initiate the immune response, which can then be strengthened by combination with ICI therapy, which loosens the host “immunological handbrake”. Merck has already recognised this potential, and is collaborating with Viralytics on the Keynote 200 Phase Ib trial of iv Cavatak in combination with Keytruda in patients with advanced lung and bladder cancer.

Three posters presented at AACR in April provided further evidence of the potential of Cavatak/ICI combination therapy. Selected highlights from the three posters are shown below.

A poster by Curti et al presented at AACR showed a very encouraging 67% preliminary response rate from the Phase Ib MITCI trial of intra-tumoural Cavatak in combination with the ICI drug Yervoy, which will recruit a total of 26 patients with advanced melanoma.

In the trial at least one melanoma lesion was injected with Cavatak four times over a three-week period before treatment with Yervoy commenced, and Cavatak continued to be injected every three weeks for up to a year. Four doses of Yervoy were administered at 3mg/kg iv every three weeks starting at day 22.

Of the 11 patients who have been treated to date, eight had previously undergone systemic immunotherapy. To date, no Cavatak-related grade 3 or higher adverse events have been reported, but there has been one (9%) Yervoy-related grade 3 adverse event (fatigue).

Exhibit 1 shows that four (67%) of the six patients who have reached the first tumour evaluation assessment at day 106 have experienced confirmed objective responses, including two (33%) complete responses. One additional patient with multiple liver metastases who had failed previous therapy with the ICI drugs Yervoy and Keytruda showed stable disease at day 106, bringing the disease control rate to 83%.

Exhibit 2 summarises the tumour responses of the six patients, while Exhibit 3 shows examples of complete and partial tumour responses.

While the number of patients with tumour assessments is still quite small, the efficacy data are very encouraging. The 67% Cavatak/Yervoy overall response rate (ORR) is numerically higher than the 60% response rate for the Yervoy/Opdivo combination in melanoma patients in a Phase II trial.

The MITCI response rate is also higher than the 56% (10/18) ORR reported by Puzanov et al at ASCO 2015 for Yervoy combined with Amgen’s approve oncolytic virotherapy Imlygic (T-vec). We note that the Puzanov study was in patients who had not undergone any systemic therapy and included patients with less severe stage IIIb disease.

Furthermore the MITCI response rate is higher than the unconfirmed ORR of 56% (n=9/16) in preliminary data reported from the Masterkey-265 study of Imlygic combined with Keytruda. We note that Cavatak has the advantage over T-vec in many other cancer types beyond melanoma in that it can be safely administered iv, whereas T-vec cannot.

The high response rate and favourable adverse event profile for Cavatak in combination with ICI drugs is expected to attract a high level of interest from potential partners.

A poster by Quah et al presented at AACR showed that combining Cavatak with anti-PD1 and anti-CTLA-4 antibodies was more effective at improving survival in a mouse model of lung cancer than either ICI antibody alone (Exhibit 4). This adds to previously presented data showing similar synergy between iv Cavatak and ICI antibodies in a mouse melanoma model and strengthens the rationale underpinning the Keynote 200 clinical trials.

The combination of iv Cavatak with the ICI antibody Keytruda is currently being investigated in non-small cell lung cancer (NSLC) and metastatic bladder cancer patients in the Keynote 200 trial, which is the new name for the Keytruda combination extension of the STORM study. Viralytics is conducting the Keynote 200 study in collaboration with Merck.

The third poster presented at AACR provided an update on the immune-profiling extension of the CALM trial of intra-tumoural injection of Cavatak in melanoma patients. The results show that CAVATAK was able to induce anti‐cancer immune activity in the tumour tissue, as shown by the infiltration of immune cells and the up‐regulation of key immune checkpoint molecules.

One striking finding of the study was that the changes in immune cell activity were far greater in tumours that responded to therapy than in non-responding tumours.

Exhibit 5 shows the tumour responses in the nine patients with matched sets of biopsies that were analysed in the study. In three patients the injected tumours progressed, shown in red in Exhibit 5. The other six patients where the disease was controlled (stable or shrinking tumours) are shown in blue.

Exhibit 6 shows that the changes within the tumour microenvironment were far greater in the tumours where the disease was controlled following Cavatak administration compared to the tumours that progressed following treatments. These changes in the tumour environment, which occur as early as seven days after the initial administration of Cavatak, could potentially be predictive of tumour response.

Exhibit 6 also shows that Cavatak treatment up-regulates many immune checkpoint inhibitory molecules in injected melanoma lesions, including CTLA-4, PD-L1, LAG-3, TIM-3 and IDO. Elevated levels of PD-L1 have been associated with improved response rates to the anti-PD1 antibody drugs Keytruda and Opdivo, providing further rationale for the ongoing Cavatak/ICI combination studies.

Viralytics reported total expenses in H116 (period ending 31 December 2015) of A$6.7m, 73% higher than the previous corresponding period (pcp). A$4.5m in R&D expenses were 72% higher than pcp (A$2.6m). With the clinical trial programme continuing to expand, we increase our forecast R&D spend in FY16 and FY17 by 10% to A$11.0m, and SG&A expenses for FY16-FY18 by 41% to A$3.6m. After deducting the R&D rebate, we forecast net R&D expenditure to be A$6.6m for FY16 and FY17, and A$4.8m in FY18. Reported cash at 31 March 2016 was A$46.1m. This gives the company sufficient cash to fund operations beyond our FY18 forecast time frame, based on our forecasts of expenditure.

We update our valuation of Viralytics, which now stands at A$272m or A$1.15/share (undiluted, previously A$192m or A$1.04/share). The increase in valuation reflects the ~A$31m net capital raised in December and January (52.7m shares issued at 61.5c/share) and the fact that we have increased forecast uptake of Cavatak in melanoma from 20% to 30% due to the high response rate in preliminary data from the MITCI trial. We have also adjusted the pace at which the 5% penetration rate for NSCLC and bladder cancer drops post peak sales in 2027. We previously had a more rapid decrease but now have modelled in a more gradual drop due to the encouraging trial results.

Our valuation uses a risk-adjusted net present value (rNPV) method to discount future cash flows through to 2033 of the cancer indications shown in Exhibit 7, using a 12.5% discount rate. It assumes a partnering deal or out-licensing of Cavatak in 2017, with the costs of all subsequent clinical development borne by the partner/licensee. Our model includes risk-adjusted upfront payments and clinical/regulatory milestones (but not sales milestones) from a potential licensing deal, based on average Phase II deal metrics from BioCentury (US$25m upfront payment, US$240m total milestones – we assume half of those payments [US$120m] are for clinical and regulatory milestones).

Viralytics is subject to typical biotech company development risks, including the unpredictable outcome of trials, regulatory decisions, success of competitors, financing and commercial risks. In particular, it has a very high single-product risk, with its entire value residing in Cavatak. The investment case hinges on the outcome of clinical trials and the company’s ability to secure a partnership (or further capital) to advance Cavatak into late-stage trials. Ideally, a partner would have the resources to evaluate Cavatak in multiple cancer indications. The greatest commercial opportunity for Cavatak is likely to be in combination with checkpoint inhibitors or other targeted agents – outcomes of ongoing and planned Phase Ib combination trials could be critical to future clinical and commercial success.