VolitionRx — Update 1 April 2016

VolitionRx is a diagnostics company that has developed an array of blood-based tests called NuQ, which detect cell-free nucleosomes in the blood. Nucleosomes are units of packaged DNA, and when cells die, they can be released into the bloodstream. Changes in the quantity or structure of these nucleosomes are correlated with various disorders including cancer. The company is using this technology to develop blood-based diagnostic tests for cancer using a combination of multiple NuQ tests in parallel. Their lead program is a NuQ panel for colorectal cancer (CRC) intended as a replacement for the fecal immunochemical test (FIT) and fecal occluded blood test (FOBT). The ability to use blood and the simplicity of the technology needed to run the test could allow NuQ to be integrated into pre-existing blood testing protocols. The company is initially targeting approval and commercialization in Europe and expects a CE mark and marketing to begin in late 2016 for the CRC test. The goal in Europe is to leverage the simplicity and low cost of the NuQ CRC test to seek approval from country-wide medical policy authorities.

VolitionRx announced for the first time a detailed regulatory and commercial strategy for the US on the most recent earnings call and in company filings. The plan is to expand the marketing authorization by seeking 510(k) clearance before the more rigorous PMA. In the US there are multiple tiers of regulatory clearance needed for different levels of marketing claims. First, any test may receive a waiver to be run in a CLIA (Clinical Laboratory Improvement Act) certified lab as long as there is not a substantial risk of error from running the test. The data from the test can be provided to the ordering physician, but marketing claims cannot be made regarding its efficacy at diagnosing a disease. Essentially a CLIA waiver will get the NuQ test on the market as fast as possible but the company cannot make any claims of efficacy.

The important aspect that was added in the most recent company guidance was the plan to seek near-term clearance via the 510(k) pathway. Diagnostics approved via this pathway are so-called “class II” tests, and their interpretation must pose at most a moderate impact to human health. Functionally this means that the company will be able to make claims for the use of NuQ panels under the umbrella that they are part of a physician’s overall assessment. Although the company has not received specific guidance from the FDA, clearances under this scheme could require trials with less than 1,000 patients. Adding this stage to the commercial rollout of the NuQ CRC test will get it into the hands of physicians and generating revenue sooner than previous plans with little overhead cost. The company is targeting trials with approximately 500 patients with a cost in the low single-digit millions per indication, contingent on FDA guidance. The company aims to meet with the FDA and initiate a 510(k) trial for CRC in 2016. The 510(k) application process has a quick review cycle, with a 90-day target turnaround. With all these factors in mind, there is the potential for a commercialization of the NuQ colorectal test in late 2017 in the US.

In the longer term, the company will be seeking a “class III” designation for tests whose interpretation poses a significant risk to heath and require submission of a PMA. This would allow claims that a NuQ panel is sufficient to diagnose a disease. A trial for PMA approval could require 10,000 or more patients, and the FDA requires that these tests are accurate and do not produce an excessive number of alarming false positives, necessitating a high specificity. However, these trials can be run concurrently with 510(k) enabling trials, and therefore the timeline to full marketing approval has not changed. The company plans on meeting with the FDA in 2016 to discuss paths forward for a PMA-enabling trial for CRC.

The company announced in February 2016 that it had competed an exploratory trial to detect pre-cancerous colorectal adenomas (polyps) at Hvidovre Hospital and the University of Copenhagen. The double-blind prospective trial included 430 patients who presented with symptoms or were high risk for CRC. The patients received a panel of five NuQ assays and their results were age-adjusted. Although previous CRC trials had accurately detected adenomas (63% sensitivity at 78% specificity), this was the first trial in which the NuQ panel was specifically tailored to detect adenomas. The result was that this panel accurately detected 75% of adenomas (at 78% specificity) in the background presence of 88 patients with stage I and II CRC.

These results improve on the already best-in-class sensitivity for non-invasive detection of colorectal adenomas (Exhibit 1). Because the presence of adenomas is a risk factor for developing CRC, this test may be used in the future to identify patients where increased surveillance is needed. The main factor limiting the potential utility of this test is the high number of false positives (22%), which could pose a risk of compelling a large number of unnecessary follow-up procedures such as colonoscopies. This risk could potentially be limited by accurate diagnosis and differentiation of patients with CRC who need follow-up over watchful waiting. Regardless, this will allow a degree of screening and stratification of at-risk individuals that simply is not possible with currently approved technology.

VolitionRx also released results from a preliminary trial done in collaboration with Liège University Hospital in Belgium in which a NuQ panel was used to identify patients with Idiopathic Pulmonary Fibrosis (IPF). IPF is a rare, difficult to diagnose and ultimately fatal lung condition of unknown origin, in which accumulation of scar tissue occludes the microvasculature and air passages in the lung. There are an estimated 5m cases of IPF worldwide.1

The study used blood samples collected from 78 individuals (21 non-treated IPF patients, 27 treated IPF patients, 30 healthy volunteers). 86% of the non-treated IPF patients were correctly identified in the study with a specificity of 80%. The number of treated-IPF patients identified was not released, but it is a safe assumption that the detection rate was lower due to less cell death during treatment.

Although these results pose the possibility of further developing a NuQ panel of tests for IPF in the future, the most significant feature of this study is that it is the first study to not specifically target cancer (or dysplasia in the case of colorectal adenomas). This proof of concept opens the possibility that NuQ tests could be optimized for a variety of different disorders. Nucleosomes detected by NuQ are released into the bloodstream following cell death and any disorder that increases the rate of cell death will produce a signal that is identifiable by NuQ. However, the test will have particular utility in disorders that are characterized by an alteration in normal chromosomal expression patterns. The modification in the nucleosomes that causes these patterns can be identified with a panel of NuQ tests, leading to a higher level of specificity. Both cancer and fibrosis fall into this category, as do some degenerative and inflammatory disorders.

The company also has three near-term clinical readouts for prostate cancer, although at an earlier phase than other programs. We currently do not include the prostate cancer program in our valuation due to the lack of current clinical data, but this may change with the upcoming results from two clinical trials expected in H116. However, we believe that the bar for prostate cancer detection is higher than other programs due to the widespread prevalence of PSA (prostate specific antigen) testing.

We have increased our valuation to $231m from $197m, although this represents a decrease in the per share value to $10.00 per basic share ($8.58 per diluted share) from $10.90/share ($8.86) due to dilution from the March 2016 equity offering. The largest factor in increasing our total firm value was rolling over our NPVs to 2016. We have integrated the new US 510(k) commercialization plan into our model by increasing R&D spending for individual US programs by approximately $5m each to account for the new trial, coupled with an earlier commercial launch. The net effect of these adjustments is small, the primary benefit being a hedge on failure of the PMA application. We expect to make adjustments to this portion of our model following the company’s forthcoming discussions with the FDA about the pathway.

We also expect to make changes to our valuation with upcoming clinical trial results, notably the prostate cancer trials, because if they significantly outperform PSA testing, we would include them in our future valuations.

We currently predict Q116 net cash at $16.6m, but we expect to adjust this for variation in operational costs for the quarter.

VolitionRx released Q415 and full year results showing net losses of $2.7m for the quarter and $9.5m for the year. The majority of losses were associated with R&D costs ($1.6m and $6.1m respectively), which increased 51% for the year over 2014. The increase in R&D for the year was not surprising considering the large number of new clinical programs that were initiated by the company in 2015 (Exhibit 3). Significant clinical activity remains invested in advancing the company’s lead indication of CRC detection, but an increasing number of clinical studies have been devoted to other indications. Although the company has not provided guidance, we predict a continued increase in R&D spending in 2016 to $9.1m.

Other costs were $1.0m and $3.9m for Q415 and the year (73% and 105% increase year-on-year, respectively), the increase in which was primarily due to increases in salaries and professional fees associated with the uplisting and offering on NYSE MKT in February 2015.

The company ended 2015 with $5.9m in cash and equivalents, which was higher than our estimate ($3.7m) due to lower than predicted operational spending in Q415, a larger than predicted portion of expenses being non-cash, an increase in warrant exercises and changes in working capital. The cash was supplemented with a $12.8m equity raise (including greenshoe) in March 2016.

Our forecast for 2015 was close to the reported financials. The loss for 2015 of $9.5m is less than $0.4m different from our estimate ($9.9m). Therefore, changes to our projections are small. When taking the company’s recent cost efficiencies into account for our forecasts, we have reduced the net loss for 2016 by $0.44m (to $13.9m) and for 2017 and onward by approximately $2.4m (to $18.1m in 2017). We predict that the company will need an additional $50m in cash to self-market the NuQ test and reach profitability in 2021. This is a reduction from previous estimates of $120m based on the efficiencies described above and the March 2017 capital raise of $12.8m. We recognize the future financing as illustrative debt, but these capital needs could result in significant dilution if the company decides to seek funding in equity markets.