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|Company||Oncolytics Biotech (Nasdaq: ONCY )|
|Submitted On:||Aug. 20, 2012|
|Stock Price at Underperform Recommendation:||$3.23|
Oncolytics Biotech Profile
|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
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