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Avoid This Biotech Stock

Editor's note: This article is a stock pitch made by a member on CAPS, The Motley Fool's free investing community. The pitch is published UNEDITED and is the opinion of the CAPS member whose pitch it is, in this case: zzlangerhans.

Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, the Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

Company Oncolytics Biotech (Nasdaq: ONCY  )
Submitted By: zzlangerhans
Member Rating: 99.56
Submitted On: Aug. 20, 2012
Stock Price at Underperform Recommendation: $3.23

Oncolytics Biotech Profile

Star Rating *
Headquarters Calgary, Canada
Market Cap $234.4 million

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
If you check out the news feed for Oncolytics you'll see stories related to Reolysin, Reolysin, and Reolysin. Reolysin is an activated formulation of reovirus, a family of RNA viruses known best for including the infant diarrhea agent rotavirus. Reolysin is intended to selectively kill tumor cells with an activated Ras pathway. Reovirus has been in clinical development at Oncolytics for substantially longer than the 6 years I've been following biotech, and progress has been slow.

The central story for Reolysin now is the REO 018 phase III trial of Reolysin with paclitaxel and carboplatin in platinum-refractory head and neck cancer. This trial completed enrollment in the 80 patient initial stage of the trial in April and the company is awaiting the results of an ongoing data review to determine if they will continue the trial and enroll another 200 patients.

I believe REO 018 will fail, very likely in the near future with a report of futility in the interim analysis. If not, the trial will almost certainly fail in a couple more years after substantial dilution and additional expenditure. The main reason I expect failure is the steady downward trend in share price since the stock spiked to 5.5 in February. I do believe that insider trading is significant in small cap biopharmas, and I think it's very likely that the current trend represents insiders and institutions selling their shares at a profit ahead of disastrous news. Reolysin represents a substantial departure from previous anti-neoplastic therapies which is a great news if it turns out to be successful, but also increases the empiric likelihood of it being unsuccessful. The final nail in Reolysin's coffin is the Feuerstein-Ratain rule, which states that no company with a market cap less than 300M has had a positive phase III trial for a cancer drug in the last ten years.

As of today, Oncolytics' market cap was about 250M. Speaking of market cap, failure of Reolysin in this phase III trial will raise the spectre of total platform destruction, which would raze the market cap close to the cash position of 36M. That corresponds to a share price around 45 cents. Unfortunately, only management knows when they will release the results of the interim efficacy analysis of REO 018, although it seems certain that it will be before the end of 2012. The ask on December 2.50 puts is 70 cents, which is a little too much implied volatility for my taste. Nevertheless, it should be an interesting situation to follow as the year goes on.

Foolish bottom line
While this CAPS All-Star thinks you should avoid Oncolytics Biotech, for a stock you don't have to avoid, check out our brand new free report: "The Only Stock You Need to Profit From the NEW Technology Revolution."

The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2012, at 6:51 PM, prginww wrote:

    Zzlagerhand's analysis of Oncolytics Biotech is based largely on inferring the near-future outcome of a phase-3 double-blinded clinical trial by observing a stock chart. This flies in the face of Warren Buffett's mantra "The market is there to serve you, not to inform you".

    In order to assess Oncolytics's prospects more fully, it is necessary to look at the existing preliminary evidence for efficacy of Reolysin and also to estimate the profits if the drug is successful.

  • Report this Comment On August 26, 2012, at 10:19 PM, prginww wrote:

    Here is the counter argument to the niave "efficient market" logic in this article. DNDN declined from from a $5 trading range to sub-$3 in the nine months before it succeeded with its pivotal phase III clinical trial, rocketing the stock price to the $30 to $40 range. I challenge you to check the chart. You can't use market behavior to predict scientific results.

  • Report this Comment On August 26, 2012, at 10:37 PM, prginww wrote:

    Btw, why has MF featured this same article multiple times, but each time with the previous rebuttals deleted? That behavior makes me suspicious about MF's motivation.

  • Report this Comment On August 26, 2012, at 10:47 PM, prginww wrote:

    How ironic that you cite DNDN as an example. The stock is back to trading in the $5 range. Go ahead and speculate on ONCY if you think its a good idea. I plan to avoid it.

  • Report this Comment On August 26, 2012, at 10:56 PM, prginww wrote:

    I made hundreds of thousands of dollars being long DNDN. No lie. I got out fast because I knew the problems that were ahead for DNDN.

    I am invested in ONCY, because I have evaluated the scientific evidence and I have a good estimate of the chances that the current head & neck cancer phase III trial will succeed. If you are not equipped to do the same, I agree that it is best to avoid ONCY. But I warn you, don't go short.

  • Report this Comment On August 27, 2012, at 12:31 PM, prginww wrote:

    The final nail in Reolysin's coffin is the Feuerstein-Ratain rule, which states that no company with a market cap less than 300M has had a positive phase III trial for a cancer drug in the last ten years.

    Well this is a stupid incorrect rule, Delcath had a positive phase 3 cancer trail this year with a mkt cap below $300M

  • Report this Comment On August 27, 2012, at 7:40 PM, prginww wrote:

    There will ultimately only be one cure for cancer. A 3 month or 4 month survival is NOT a cure. Reolysin looks like the real deal. I'm a little suspicious of anyone putting out so much bad news just before the results that could make or break this company. I noticed that MF has posted a CAPS member opinion so they have plausible deniability when things go the other way.

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Oncolytics Biotech… CAPS Rating: **