Let me preface this by saying that investing in the biotech sector can sometimes be nothing more than speculating. The fortunes of a biotechnology can turn on a dime based on numerous factors that can include how many clinical trials it's currently running, how many diverse drugs account for those trials, whether or not any partnerships exists, and how much available cash a company has on hand.
We've witnessed first-hand what a crapshoot the space can be. Four years ago, Pharmacyclics (UNKNOWN:PCYC.DL) looked like just another biotechnology company that was going to waste away into nothing with its share price trading for less than $1. In the years since, it's forged nearly a $1 billion licensing partnership with Johnson & Johnson (NYSE:JNJ) for its relapsed/refractory mantle cell lymphoma and chronic lymphocytic leukemia drug hopeful, Ibrutinib, and delivered some of the strongest overall response rates ever witnessed in trials for these two diseases. Shares of Pharmacyclics closed yesterday above $80 per share.
On the other hand, Affymax went from hero to nearly zero when its anemia drug Omontys was voluntarily pulled from market following the death of three patients. Because Omontys is Affymax's only drug approved by the Food and Drug Administration, and its only two ongoing clinical trials also included Omontys, the company is literally a shell of its former self.
With this in mind, I feel it'd be prudent of biotech-savvy investors to give Oncolytics Biotech (NASDAQ:ONCY) a closer look.
The big risks
I'm quite aware that there are a lot factors that'd raise a red flag with Oncolytics. Similar to Affymax, you could say that Oncolytics has put all of its eggs in one basket with its lead experimental drug, reolysin. According to Oncolytics' website, including its U.K., Canadian, and U.S. studies, reolysin as either a monotherapy or combination therapy is the basis for all 31 clinical trials! Obviously, if reolysin proves ineffective or unsafe, Oncolytics is going to be a world of hurt.
Another factor worth considering here is that history isn't on Oncolytics' side. Developed by TheStreet.com's senior columnist Adam Feuerstein and University of Chicago oncologist, Dr. Mark Ratain, the Feuerstein-Ratain Rule noted that of numerous late-stage cancer compounds over the past decade, no company with a market cap of less than $300 million had successfully had a drug approved by the FDA. In fact, the Feuerstein-Ratain Rule is now a perfect 23 for 23 in predicted the failure of late-stage cancer drugs. With Oncolytics below that $300 million threshold, history is certainly against it.
... and the potentially huge reward
However, there exists plenty of promise as well, if you can get over these concerns. Possibly the most unique and differentiable factor for Oncolytics Biotech is the pathway by which its drug works. Unlike normal cancer-fighting agents, reolysin is actually made from a naturally occurring virus, making its treatment a cancer vaccine. The reovirus is often non-pathogenic in humans, meaning it may cause an infection, but rarely with any symptoms. In normal cells, detection of the reovirus triggers an immune response that disallows the virus from replicating. In cancer cells, however, no immune response is triggered and eventually the reovirus replicates until it kills the cell. Better yet, the resulting symptoms often resemble nothing worse than flu-like symptoms.
Initial results from a couple of mid-stage trials have shown incredible promise for Oncolytics despite its small subset of patients. In February, reolysin delivered perhaps its best results to date in a mid-stage squamous cell carcinoma lung cancer trial. Of the 20 patients receiving reolysin, 19 exhibited some level of tumor shrinkage. More recently, in May, Oncolytics reported positive results from the first stage of phase 2 trial in treating metastatic melanoma. The primary endpoint of the trial was achieving three partial responses within 18 patients; but it reached its endpoint after the 14th patient. Furthermore, the combination of reolysin, paclitaxel, and carboplatin helped seven of those patients maintain steady disease, for a disease control rate of 71.5%.
This is just half the battle
As we've seen in recent years, getting a drug approved by the FDA can be just half the battle. Even if Oncolytics successfully gains approval for reolysin in one of the many types of cancer it's targeting, it's going to face a sea of competition.
Take lung cancer, for instance, which currently has 29 compounds approved by the FDA -- including Celgene's (NASDAQ:CELG) Abraxane, which was approved as a first-line treatment for non-small-cell lung cancer in October. Abraxane was able to boost the overall response rate by 8% relative to placebo and, along with a handful of other NSCLC treatments, will be tough to unseat even if reolysin works effectively in treating NSCLC.
Even in metastatic melanoma, where Oncolytics' early phase 2 trial showed signs of success, the company will face plenty of competition. GlaxoSmithKline (NYSE:GSK), for instance, had two metastatic melanoma drugs approved last month, Tafinlar and Mekinist. Both are approved as single-agent treatments and work by targeting various forms of the BRAF mutation. Unseating a juggernaut like Glaxo for a small-cap biotech will not be easy.
Do this one thing
If you take anything away from this discussion of Oncolytics Biotech, it's that it deserves to be on your watchlist. While the cards are certainly stacked against the company, its approach to cancer treatment via a naturally occurring virus is incredibly unique and has proven successful in a few mid-stage trials. It still remains to be seen if these response rates and tumor shrinkages will actually translate into an overall survival benefit, but I'd certainly suggest adding it to your watchlist and keeping a close eye on any developments with the company.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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