Saturday, 9 February 2013

Oncolytics Biotech Rises on Further Cancer Treatment Data

Feb. 9, 2013 - Oncolytics Biotech Inc. (ONC.TO, ONCY) rose over 20% to the $4.30's on Friday after news of their mid-stage trial of their experimental lung cancer drug showed that 95 percent of the patients experienced a reduction in the size of their tumors. Of the 20 patients, 19 of them experienced shrinkage of their tumors by a third on average. Additional data for the study can be found here.

The positive lung cancer treatment data builds upon the first endpoint Phase III Study data results for REOLYSIN® in the treatment for head and neck cancers announced in December, when we first alerted our readers of ONCY stock in the low $3's. The revenue potential from ONCY's drug is $900M per year and could reach as high as $3 billion if REOLYSIN® achieves success as a multi-purpose cancer drug and the news from the past three months indicates a strong likelihood of that happening, particularly at a time when the FDA has been generous with drug approvals. Byron Capital maintains a $9 target price on ONCY.

From the Reuters article:

"The drug, Reolysin, was used intravenously in combination with chemotherapy drugs carboplatin and paclitaxel. It was tested on patients suffering from metastatic or recurrent squamous cell carcinoma of the lung.

Squamous cell carcinomas account for about a fourth of all lung cancers, the company said in a statement.

"Based on these findings we intend to continue to look at Reolysin as a treatment for cancers of the lung and cancers that metastasize to the lung," Chief Executive Brad Thompson said.

The results further suggest that Reolysin may have potential use in pre-surgical settings, the company said."

In January the company announced Positive REOLSYIN® Clinical Trial Data for metastatic colorectal cancer. Many more clinical trials are ongoing for REOLSYIN across the US, Canada and the UK, allowing for plenty of opportunity for more positive data to be released.

A BioWorld article shows the potential for Oncolytics, as outlined by a quote from Douglas Miehm, an analyst for RBC Dominion Securities in his research report "support(s) a higher probability of success for final primary data points." With a quote such as this on record, expect analyst upgrades to the already very bullish targets for the stock.

Further quotes from the BioWorld article with respect to ONCY's results on the head and neck cancer study:

"The endpoint checked tumor changes between the pre-treatment and first post-treatment scans, typically at six weeks, and stabilization was described – more stringently than in other accepted criteria – as zero percent growth.

"It's not good enough to have some growth," Thompson said. "The surgeons involved want shrinkage, period."

Of the 105 total patients with evaluable metastatic tumors, 86 percent (n = 50) of those in the test arm of the study exhibited tumor stabilization or shrinkage, compared with 67 percent of patients (n = 55) in the control arm.

"To be candid, I think all of us here were modestly surprised that we saw the degree of differentiation, the amount of shrinkage that we did at six weeks," Thompson said. "Reolysin is a pretty gentle agent when it comes to tumor shrinkage."

One must ask upon all the positive data, how is ONCY at a mere $333M market cap? One answer is the foolish act of shorting on ONCY as the short interest has grown from 3M shares last year to 6.9M shares as of January 15th. As those shorts continue to lose on their position as the stock rises, one can only assume the high volume on Friday resulted in even greater shorting as they desperately try to keep the price down. The stock tanked from the $4.60's to the $4.30's on very light volume in the last hour of Friday afternoon trading, a clear sign of manipulation that didn't work very well the last time. On December 13 - the day ONCY released the data on the head and neck cancer trial - ONCY pulled back from a $3.85 high to a $3.03 close in a similar fashion near the end of the day. 11 of the next 12 trading sessions resulted in gains for the stock as it flew over $4. With only 76.7M shares outstanding, shorters of the stock are in great danger of experiencing a short squeeze, particularly after the recent run of positive data.

One driver for such a high short interest on the stock is the presumption that Oncolytics will run out of cash in 2013 and will need to do a dilutive equity financing. This Seeking Alpha article which very aptly describes the science behind ONCY's drug ends with commentary about the company's burn rate. ONCY had $22M in cash net of liabilities as of September 30, 2012. The burn rate for Q3 2012 was $9.3M so on the surface, the idea of the company running out of cash soon would appear correct. But one must dive into the detail of their expenses to understand the burn rate going forward. Of that $9.3M, $8.1M was for research and development activities. Reviewing the company's MD&A for the quarter reveals that $5.6M of that expense was for direct patient costs, an expense that occurs at the enrollment of the clinical trials undertaken for the quarter. As the enrollment period ended, we can reasonably expect for those costs to come down.

While the looming cash crunch appears overstated, at some point in time the company will need more funding. However one must understand the context. 5 million shares financed between $4-$5 brings in another $20-$25M for the company. That amount of dilution is only 6.5% for another year or more worth of cash. That's less than the short interest on the stock. Note that Oncolytics had no problems with financing exactly one year ago on February 8, 2012. That financing was for just over 5M shares for $21M in cash, and it had no negative impact on the stock price when reviewing the stock's price history on the days immediately following its announcement. Given how much ONCY has advanced its drug in the past year, it also has the option to finance by debt, acquire a partner or it could be a target of a hostile takeover.

The idea of shorting or being bearish on Oncolytics purely based on their need for financing is a poor investment decision. Being short or bearish on Oncolytics based on the data coming from the various REOLYSIN® cancer trials is absolutely ludicrous and not being long on ONCY is a clear missed opportunity. The extensive variety of treatments that REOLYSIN® is capable of within the cancer community with no side effects of note after all of these various trials will lead to the drug being approved by the FDA. 

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