|Shares Out. (in M):||22||P/E||0||0|
|Market Cap (in $M):||24||P/FCF||0||0|
|Net Debt (in $M):||-16||EBIT||0||0|
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OncoSec Medical (ONCS) is a tiny cancer immunotherapy company that may have found at least a niche use for its delivery technology platform for a difficult-to-target subset of melanoma patients. At a market cap below $25 million while commencing a Phase II trial alongside Merck’s approved checkpoint inhibitor that could lead to an FDA approval, it is priced for failure. That said, the trial design is not ideal and the way the delivery system works may limit its broader adoption across solid tumor types. The key insight here is that the company is one of the farthest along in combining its very safe program with a therapy that is emerging as the standard of care (checkpoint inhibitors) where other combinations contribute to increased toxicity. This combination is specifically seeking to improve the low response rates of checkpoints which is one of the biggest problems in cancer immunotherapy today. Overall, if its next trial successful, ONCS could be a multi-bagger while if it fails the low market cap and collection of other related programs should prevent a complete wipe-out.
In simple English, OncoSec’s “ImmunoPulse” platform is based on the insight that if one injects a certain cancer fighting drug directly into a tumor while also pulsing it with electricity, the drug seems to work better by stimulating the immune system. This process is called electroporation and the particular compound is a protein called interlukin-2 (IL-2). The company was formed in 2011 with the acquisition of technology from another electroporation company, Inovio Pharma (which licensed the technology back and is targeting different cancers than ONCS (and infectious diseases), is partnered with AstraZeneca, and sports a $460 million market cap). ONCS has completed a number of proof-of-concept studies and is now focused on melanoma. Responding to a shift in the market towards recently approved checkpoint inhibitors (like Merck’s Keytruda and BMS’ Opdivo), ONCS has just begun a combination trial.
Checkpoint inhibitors are immunotherapy’s best success story and are now a key part of the treatment regimens in an ever-growing number of cancer types. The issue with checkpoints is that they only work in a limited subset of patients. The ability to convert low-TIL “cold” non-responsive tumors to high-TIL “hot” tumors is the next challenge of immunotherapy. (TILs are “killer” CD8 positive T cells (tumor infiltrating lymphocytes) and if there are minimal amounts of them in a tumor, it is an indicator that the immune system is not active. Tumors loaded with TILs are associated with clinical response.) Only approximately 30% of all patients are responders to checkpoints. Thus, any compound which when combined with checkpoints increases their response rate will see an immediate commercial opportunity once approved.
Recent Phase II data from earlier this year suggests that in a small 21 patient population, ONCS’s IL-2 based product improved melanoma response rates when used with Keytruda as compared to what would have been expected for Keytruda alone. This data, which I will not detail here, was sufficiently exciting that Merck agreed to supply Keytruda for another 48 patient phase II that will specifically target patients who have failed a checkpoint. The trial is set up so that after 16 patients, it can be flipped into a “registrational” study that could potentially allow for an approval sometime in 2019 (this would be very aggressive but not impossible given the unmet need). The trial is open label which means that it is not the preferred double-blind placebo controlled design and it is also quite small (again n=48).
That response rates will improve when new modalities are combined with checkpoint inhibitors is not a secret. At a recent meeting, a Roche executive said there are now more than 800 clinical trials testing PD-1 (or a variant called PD-L1) inhibitors in combination. There is precedent in cancer treatments for a series of combinations such as the PMitCEBO regime which combines six chemical agents at once. Meanwhile the CHOP regime combines 4 chemical agents at once and has a cure rate of 50% in non-Hodgkin’s lymphoma. Immunotherapy will now likely follow this treatment path.
An important consideration for combinations where OncoSec’s ImmunoPulse may have an edge over other alternatives will be if it can generate improved activity without causing greater toxicity. The largest group of combination trials is still with chemotherapies where cumulative tox will certainly be a concern. But even a recent combination trial of two approved checkpoint inhibitors (BMS’s Optivo and anti-CTLA4 Yervoy), while approved for use together in Melanoma, saw over half the patients experience severe grade 3 or grade 4 toxicities. Fortunately, ImmunoPulse has generated a favorable safety profile with low toxicity thus far in over 100 patients, which suggests it would not be a large contributor to increased toxicity when used in combination.
I would add that my conversations suggest electroporation is perceived as burdensome and painful which may limit market adoption but if there is not an alternative for metastatic melanoma patients, I would think that many of them would try it despite its drawbacks. Melanoma is also a well-suited tumor type for electroporation since it is easy to access. For tumors located deep inside the body, electroporation ultimately may not be practical. Worth noting however is that just this week Merck announced that Keytruda was ineffective on its own in a head and neck cancer trial (barely missing statistical significance which may not discourage physicians from using it) but ONCS has proof-of-concept in this tumor type which is often easily accessible for electroporation much like melanoma. A potential combination in head and neck might make sense.
Finally, some of ONCS’ earliest patents will expire soon but the company believes it is adequately protected by its subsequent portfolio. Some of its patents extend until 2027 though they are method-of-use patents that are generally viewed as weaker competitive barriers. Also on the competitive front, it is possible that a physician may one day use an Inovio IL-2 product off-label if one is ever approved despite contractual field-of-use limitations. Inovio’s Chairman is also Chairman of ONCS.
In trying to understand why the market has not been willing to ascribe greater value to OncoSec’s technology platform (beyond there not being enough data), there are two issues: First, the mechanism of action involves the stimulation of the immune system to produce antigens which technically makes it a “cancer vaccine.” When used as a monotherapy, cancer vaccines have looked exciting early only to flame-out again and again as late as Phase III. Their combination with checkpoints is too new to have any late stage convincing mitigating data. Until there is a breakthrough, the market hates them. Second, the company will need to raise more capital as it only has nine months of cash which will not get it to data from its combination trial.
If ONCS’ registrational trial meets its endpoint then the Company would clearly be worth many multiples of its current $24 million market cap. In a conservative scenario, it could be worth approximately 5x more. Using the company’s estimate of 10,200 non-responders to PD-1 (unfortunately an ever growing population as more patients receive the relatively new drug and a small fraction of the 240,000 melanoma cases in the US only) and a price of $25,000 (conservative compared to many therapies that cost in excess of $100,000) that would yield a market opportunity of approximately $250 million. For a population with no other alternative, let’s assume that ONCS only treats 50% of those patients which would be $125 million of revenues. Since there is a device component to this and presumably some sales infrastructure required, let’s assume that the company would generate 40% EBITDA margins which would be $63.8 million. Applying a VIC-friendly EBITDA multiple of 6x would suggest an enterprise value of $382.5 million. Assuming no net debt and doubling the shares outstanding (inclusive of warrants would be 60 million shares) to account for additional capital raises to complete the registrational trial by 2019 would equate to a $6.38 share price. (Note that there are 1.35m penny warrants and 5.5m $1.69 strike warrants outstanding as well as approx. 2.6m at higher strike prices. There are also out-of-the money options with an average strike price of $5.88)
If the trial fails, there are other indications such as triple negative breast cancer but also several pre-clinical collaborations including with co-stimulator company Jounce Therapeutics. These programs would suggest that the company would not go to zero although it could always go lower from its already low $25 million market cap. If a portion of any cash could be redirected towards taxable income without trigger a change of control, the presence of a $23.5m after-tax NOL could also have value.
We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document. We have no obligation to update this document. We may change our position at any time without posting an update. The views expressed here are merely the opinion of the author. Readers should do their own research.
Decision to make current phase II combination trial registrational, positive melanoma data, advancement of other programs
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