Viralytics — Update 21 November 2016

Immune checkpoint inhibitor (ICI) drugs 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 of 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 intratumoral injection, making it an ideal candidate to “prime” or initiate the immune response that 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 and the CAPRA trial combining intratumoral Cavatak with Keytruda in advanced melanoma.

A poster by Curti et al presented at the 31st Annual Meeting of the Society for Immunotherapy of Cancer (SITC) in National Harbor, Maryland (US) in November 2016 showed an encouraging 50% preliminary response rate from the Phase Ib MITCI trial of intratumoral Cavatak in combination with the ICI 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.

Most of the 18 patients who have been treated to date had previously undergone systemic immunotherapy. To date, no Cavatak-related Grade 3 or higher adverse events have been reported, but there has been one (6%) Yervoy-related Grade 3 adverse event (fatigue).

Exhibit 1 shows that nine (50%) of the 18 patients who reached the first tumour evaluation assessment at day 106 experienced confirmed objective responses, including three (18%) complete responses. Five additional patients showed stable disease at day 106, bringing the disease control rate to 78%.

A striking feature shown in Exhibit 1 is that in most cases the tumours continued to shrink long after treatment with ipilimumab stopped.

Exhibit 2 summarises the tumour responses of the 18 patients, while Exhibit 3 shows examples of complete and partial tumour responses.

Exhibit 4 shows that there have been three (38%) responses among eight patients who had failed previous treatment with ICI drugs. This is an impressive response rate in patients who have failed to respond to the best available therapies.

The efficacy data are very encouraging for a highly pre-treated patient group with advanced melanoma. The 50% Cavatak/Yervoy overall response rate (ORR) is comparable to the 60% response rate for the Yervoy/Opdivo combination in melanoma patients in a Phase II trial.

The MITCI response rate is also comparable to the 56% (10/18) ORR reported by Puzanov et al at ASCO 2015 for Yervoy combined with Amgen’s approved 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.

Importantly, there were three responses (38%) among the eight patients who had failed treatment with one or more PD-1 ICI drugs (Exhibit 4). This compares to a response rate of only 10% when patients who had failed PD-1 ICI drugs were treated with ipilimumab on its own. Furthermore, there were four responses (57%) among the seven patients with Stage IV M1c melanoma with visceral metastases including lung and liver; this included responses in the non-injected visceral lesions.

These preliminary results show that adding Cavatak to an ipilimumab regimen dramatically increased response rates compared to treatment with ipilimumab on its own.

Viralytics is testing the combination of intralesional Cavatak with pembrolizumab (Keytruda) in advanced melanoma (Stage IIIb/c and IV) in the Phase Ib CAPRA study. The Cavatak dose regimen used in this trial is similar to that in the CALM trial.

The trial uses a Simon’s two-stage design. If there are two or fewer responses after 12 months of therapy in the first 12 patients, the trial will be terminated for futility. If there are three or more responses, a further 18 patients will be recruited, taking the total to 30.

Phase Ib data from the first 10 patients presented at SITC showed a disease control rate of 100%. The objective response rate was 70% (7/10) and stable disease was observed in 30% (3/10). These response rates are higher than the published rates for either agent used alone: Cavatak 28% and Keytruda c 33% in patients with late-stage melanoma.

Interestingly, a disease control rate of 100% (7/7 lesions) was observed in individual non-injected visceral and non-visceral lesions, with an objective response rate of 86% (6/7).

As we described in our previous report, Viralytics has previously presented data from patients administered iv Cavatak in Part A of the Phase I STORM study showing 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. The expression of viral RNA was also associated with the expression of viral proteins in infected tumour cells.

At SITC, Viralytics presented initial data from the first few patients treated in Part B of the STORM study (Keynote 200), which is being conducted in collaboration with Merck. The study will test iv Cavatak in combination with the anti-PD-1 ICI antibody Keytruda (pembrolizumab) in over 80 patients with advanced NSCLC or metastatic bladder cancer.

Keynote 200 starts by confirming that the three doses of IV Cavatak that were tested as a monotherapy in Part A of the trial are safe to use in combination with pembrolizumab. Six patients of the first two cohorts have been enrolled. Each cohort will test Cavatak doses of 1x108 and 3x108 TCID50. Cohort 1 is fully enrolled and enrolment in Cohort 2 is nearing completion. Cohort 3 will treat ~80 patients (~40 NSCLC and ~40 with metastatic bladder cancer) at a dose of 1x109 TCID50 after safety is confirmed in the first three patients at this dose.

So far the combination has been well tolerated, with only one unconfirmed Grade 3 treatment-related adverse event and no dose-limiting toxicities for the combination having been reached.

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. Merck is already collaborating with Viralytics in one trial combining Cavatak with pembrolizumab.

There have already been two deals involving oncolytic virotherapy companies so far in 2016. First, in June 2016 BMS entered into an agreement with PsiOxus for trials of its oncolytic virotherapy in combination with nivolumab (Opdivo). The deal included a US$10m upfront fee, but other financial terms were not disclosed.

Second, in September 2016 Boehringer Ingelheim completed a deal with preclinical-stage company Vira Therapeutics that was worth up to €210m (US$236m). The deal involved an upfront payment of €20m and an option to Boehringer for the right to buy the company on completion of Phase I for €190m. Vira Therapeutics’ oncolytic virus is based on the vesicular stomatitis virus (which infects livestock and rodents); the virus is intended to be administered iv in Phase I trials that are expected to commence in 2018.

These deals reflect the belief that oncolytic viruses may provide a complementary mechanism to address tumours that are resistant to ICI therapy because oncolytic viruses are designed to have immune stimulating effects, while ICI drugs are designed to alleviate immune suppression. The high response rates seen with the combination of Cavatak and ipilimumab in the MITCI trial provide strong support for this complementary mechanism.

We lift our valuation of Viralytics to A$385m or A$1.60/share (undiluted) from A$272m or A$1.15/share due to increased milestone payment assumptions and rolling forward the DCF model. Our valuation uses a risk-adjusted net present value (rNPV) method to discount future cash flows of the cancer indications shown in Exhibit 6 through to 2033, using a 12.5% discount rate. It assumes a partnering deal or out-licensing 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 and sales milestones from a potential licensing deal, based on average Phase II deal metrics from BioCentury (US$25m upfront payment, US$240m total milestones) and our own assessment of the development stage of Cavatak. We had previously modelled milestone payments of US$120m on the assumption that only half of the payments would be for clinical and regulatory milestones. There is a broad range of value for deals in the oncolytic virus field; from the US$236m Boehringer Ingelheim/Vira Therapeutics deal for a drug that is still in preclinical development, to $1bn ($425m cash upfront and $575m earnout) of the Amgen/BioVex deal for Phase III asset, T-vec. To reflect this, we have increased forecast milestone payments for a Cavatak licence deal from US$120m to US$355m as the product is increasingly generating clinical data, and advancing towards mid-stage development.

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.

Viralytics reported a total loss of A$9.1m FY16 (year end 30 June) vs A$4.3m in FY15, reflecting increased clinical development activities. We lift forecast SG&A expenditure by A$0.9m to A$4.5m in both FY17 and FY18, in line with the increased expenditure in FY16. We do not include the foreign exchange translation gain or loss in our financial summary (Exhibit 7). Cash at 30 September of A$42m is sufficient to fund operations beyond the end of FY18 in our forecasts.