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Viralytics — Update 10 June 2016

Viralytics — Update 10 June 2016

Viralytics

Analyst avatar placeholder

Written by

Viralytics

Three Cavatak/checkpoint combination trials

ASCO update

Pharma & biotech

16 June 2016

Price

A$0.95

Market cap

A$225m

US$0.76/A$

Net cash (A$m) at 31 March 2016

46.1

Shares in issue

237.3m

Free float

84.6%

Code

VLA

Primary exchange

ASX

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

21.0

48.4

6.7

Rel (local)

19.9

42.4

7.6

52-week high/low

A$1.0

A$0.5

Business description

Viralytics is a biopharmaceutical company developing Cavatak oncolytic virotherapy to target late-stage melanoma and other solid tumour types. It is trialling Cavatak as a monotherapy and in combination with checkpoint inhibitors. The virus can be delivered intravenously or by intralesional injection.

Next events

CAPRA Keytruda combo trial update

H216

Further MITCI Yervoy combo trial update

H216

CANON bladder cancer update

H216

Analysts

Dennis Hulme

+61 (0)2 9258 1161

Lala Gregorek

+44 (0)20 3681 2527

Viralytics is a research client of Edison Investment Research Limited

Additional data presented at ASCO confirm the potential for synergistic combinations of Cavatak with immune checkpoint inhibitor (ICI) drugs to improve the proportion of cancer patients who respond to ICI therapy. Three Phase Ib trials are underway testing Cavatak in combination with Yervoy or Keytruda in melanoma, lung and bladder cancers. Initial data in April showed an impressive 67% response rate in the first six patients in the MITCI study of Cavatak and Yervoy in melanoma. Further updates on MITCI and initial data from the CAPRA trial of Cavatak plus Keytruda could be potential catalysts for the stock in H216. We maintain our valuation of A$272m (A$1.15 per share) ahead of the anticipated newsflow.

Year end

Revenue
(A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/14

2.5

(4.7)

(3.9)

0.0

N/A

N/A

06/15

2.5

(5.5)

(3.0)

0.0

N/A

N/A

06/16e

4.4

(9.9)

(4.7)

0.0

N/A

N/A

06/17e

4.4

(9.4)

(4.0)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Tumour targeting of iv Cavatak attracted Merck collaboration

Tumour biopsy studies presented at ASCO confirmed successful tumour targeting following iv administration of Cavatak in patients with melanoma, non-small cell lung cancer (NSCLC) and bladder cancer. The immune response to infection of the tumour by Cavatak increased levels of immune cell infiltration and the expression of immune-checkpoint molecules that are targeted by ICI therapies. Viralytics is collaborating with Merck on the recently initiated Phase Ib Keynote 200 (STORM Part B) trial of iv Cavatak in combination with the anti-PD-1 ICI drug Keytruda in advanced bladder and lung cancers.

Updates on ICI combinations in melanoma in H216

Initial data presented in April revealed an impressive 67% response rate in the first six patients treated in the MITCI Phase Ib trial of Cavatak in combination with Yervoy (ipilimumab) in patients with advanced melanoma. We expect further updates on this 26-patient trial in the second half of the calendar year. We also expect an update on the CAPRA trial of intra-tumoural injection of Cavatak in combination with Keytruda in H216. The trial, initiated in September 2015, will recruit 30 patients with advanced melanoma.

Valuation: Unchanged at A$1.15 per share

Our risked DCF valuation is unchanged at A$272m or A$1.15/share. Cash at 31 March 2016 of A$46.1m is sufficient to fund operations beyond the end of FY18 in our forecasts. We expect the ongoing Phase Ib trials of Cavatak in combination with Keytruda in melanoma, lung and bladder cancer to be of great interest to potential partners.

Potentially synergistic Cavatak/ICI combos

Checkpoint inhibitors have markedly improved the treatment prospects for a number of cancers. Responses to the approved ICI drugs Yervoy (ipilimumab), Keytruda (pembrolizumab), Opdivo (nivolumab) and Tecentriq (atezolizumab) are frequently long-lasting, but response rates to single agent ICI therapy are relatively low, typically in the range 10-30%. Viralytics’ Cavatak oncolytic virotherapy 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.

Two posters presented at ASCO provided further evidence of the potential of Cavatak/ICI combination therapy. Selected highlights from the posters are shown below.

Successful tumour targeting by iv Cavatak in STORM/Keynote 200 trial

Viralytics presented updated data at ASCO on the detection of Cavatak (CVA21) viral RNA in biopsies of tumour tissue from patients administered iv Cavatak in Part A of the Phase I STORM study. Exhibit 1 shows that viral RNA was detected in tumour biopsies of all three melanoma patients, both NSCLC and one of the two bladder patients, but in none of the three prostate cancer patients tested. Exhibit 2 confirms that the expression of viral RNA was also associated with the expression of viral proteins in infected tumour cells.

The expression of viral proteins and the lysis of virus-infected tumour cells both contribute to stimulating an immune response in the tumour micro-environment, including infiltration of the tumour by inflammatory cells.

Exhibit 1: Cavatak viral RNA detected in tumour biopsies after iv administration in STORM Part A study

Exhibit 2: Cavatak viral proteins also detected in tumour biopsies

Source: Pandha et al poster #TPS3108 ASCO 2016

Exhibit 1: Cavatak viral RNA detected in tumour biopsies after iv administration in STORM Part A study

Exhibit 2: Cavatak viral proteins also detected in tumour biopsies

Source: Pandha et al poster #TPS3108 ASCO 2016

The ASCO poster also presented additional data that confirmed the results from previous preclinical studies of Cavatak in combination with an ICI. Exhibit 3 shows that in an immune competent mouse model of NSCLC, combination therapy with iv Cavatak plus a mouse anti-PD-1 antibody significantly increased survival compared to either agent on its own.

Exhibit 3: Combining iv Cavatak with anti-murine-PD-1 monoclonal antibody improves survival in mouse model of non-small cell lung cancer

Source: Pandha et al poster #TPS3108 ASCO 2016

The evidence that Cavatak infects tumour cells in NSCLC and bladder cancer patients following iv administration and the positive outcomes from the preclinical combination studies are both encouraging pointers for potential synergy from the combination in the recently initiated Part B of the STORM study (Keynote 200) being conducted in collaboration with Merck. The study is testing iv Cavatak in combination with the anti-PD-1 ICI antibody Keytruda (pembrolizumab) in 80 patients with advanced NSCLC or metastatic bladder cancer.

CALM immune profiling extension shows statistically significant upregulation of immune response genes

A separate poster at ASCO presented an updated analysis of changes in the tumour micro-environment of melanoma lesions that had been injected with Cavatak, including a detailed comparison of responders vs non-responders.

This provided further evidence that responses to Cavatak therapy were associated with significant upregulation of the expression of genes involved with immune responses. The analysis in Exhibit 4 shows that one week after the first injection with Cavatak (ie day 8), there were statistically significant increases in the expression of at least 10 immune response-related genes in patients who responded to therapy, whereas there were only minimal changes in the expression of these genes in patients who did not respond to therapy and whose disease progressed.

Exhibit 4: Cavatak injection up-regulates interferon-induced genes and immune checkpoint molecules within melanoma tumours

Source: Andtbacka et al poster #9553 ASCO 2016

In common with other immunotherapies, Cavatak therapy often leads to delayed tumour shrinkage

Viralytics has previously disclosed that intralesional injection of Cavatak into melanoma lesions in the CALM Phase II trial resulted in an overall response rate (ORR) of 28% (16/57) and a durable response rate of 21%.

Exhibit 5 shows the change in total measured tumour burden over time in the 16 responders in the CALM trial. In common with other cancer immunotherapy treatments, several patients experienced delayed responses to treatment. Five of the 16 responders, including three of the eight complete responders, had increases in tumour burden of at least 20% within the first six months of the study before eventually responding to treatment. This initial increase in tumour burden followed by tumour shrinkage is known as pseudoprogression. It can be caused by a delayed onset of the immune response, or by an initial increase in the size of tumours due to infiltration by inflammatory cells and the swelling (oedema) associated with the inflammatory response, with subsequent tumour shrinkage as the inflammation subsides.

In the Cavatak clinical trials tumour responses are assessed using modified criteria known as irRECIST, which include an allowance for a temporary increase in tumour burden.

Exhibit 5: Changes in tumour burden of responding patients in CALM Phase II

Source: Andtbacka et al poster #9553 ASCO 2016

Valuation

Our valuation of Viralytics is unchanged at A$272m or A$1.15/share (undiluted). 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 6, 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).

Exhibit 6: Viralytics rNPV valuation

Value driver

Unrisked NPV (A$m)

Probability of success

rNPV
(A$m)

rNPV per share (A$)

Key assumptions

Cavatak in metastatic melanoma

557.0

35%

195.0

0.82

Launch in 2021, with peak market penetration of 30% five years after launch. Peak global sales of US$1.0bn.

Assumes simultaneous product launches in US, Europe and RoW; average price of drug US$75k in US and US$45k elsewhere.
One cycle of treatment per patient.
Out-licensing in 2016 with all development costs borne by licensee and a 15% royalty on sales due to Viralytics.

Cavatak in NSCLC

369.6

15%

55.4

0.23

Launch in 2023, with peak market penetration of 5% five years after launch. Peak global sales of US$950m.

Cavatak in CRPC

110.9

15%

16.6

0.07

Launch in 2023, with peak market penetration of 2% five years after launch. Peak global sales of US$285m.

Cavatak in metastatic bladder cancer

49.7

15%

7.5

0.03

Launch in 2023, with peak market penetration of 5% five years after launch. Peak global sales of US$130m.

Intravesical Cavatak in NMI bladder cancer

60.4

15%

9.1

0.04

Launch in 2024, with peak market penetration of 10% five years after launch. Peak global sales of US$185m, assuming average price of drug US$10k in US market, and global sales 2x US sales. 15% royalty on sales due to Viralytics.

Milestones

91.7

50-35%

38.5

0.16

US$25m upfront payment (50% risk adjustment); US$20m milestones on Phase III start, US$40m filing, US$60m on approval (35% risk adjusted).

R&D expenses (net of rebate)

(9.4)

(5.7)

(0.02)

 

 

Admin

(28.1)

100-10%

(10.4)

(0.04)

 

 

Tax

(301.1)

(76.7)

(0.32)

Australian corporate tax of 30%

 

Portfolio total

900.7

229.3

0.97

Net cash (end FY16e)

43.0

0.18

 

 

Total

272.3

1.15

 

 

Source: Edison Investment Research

Sensitivities: Trial results and partnering key risks

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.

Exhibit 7: Financial summary

A$'000s

2014

2015

2016e

2017e

2018e

30-June

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,508

2,454

4,400

4,400

3,200

R&D expenses

(4,998)

(5,925)

(11,000)

(11,000)

(8,000)

SG&A expenses

(2,438)

(2,568)

(3,631)

(3,631)

(3,631)

EBITDA

 

 

(4,928)

(6,040)

(10,231)

(10,231)

(8,431)

Operating Profit (before amort. and except.)

 

 

(4,956)

(6,074)

(10,286)

(10,300)

(8,514)

Intangible Amortisation

(390)

(390)

(390)

(390)

(390)

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(5,346)

(6,465)

(10,676)

(10,690)

(8,904)

Net Interest

296

527

431

859

671

Profit Before Tax (norm)

 

 

(4,660)

(5,547)

(9,855)

(9,441)

(7,844)

Profit Before Tax (FRS 3)

 

 

(5,050)

(5,938)

(10,245)

(9,831)

(8,234)

Tax

0

0

0

0

0

Profit After Tax (norm)

(4,660)

(5,547)

(9,855)

(9,441)

(7,844)

Profit After Tax (FRS 3)

(5,050)

(5,938)

(10,245)

(9,831)

(8,234)

Average Number of Shares Outstanding (m)

119.2

184.0

210.7

237.3

237.3

EPS - normalised (c)

 

 

(3.9)

(3.0)

(4.7)

(4.0)

(3.3)

EPS - normalised fully diluted (c)

 

 

(3.9)

(3.0)

(4.7)

(4.0)

(3.3)

EPS - (IFRS) (c)

 

 

(4.2)

(3.2)

(4.9)

(4.1)

(3.5)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

2,523

2,116

1,740

1,349

945

Intangible Assets

2,475

2,034

1,643

1,253

863

Tangible Assets

48

82

96

96

82

Investments

0

0

0

0

0

Current Assets

 

 

27,120

24,441

45,842

36,402

28,573

Stocks

0

0

0

0

0

Debtors

2,784

2,875

2,875

2,875

2,875

Cash

24,336

21,566

42,967

33,526

25,697

Other

0

0

0

0

0

Current Liabilities

 

 

(767)

(1,685)

(1,685)

(1,685)

(1,685)

Creditors

(767)

(1,685)

(1,685)

(1,685)

(1,685)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

0

0

0

0

0

Long term borrowings

0

0

0

0

0

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

28,877

24,872

45,897

36,066

27,832

CASH FLOW

Operating Cash Flow

 

 

(5,486)

(5,010)

(10,363)

(10,230)

(8,430)

Net Interest

0

544

431

859

671

Tax

0

0

0

0

0

Capex

(8)

(69)

(69)

(69)

(69)

Acquisitions/disposals

0

0

0

0

0

Financing

25,180

40

30,973

0

0

Dividends

0

0

0

0

0

Net Cash Flow

19,686

(4,495)

20,972

(9,440)

(7,829)

Opening net debt/(cash)

 

 

(5,079)

(24,336)

(21,566)

(42,967)

(33,526)

HP finance leases initiated

0

0

0

0

0

Other

(429)

1,725

429

(0)

0

Closing net debt/(cash)

 

 

(24,336)

(21,566)

(42,967)

(33,526)

(25,697)

Source: Edison Investment Research, Viralytics data. Note: Risk-adjusted revenue from anticipated licensing deals that have not yet been signed is included in our DCF valuation model, but is not included in our financial forecasts.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Viralytics and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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