VolitionRx — Update 23 September 2016

VolitionRx is developing the NuQ cell free nucleosome test for the blood-based detection of a series of different cancers. The test detects the fragments of chromosomes that are released on cancer cell death and uses the modifications present on these structures to rule out other diseases. This provides a non-invasive method of detecting cancer, and because the technology is based on the routine ELISA test, it is easily integrated into existing protocols at a low cost ($20-50). The lead program is for the detection of colorectal cancer (CRC), a market with 225 million people in the US and Europe. The company will begin commercialization of its first test in Europe starting in early 2017. US commercialization will proceed in stages with first a 510(k) approval followed by additional trials and an eventual PMA. First US sales are expected in late 2017 or early 2018.

We have increased our valuation to $246m or $10.46 per basic share, from $231m or $10.00 per basic share, primarily due to rolling over our NPVs. We currently record CRC (including triage test, and US and EU frontline tests) as the most valuable program at $182m, and the majority of this value ($112m) is from US commercialization. This assumes a 33% peak market share and 20% compliance of the predicted screening population to blood tests. We predict initial pricing in the US of $40 and $20 in Europe. We expect to update our valuation with the release of additional clinical data over the next nine months, and on the release of the parameters of the NuQ triage colorectal test at the European Society for Medical Oncology (ESMO) in October 2016. We currently value the lung and pancreatic cancer programs at $40m and $9m respectively.

The company ended Q216 with $14.5m in cash after losses of $2.9m for the quarter. We expect an increase in both R&D and SG&A costs associated with the trials needed for marketing approval for the frontline test and the commercial launch of the triage test and forecast $15m in pre-tax losses for 2016 and $17m for 2017. We predict that the company will need an additional $60m in financing before profitability in 2021 with acceptance of a PMA for the test in the US.

The risks to the company are typical of small diagnostics companies and are a combination of clinical development risks and commercial uncertainties. The majority of studies of the NuQ technology have been retrospective and prospective trials have been small. The company will need to perform large prospective trials to receive marketing approval. Moreover, the specificity demonstrated in these various studies has been low enough (low 90% range) that high number of false positives would be expected for these tests. This is a problem identified by the FDA, although the recent approval of Epi proColon on the basis of improving compliance over FIT is seen as a positive regulatory sign. The market for the lung and prostate cancer screening is small in comparison to colorectal screening as they are limited to a subset of smokers and to first-degree relatives of cancer victims respectively. The market for the colorectal triage test is also small because it only follows a positive FIT test, which occurs in 7% of those tested. We expect the triage test commercial launch to be slow due to the need to negotiate with multiple central health committees across Europe. Revenue from this early market entry will offset the funding requirement to reach profitability, but the amount is still substantial at $60m.

VolitionRx is a diagnostics company developing blood-based cancer diagnostics. Its NuQ tests are a series of assays designed to quantify cell free nucleosomes in the blood as well as any mutations or modifications of those nucleosomes. Nucleosomes are a combination of DNA and protein that are normally found in chromosomes, but in distressed or dying cells they become free and are released into the bloodstream. In healthy cells, nucleosomes are modified to control the expression of different genes, but in cancer nucleosomes become hyper-modified as the cell loses the ability to regulate normal gene expression. NuQ tests measure both the number of cell free nucleosomes and their modification, and a typical panel of test for a particular cancer type uses four to five different NuQ assays against different nucleosome modifications to improve the predictive power. NuQ tests use the widespread ELISA testing technology, and therefore can be easily integrated into pre-existing testing protocols and infrastructure. The company’s lead program is a test for CRC, but it is also developing tests for lung, pancreatic and prostate cancer.

The company’s lead program is developing a series of tests for CRC. The strategy is multi-tiered with separate specialized plans for the US and European roll-outs. The company will be commercializing initially in Europe with the recently announced (September 2016) triage test strategy, a test targeting reducing colonoscopies within the scope of pre-existing state run CRC testing programs (see below). The triage test will begin commercialization in early 2017. Initial commercialization in the US will consist of a 510(k) approved test to be used as an adjunct to established CRC diagnoses, with an expected launch in late 2017 or early 2018. Following these initial entries into the market, the company will continue to develop and launch first-line diagnostic tests with the goal of providing a definitive diagnosis of CRC. These test aim to act as a replacement for established tests such as the fecal occluded blood test (FOBT) and FIT. Approval for a frontline test will require a PMA approval in the US, and the company expects to get feedback from the FDA on their regulatory path forward in H117. The company has three CE marks for different assays in Europe.

The market for CRC screening is large with approximately 225 million people in the US and Europe of screening age, and there is significant pressure to diagnose the disease early. Localized disease has a 90.1% five-year survival rate, which drops to 13.1% following metathesis.1 In the US the current recommendations are that adults aged 50 and older should be tested with one or more of the following to detect CRC:

Similarly in Europe there are multiple national initiatives to screen the at-risk population, for instance a FIT test distributed to at-risk individuals once every two years, as in Scotland. The problem with these strategies is that compliance for fecal testing is low (13-60% depending on the study) and, while highly accurate, colonoscopy is invasive and requires sedation. The Cologuard test developed by Exact Sciences has attempted to address some of the performance limitations of other fecal tests, and has significantly improved accuracy. However, the test still underperforms colonoscopy, and adoption was slow in its first full launch year, with only 104k tests sold in 2015.

The limitations of established testing technology have led to the development of an array of blood-based tests (Exhibit 3), which promise to lessen the burden on the patient and improve compliance. The majority of these tests have been promoted by small companies unable to support the large-scale clinical trials necessary for widespread adoption. An exception is Epi proColon (developed by Epigenomics) which was launched in April 2016 in the US after FDA approval for patients that are non-compliant with other testing methodologies. The test received approval from the FDA based on a screening study that compliance with testing increases when patients are given the option of blood-based testing. This result is significant because it provides a pathway for testing methodologies to reach approval that exhibit higher rates of false positives. The FDA initially rejected the Epi proColon application because estimates indicated that only a little over 2% of patients testing positive had CRC (compared to 16% of those with positive FIT), which presented both a burden on the patients on the medical system with the obligatory follow-up colonoscopies. However, the screening study showed that only 0.5% of patients were noncompliant with Epi proColon (compared to 12% for FIT), which would translate into improved overall outcomes.

NuQ has been evaluated in two separate trials for CRC. In a retrospective trial of 4,800 samples from patients presenting with CRC or other bowel diseases, the test showed 81% sensitivity to detecting CRC (at 78% specificity). This trial established the capacity of the test to identify patients with CRC, but had several limitations. Because all the patients included in the screen had a variety of bowel diseases, including polyps and adenomas, one would expect a higher degree of false positives than would be observed in the general population: it is a reasonable assumption that these patients would also have abnormal DNA expression and higher degrees of cell death. However, the test still performed in this background. A limitation is that the retrospective nature of the test limits the capacity to interpret the statistics of the study fairly. To this end, the company performed a prospective trial of 121 patients that were identified in CHU Dinant Godinne – UCL Namur University Hospital in Belgium with symptoms of CRC. In this study a panel of four NuQ assays identified CRC with 91% sensitivity and 90% specificity. These results, if repeatable, would make NuQ the best in class blood-based CRC diagnostic, but additional studies are needed because the number of CRC cases (23) and healthy subjects (20) was low in the sample, due to the large number of patients with other bowel diseases.

One of the distinguishing features of the NuQ CRC test is its ability to detect colorectal adenomas. Adenomas, also referred to as precancerous polyps, are benign growths on the lining of the bowel characterized by a dysregulation of normal cellular function. These growths almost universally precede the development of CRC and are a significant risk factor. A NuQ testing panel was able to identify 75% of adenomas among a population of 430 patients presenting with signs of bowel disease (specificity of 78%). Other blood and fecal-based tests do not detect adenomas with any viable degree of sensitivity (Exhibit 4).

The company announced the strategy for the initial commercialization of NuQ for CRC screening in September 2016. It will be launching a test in Europe based on a single normalized CE-marked NuQ assay designed as a follow-up to a positive FIT. The test is not designed to diagnose cancer in the same way as the NuQ panels that have been previously reported, but instead is designed as a companion diagnostic used to rule out some patients that are not at risk to colon cancer. The name for the new test is the NuQ triage colorectal screening test.

The company developed this commercial plan after speaking with European authorities, who expressed the need for a tool to reduce colonoscopies, which are a significant burden on patients and the healthcare system of these countries. In many European jurisdictions (14 of the 28 EU member states), central health authorities have widespread CRC screening programs, where FIT or FOBT tests are distributed to the screening population on a regular basis. Given the high false positive rate of these tests, a large number of these must be followed up with a colonoscopy. The new triage test is meant as an intermediary step of this process where the patient will instead be sent to the doctor for a blood test following a positive FIT result. The company reported that the NuQ test could rule out up to 25% of patients with a positive FIT result that are not at risk for colon cancer, and therefore do not need a follow-up colonoscopy.

The triage test consist of a pair of assays (a diagnostic and a baseline), which is fewer than the panels of four or five tests being explored for the frontline diagnostic. The lower number of assays may translate into better pricing as well as lower the barriers to entry for the product as it will fit more seamlessly into existing blood testing protocols and require less interpretation.

The company will commercialize the triage test by approaching the central health authorities in countries that have established FIT testing protocols. Near-term targets include Belgium, France, Denmark, Scotland and the Republic of Ireland. England is testing a pilot FIT program and may become available as a market soon. The company will employ a small number representatives to pursue market access in these regions and these relationships will likely be leveraged when the frontline NuQ colorectal screening test enters the market.

The addressable market for the triage test is small compared to the frontline lest. There are approximately 136 million patients in Europe eligible for routine CRC screening. However, many fecal testing programs have historically had low compliance rates. A recent study of fecal testing in France found compliance rates between 47% and 54%2 over four consecutive two-year periods (24-27% tested per year). A study in Spain identified a FIT positivity rate of 7.2%,3 similar to rates observed in the US (7.0%).4 This corresponds to a total market of 2.5 million individuals per year across Europe if all nations adopted FIT screening programs, or a little over 1% of the predicted US and European frontline CRC screening market.

The company will be releasing more-detailed information about the specifics of the test at the ESMO meeting in October 2016.

VolitionRx is also developing a NuQ testing panel to identify patients with lung cancer. Lung cancer is another disease that can benefit from early detection, but unlike CRC, widespread screening efforts are limited by technology. The majority of lung cancers are identified after metathesis (57%), when the five-year survival rate is only 4.2%.1 Survival rates are significantly higher (54.8%) if the cancer is detected when still localized.

Despite the significant need for new lung cancer screening methodologies, the market is much smaller than for CRC. Because of its close association with smoking, the population at risk is much lower. The Centers for Medicare and Medicaid Services (CMS) recommends screening for those aged between 55-74 with ≥30 pack per year smoking history and cessation less than 15 years ago, which results in 8.6 million people in the US (compared to 89 million screening population for CRC).

There are a number of different screening methods in general practice (Exhibit 5), but the current standard advocated by the US Preventative Services Task Force (USPSTF) is a yearly low-dose computed tomography (LDCT) scan. LDCT is one of the most effective methods of identifying lung cancer (89% sensitivity, 93% specificity) but is associated with radiation exposure. The amount of radiation exposures is small on an individual basis (2 millisieverts), but in the scale of the total number of screened patients, represents a very large level of exposure with potential health effects. So there is still a medical need for new screening regimens.

The company released interim results of 73 patients (as part of a larger 600 person prospective study) that presented at Centre Hospitalier Universitaire de Liege in Belgium with symptoms of lung disease. The study correctly identified 93% of patients with cancer and successfully discriminated them from chronic obstructive pulmonary disease (COPD) patients (with 91% specificity). These results are comparable to LDCT, albeit on a small data set. The full data is expected to be released in H117.

Another indication with a desperate need for early screening capabilities is pancreatic cancer. The diagnosis typically is made when symptoms arise as a result of metathesis and a minority of patients (47%) are identified before this point. The five-year survival rate for patients with distant metatheses is also one of the worst in the oncology space at 2.4%, whereas it is 27.1% when localized. Pancreatic cancer survivability could be significantly improved with better diagnostics.

There are substantially fewer established technologies used to test for pancreatic cancer. The primary procedure used to screen patients is endoscopic ultrasound, where an ultrasound device is inserted through the esophagus and a recording is taken through the wall of the stomach. Needless to say, this is a highly invasive procedure that requires anesthesia and carries the risks of complications. The only other screening method in common use is a blood test called CA19-9. Current ASCO guidelines recommend against use of CA19-9 as a screening tool for pancreatic cancer due to its inaccuracy. According to a review of CA19-9 studies, it has 79% sensitivity and 82% specificity.6 Its primary use is to assess the response the therapy for already established pancreatic cancer patients, but is frequently used off label for diagnosis, albeit as part of a larger set of diagnostic procedures.

These limitations in screening technology and the relatively low incidence of the cancer (53,000 new cases per year in the US)1 is likely the reason why the International Cancer of the Pancreas Screening Consortium does not recommend screening for the general population. Currently, only those individuals with multiple first-degree relatives that have had pancreatic cancer are considered of sufficient risk to warrant screening. We believe that these features severely limit the potential pancreatic screening market, even if VolitionRx can develop and accurate test. Even in the event of substantial clinical success, there is are significant uphill hurdles associated with establishing the market.

The NuQ test for pancreatic cancer has been tested in a two retrospective data sets. The first employed 59 samples from Lund University in Sweden, and detected 92% of cancers with 100% specificity with a NuQ panel of four assays combined with the CA19-9 test. In a follow-up study, the company combined a similar NuQ panel with a carcino-embryonic antigen (CEA), and identified 95% of cancers with 84% specificity in the same 4,800 person sample from Hvidovre Hospital in Denmark used in the CRC test development. The company has initiated a 750-person study at the German Cancer Research Center (DKFZ) with results expected in H117.

The company recently released its first results on a NuQ panel for the detection of prostate cancer in April 2016. The test was able to identify 71% of stage-one cancers and 86% of stage-four cancers out of a retrospective sample of 537 men with 93% specificity.

Unlike the other indications that the company is targeting, prostate cancer already has a widely used blood based test: the prostate specific antigen (PSA) test. PSA testing is often combined with digital rectal examination (DRE) to form the standard of detection for the disease. The accuracy of both of these tests varies dramatically in the literature: a meta-analysis in 2003 found sensitivities from 67% to 100% and specificities from 18% to 100% for PSA and from 49% to 69% sensitivity and 18% to 99% specificity for DRE.8

Although the number of men screened each year is relatively large (approximately 20 million per year receive a PSA test),9 the benefits of testing are currently under question. In 2012 the USPSTF recommended against the use of PSA testing for the diagnosis of cancer, not based on the accuracy of the test, but because the benefit to the patient in the event of a diagnosis was small. The number of patients who are impacted by early diagnosis is small because the majority either have prostate cancer advanced enough that detection does not alter the prognosis or are more likely to die from other causes before the benefits of early testing can be realized. Future advances in treatment may affect this assessment, but currently the benefits of testing for prostate cancer are limited.

VolitionRx faces a series of both clinical and commercial hurdles before success that are typical of early stage diagnostics companies. The company is engaged in, and has completed, a large number of clinical trials. However, the majority of these studies have been retrospective in nature, using stored samples correlated with medical records. While important for informing the design of testing panels, these preselected populations cannot replicate the complex patient dynamics present in prospective trials, which is why prospective studies are required for marketing authorization. Although the NuQ technology has provided superior sensitivity to existing testing methods in a number of these studies, specificity has rarely exceeded the low 90% range. Specificity in cancer screening has been cited by the FDA and USPSTF as a very significant factor when evaluating a test, because the low incidence rates of these diseases mean false positives can outnumber true positives by orders of magnitude. That being said, we consider the recent analysis advanced by Epigenomics and accepted by the FDA that Epi proColon increases outcomes from a compliance standpoint as a positive regulatory development that could be utilized by VolitionRx as well.

We believe that the company has correctly identified CRC as the lead indication for the platform, because it has a broad, established testing market supported by medical guidelines. However, the other indications that the company is investigating have a series of structural market deficiencies by comparison: lung cancer testing is limited to a set of smokers, the incidence rate for pancreatic cancer is low and the benefit of testing for prostate cancer at all is questionable.

The company has a multi-tiered commercialization strategy for the CRC test, which we believe is a prudent hedging strategy on regulatory risk. The company’s first commercial enterprise, the recently announced CRC triage test strategy that will be pursued in Europe starting in 2017, will be limited in scope. The market is small as it depends on positive FIT tests, pricing demands will be low and the roll-out will be slow because it depends on negotiations with numerous central regulators. We do not expect significant revenue for the company as a whole until approximately 2020 with PMA approval of the CRC test in the US.

As an early-stage company with significant development costs ahead, VolitionRx also has the associated financing risks. We currently forecast the need to seek approximately $60m in additional financing before the company is cash flow positive in 2021.

We have increased our valuation to $246m or $10.46 per basic share from $231m or $10.00 per basic share. The increase is predominantly due to rolling forward our NPVs to Q316. We have added the triage CRC test to our model, which we value at $12m based on 33% peak market share of the FIT positive tests in Europe, with a peak sales of $30m. We assume an initial price of $20 per test. This addition is largely offset by delays in our expected commercialization timing for the frontline NuQ CRC test to first sales in late 2017, a net effect of negative $11m. We assign a probability of success for the program as a whole of 30% as we expect significant hurdles to widespread acceptance in line with other diagnostics. We model a blood-based testing market expanding from 11-12% of at risk individuals a year to over 20% by 2033 as market matures with more entrants. We expect an initial price for the frontline test of $40 in the US and $20 in Europe. We will not include the prostate test in our models until it can demonstrate significant superiority to the PSA test in a prospective trial given the limitations we see to entering the entrenched PSA market. We may update our valuation following the release of more information on the triage CRC test at ESMO in October 2016 and following the upcoming clinical data releases expected for CRC, lung, prostate, and endometriosis over the next nine months.

VolitionRx reported a net loss of $2.9m for Q216. The majority of these costs ($1.7m) were associated with clinical development. We currently project these costs increasing throughout the year (to $9.1m for 2016) as the company advances the CRC program in preparation for 510(k) submission in 2017 and with the advancement of other programs into broader trials. Similarly, we expect an increase in SG&A spending to $6m for the year to support the commercial roll-out of the triage CRC test in Europe and other preparatory activities for commercialization. This marks an increase in the 2016 loss before taxes ($15.1m vs $13.9m previously) and a decrease in 2017 losses ($16.9m vs $18.1m) to account for the new commercialization strategy and commercialization timeline for the frontline test. The company ended Q216 with $14.5m in cash. We currently project that the company will need $60m in additional financing ($25m in 2017, $25m in 2018, and $10m in 2019) before becoming cash flow positive in 2021. This is an increase compared to our previous report on the basis of increased SG&A costs and working capital associated with the triage CRC test and the delay of the frontline CRC test commercialization in Europe to late 2017. We currently record this financing as illustrative debt, but it may result in significant dilution if the company seeks this financing on the equity markets.