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Viralytics
Outlook for 2015
Building the clinical data package
Pharma & biotech
8 January 2015
The potential combination of Cavatak (oncolytic virus) with checkpoint
inhibitors represents a substantial commercial and partnering opportunity
for Viralytics. The company is currently focused on building the clinical
data package on Cavatak, which could prove attractive to big pharma
Price
A$0.31
Market cap
A$57m
companies seeking complementary therapies to boost immune responses
to their checkpoint inhibitors. We see a potential deal for Cavatak in 2016
and value Viralytics at A$141m, or A$0.76 per share.
Net cash (A$m) at 30 September 2014
Year end
06/13
06/14
06/15e
06/16e
Revenue
(A$m)
2.5
2.5
2.0
3.8
PBT*
(A$m)
(3.7)
(4.7)
(8.2)
(3.2)
EPS*
(c)
(4.5)
(3.9)
(4.4)
(1.7)
DPS
(c)
0.0
0.0
0.0
0.0
P/E
(x)
N/A
N/A
N/A
N/A
Yield
(%)
N/A
N/A
N/A
N/A
A$1.23/US$
Shares in issue
23.8
184.0m
Free float
86%
Code
VLA
Primary exchange
ASX
Secondary exchange
OTCQX
Share price performance
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items
and share-based payments.
Cavatak therapy shrinks untreated tumours…
Injection of Cavatak into melanoma tumours in the skin or superficial lymph nodes
led to an impressive overall response rate of 28% in injected and un-injected
lesions in the CALM Phase II study. A key goal in melanoma treatment is to control
disease that has spread to the lung, brain or other organs. The results of the CALM
trial are also encouraging in this regard: we estimate that the response rate in
un-injected metastatic tumours in Stage 4 melanoma patients was at least 11%.
%
1m
3m
12m
Abs
3.3
1.6
3.9
…with potential checkpoint inhibitor combinations…
Rel (local)
2.9
0.7
3.6
Checkpoint inhibitors seem set to dramatically change the therapeutic landscape
for melanoma and many other cancers by releasing the handbrake on the body’s
natural immune response to tumours. Yet efficacy, and a broader patient response,
could be boosted by the addition of other agents such as oncolytic viruses.
52-week high/low
…that may boost partnering prospects
Amgen acquired Biovex and its T-Vec oncolytic virus in 2011 for US$425m upfront
(+US$575m potential milestones) on the basis of Phase II data similar to Cavatak.
We expect the leading checkpoint inhibitor developers – Merck & Co, Bristol-Myers
Squibb, Roche and AstraZeneca – to be seeking products that would enhance
immune responses. Viralytics is therefore building a data package that addresses
the key questions of interest to potential partners, with further data from CALM,
STORM trial results (IV Cavatak) in solid tumours, and a Phase Ib study of Cavatak
in combination with a checkpoint inhibitor (Yervoy), expected in 2015.
Valuation: rNPV of A$141m (A$0.76 per share)
Our risk-adjusted NPV is largely unchanged at A$141m or A$0.76 per share
(previously A$0.77/share). We have delayed our forecast launch of Cavatak for
melanoma by a year to 2021 to allow for Phase Ib check point inhibitor combination
trials, although the weaker Australian dollar has largely offset the negative impact
on valuation. We assume a 35% success probability in melanoma.
A$0.36
A$0.27
Business description
Viralytics is an ASX-listed biopharmaceutical
developing virus applications using a common cold
producing virus to target late-stage melanoma and
other solid tumour types. The Phase II CALM trial is
evaluating intratumoural administration of lead
candidate Cavatak in patients with metastatic
melanoma.
Next events
Initiate Yervoy combination study
Q115
Initial results STORM Phase I/II
Q115
Final results CALM Phase II
Q115
Initiate CANON bladder cancer
Q115
Analysts
Dr Dennis Hulme
+61 (0)2 9258 1161
Christian Glennie
+44 (0)20 3077 5727
Dr Mick Cooper
+44 (0)20 3077 5734
healthcare@edisongroup.com
Edison profile page
Viralytics is a research client of Edison Investment Research Limited
Investment summary: Targeting metastatic melanoma
Company description: Oncolytic virotherapy developer
Viralytics is focused on developing oncolytic virotherapy to treat a range of cancers. Lead candidate
Cavatak is a proprietary formulation of a common cold virus, Coxsackievirus A21 (CVA21), which is
in clinical development for late-stage melanoma and a range of other solid tumours. A US Phase II
study of Cavatak (CALM) achieved a 28% objective response rate, including an estimated response
rate of at least 11% in non-injected tumours in the lung and other organs. A UK Phase I/II study
(STORM) of intravenous Cavatak in advanced solid tumours (melanoma, prostate, lung, bladder) is
expected to report preliminary results in H115. Viralytics will begin a Phase Ib study of Cavatak in
combination with the checkpoint inhibitor Yervoy in early Q115, and we expect additional
combination studies with other checkpoint inhibitors to follow. Viralytics raised A$27m in March
2014 including investments from 12 specialist healthcare institutional investors, and had A$24m
cash at 30 September 2014.
Valuation: rNPV of A$141m, or A$0.76 per share (undiluted)
We value Viralytics at A$141m, or A$0.76 per share (undiluted), using a risk-adjusted net present
value method to discount future cash flows through to 2033 in metastatic melanoma, bladder
cancer, non-small cell lung cancer and prostate cancer. A 35% probability of success has been
applied to reflect Cavatak’s phase of clinical development with projected cash flows discounted at
12.5%. Our approach assumes a partnering deal or out-licensing of Cavatak post-release of the
checkpoint inhibitor combo trial data in 2016, with all costs of subsequent clinical development
borne by the partner/licensee. Of note, while our model does include upfront payments and
clinical/regulatory milestones (but not sales milestones) from a potential licensing deal, these have
been risk-adjusted.
Sensitivities: STORM and combo trial outcomes the key
Viralytics is subject to typical biotech company development risks, including the unpredictable
outcome of trials, regulatory decisions, success of competitors, financing and commercial risks. In
particular, it has a very high single-product risk, with the entirety of its value residing in Cavatak.
The investment case hinges on the outcome of clinical trials and, assuming data are positive, the
company’s ability to secure a partnership (or further capital) to advance Cavatak into late-stage
trials. Ideally, a partner would have an established oncology franchise with the resources and
experience to evaluate Cavatak in multiple cancer indications. The rapidly evolving treatment
landscape for melanoma means that the greatest commercial opportunity for Cavatak is likely to be
in combination with checkpoint inhibitors or other targeted agents – selection of the appropriate
therapy to combine with Cavatak could be critical to future clinical and commercial success.
Financials: Sufficient cash for a Phase IIb trial
Viralytics reported cash of A$24m at the end of September 2014. The company has the resources
to complete the ongoing CALM and STORM trials, and the planned CANON and Phase Ib Cavatak
combination trials, as well as a randomised Phase IIb study in advanced melanoma. Viralytics
received a rebate of A$2.5m under the Australian R&D tax incentive scheme in December 2014. If a
partner or licensee is not secured for Cavatak, Viralytics has sufficient resources to conduct the
Phase IIb trial (we expect it to be in combination with a checkpoint inhibitor). Given the positive
signs of efficacy to date, the prospects for attracting a big pharma partner appear promising.
Viralytics | 8 January 2015
2
Outlook: Answering key questions of potential partners
Viralytics’ investment case centres on the successful development and commercialisation of its lead
product Cavatak to treat advanced melanoma and potentially other solid cancers. Interim results
from the CALM Phase II melanoma trial show that Cavatak has encouraging anti-cancer efficacy as
a single agent. However, the main commercial opportunity is for its use in combination with
checkpoint inhibitors such as Yervoy, Opdivo or Keytruda, or other targeted agents such as the
BRAF inhibitor Zelboraf. Viralytics is attempting to build a solid data package that answers the key
questions that would be of interest to potential partners such as Merck & Co, Bristol-Myers Squibb,
Roche and AstraZeneca. As that data set matures, and if the trials continue to deliver positive
results, we see a high likelihood of a licensing deal or M&A transaction. We see the immuneprofiling extension of the CALM Phase II trial, the STORM trial of intravenous Cavatak (initial results
due in Q115), and the upcoming combination trial with the checkpoint inhibitor Yervoy as potential
triggers for a partnering deal or M&A transaction.
Oncolytic virus – kills cancer cells, triggers immune response
Dual mechanism of anti-cancer activity
Oncolytic virotherapy is an emerging class of anti-cancer therapy that harnesses viruses to
eradicate tumour cells while sparing their normal counterparts. Oncolytic viruses exert anti-cancer
effects against both local (primary) and distant (metastatic) tumour cells, by preferentially infecting
and destroying cancer cells while simultaneously activating a tumour-specific immune response.
Presentations at the recent Society for Melanoma Research Conference highlighted the potential
for the release of tumour antigens following the lysis of cancer cells by oncolytic viruses to act as a
multivalent vaccine, releasing antigens potentially specific to the tumour. The presentations
highlighted that these therapies have a potential use as immune priming agents prior to the use of
checkpoint inhibitors, and recommended that they should be evaluated in combination with those
drugs.
Amgen recently applied for FDA and EU marketing approval for its oncolytic virus T-Vec
(talimogene laherparepvec) in metastatic melanoma, so oncolytic virotherapy may soon become a
commercial reality. Amgen acquired Biovex, T-Vec’s developer, in 2011, in a deal valued at up to
US$1bn (US$425m upfront, US$575m potential milestones).
Oncolytic viruses could offer a broad and targeted anti-cancer activity that address the limitations of
current treatment or, more likely, provide additive efficacy when combined with existing agents.
Cavatak – new role for a common cold virus
Cavatak is a proprietary formulation of the Coxsackievirus A21, a wild-type (genetically unaltered)
common cold-producing enterovirus, of the family Picornaviridae. Immunohistochemical tissue
studies suggest CVA21 preferentially infects cells with high surface levels of the receptor
intercellular adhesion molecule-1 (ICAM-1). CVA21 was one of several viruses identified by
Professor Darren Shafren, Viralytics’ chief scientific officer, as having oncolytic activity against in
vitro cultures of cancer cells and in vivo xenografts of human cancers in mouse models of
melanoma, multiple myeloma,prostate and breast cancer, all of which exhibit high surface
expression of ICAM-1.
CALM Phase II trial shows Cavatak shrinks melanomas
The US-based, single-arm, open-label Phase II CALM study is evaluating intratumoural (IT)
injections of Cavatak administered as a monotherapy over 18 weeks, in patients with advanced
Viralytics | 8 January 2015
3
melanoma. The initial CALM study enrolled 57 subjects with Stage IIIc (42%) or IV (58%) disease
that have failed previous therapy (average of three treatments).
The primary endpoint of CALM is stable disease (or better) at six months after the first dose of
Cavatak, as measured by irPFS; this includes patients with a complete response (CR), partial
response (PR) or stable disease. To meet its primary endpoint the study had to achieve an irPFS at
six months in at least 18.5% of patients; this benchmark was based on a meta-analysis of 42 Phase
II trials in metastatic melanoma.
Exhibit 1 shows that Cavatak easily met the primary endpoint of the CALM trial, with 39% (22/57) of
patients achieving the six-month irPFS endpoint. Importantly, no Grade 3 or 4 drug-related adverse
events were seen.
Exhibit 1 also shows that the efficacy for CAVATAK is similar to that for T-Vec where comparable
data are available. In particular, the overall response rate of 28% for CAVATAK (both injected and
non-injected lesions) is very similar to the 26% overall response rate reported to T-Vec in its Phase
II and Phase III trials.
Exhibit 1: Cavatak efficacy matches or exceeds Amgen’s T-Vec
Number of patients
Stage of disease
ir Progression-Free Survival – six months
ir Progression-Free Survival – three months
One-year survival rate
Overall response rate
Durable (six months) response rate
Complete response rate (all tumours)
Complete response rate (target lesions)
Response rate un-injected distant metastases (Stage IV)
Response rate visceral metastases (Stage IV m1b, m1c)
Viralytics CAVATAK
Phase II CALM
Melanoma interim
data
57
IIIC-IV
39% (22/57)
50%#
73% (33/45)
28% (16/57)
Amgen/Biovex TVec Phase II
Melanoma final
data^
50
IIIC-IV
Not reported
50%^^
58%
26% (13/50)
T-VEC Phase III
OPTiM results
439
26%
16%
11%
14%
≥12% (≥4/33)*
≥11% (≥2/19)*
Source: Viralytics investor presentation October 2014, Viralytics ESMO poster September 2014, Amgen
announcement, Edison Investment research. Note: ^Data from Senzer et al, 2009. J. Clin.Oncol., (34):5763-7;
^^Referred to as Disease control rate in Senzer et al, 2009. J. Clin.Oncol., (34):5763-7; #50% irPFS when
assessed in 38 patients in November 2013; *estimated by Edison Investment Research from conference
poster presentation.
Cavatak shrinks un-injected melanoma tumours in major organs
Importantly, in addition to its effect on injected lesions, Cavatak treatment shrank un-injected
metastatic melanoma tumours in major organs such as the lungs.
Viralytics has not yet released a detailed breakdown of the response rates in Stage 3 and Stage 4
melanoma. However, based on case reports included in conference poster presentations, we
estimate that in patients with Stage 4 metastatic melanoma, where the disease has spread beyond
the skin and nearby lymph nodes we estimate that the response rate in un-injected distant
metastases is at least 12% (Exhibits 1, 2 and 3). Furthermore, with patients with the most serious
disease where the melanoma has spread to the lungs or other visceral organs, the response rate
was at least 11%.This is a meaningful response rate for an immune therapy – Yervoy improved
overall survival in a Phase III trial following an 11% overall response rate.
Viralytics has shown that the responses in un-injected distant tumours occurred when there were
already high levels of neutralising antibodies against the CVA21 virus; this suggests that the tumour
shrinkage was caused by an immune response and was not due to subsequent viral infection.
Viralytics is currently enrolling a further 12 participants in an extension to the CALM study that will
study the immune profile of treated patients and seek to confirm that Cavatak therapy triggers an
immune response against melanoma cells.
Viralytics | 8 January 2015
4
Exhibit 2: Non-injected chest wall distant lesion surgical complete response
Source: Viralytics investor presentation October 2014
Exhibit 3: Non-injected lung lesion partial response
Source: Viralytics investor presentation October 2014
Cavatak can activate the cancer immunity cycle
The immune system incorporates a number of inhibitory factors that act as ‘checkpoints’ to guard
against autoimmunity and to protect tissues from damage by an over-exuberant immune response
to an infection. Tumours can take advantage of these natural inhibitory protective mechanisms to
evade an immune response.
The generation of an immune response to cancer cells has been described as a cyclic process that
can be divided into seven major steps (Exhibit 4). In step one, cancer-specific antigens are
released following cancer cell death and captured by antigen-presenting dendritic cells for
processing. Next, dendritic cells present the captured antigens to T cells (step two) resulting in the
priming and activation of effector T cell responses against the cancer-specific antigens in the lymph
node (step three). Finally, the activated T cells migrate to the tumour, where the cytotoxic T cells kill
cancer cells in step seven.
Exhibit 4 shows that each step in the cancer immunity cycle is influenced by a number of
stimulatory or inhibitory factors. Stimulatory factors, shown in green, promote immunity, whereas
inhibitors, shown in red, reduce immune activity and/or prevent immunity.
In addition to directly killing cancer cells by cell lysis, we expect Cavatak to stimulate the cancer
immunity cycle in a number of ways. Firstly, the lysis of infected tumour cells increases the release
of tumour antigens. Secondly, the immune response directed against viral antigens expressed on
Viralytics | 8 January 2015
5
infected tumour cells would stimulate the release of signals that would also stimulate an immune
response rather than tolerance of cancer-specific antigens and thereby increase the production of T
effector cells in step 3 of the cycle. The immune profiling extension to the CALM trial is gathering
additional information about the way that Cavatak stimulates the immune system.
Exhibit 4: Stimulatory and inhibitory factors in the cancer immunity cycle
Source: Chen and Mellman, 2013. Immunity 39, 25 July 2013. http://dx.doi.org/10.1016/j.immuni.2013.07.012.
Note: Each step of the Cancer-Immunity Cycle requires the coordination of numerous factors, both stimulatory
and inhibitory in nature. Stimulatory factors shown in green promote immunity, whereas inhibitors shown in red
help keep the process in check and reduce immune activity and/or prevent autoimmunity.
Checkpoint inhibitors take the brakes off the cancer immunity cycle
Two classes of immune-checkpoint inhibitors have been developed that activate an immune
response by blocking inhibitory factors. The first, the anti-CTLA-4 antibody ipilimumab (Yervoy),
predominantly upregulates T-cell activation in the priming phase at step three of the cancerimmunity cycle by blocking the action of the major negative regulator of T cells (CTLA-4). Yervoy
treatment as a single agent has a modest 11% response rate in melanoma patients and has a
number of toxic side effects because it upregulates the overall immune system.
The newer PD-1 and PD-L1 checkpoint inhibitors, block the ‘programmed death’ (PD-1) signalling
protein or the factor (ligand) that binds to it, PD-L1. Blocking the PD-1/PD-L1 complex
predominantly upregulates effector T-cell activity within the tumour tissue at step seven of the
cancer-immunity cycle. PD-L1 is expressed on 20-50% of human cancers and is an important
pathway by which cancers evade the immune system. PD(L)-1 checkpoint inhibitors have achieved
response rates of 13-40% across a range of cancers, including melanoma, when used as a single
agent, and the responses are often long-lasting. Because they disable immune inhibition in the
tumour microenvironment they cause fewer toxic side effects than the CTLA-4 inhibitor Yervoy.
Viralytics | 8 January 2015
6
Cavatak poised to join the checkpoint inhibitor revolution
PD(L)-1 checkpoint inhibitors work well in patients who have an active immune response that is
being suppressed by PD(L)-1; however, the biggest survival benefits are typically observed in just a
subset of patients. Evidence is building that the efficacy of checkpoint inhibitors can be increased
by combining them with therapies that stimulate the earlier steps in the cancer immunity cycle. For
example, the combination of Yervoy and the PD-1 inhibitor Opdivo (nivolumab) reported a 43%
response rate in a Phase Ib trial. However, the combination therapy also amplified the toxic side
effects already seen with Yervoy as a single agent.
The potential benefits of combining oncolytic virotherapy with a checkpoint inhibitor was highlighted
by a recent Phase Ib trial where the combination of Amgen’s T-Vec with Yervoy shrank tumours in
56% of the 19 participating melanoma patients, compared to the 26% response rate seen in trials of
T-Vec as a single agent.
Cavatak is an ideal candidate for combining with checkpoint inhibitors because it has few toxic side
effects and it has already shown that it can shrink or eliminate distant un-injected tumours, including
those in major organs such as the lungs. Viralytics has shown that CAVATAK given in combination
with mouse versions of PD-1 and CTLA-4 produced superior efficacy in a mouse melanoma model,
compared to the efficacy of either agent alone. We expect Viralytics to initiate a series of Phase 1b
trials of Cavatak in combination with a range of different checkpoint inhibitors.
Active clinical trial programme enhancing the data package
Viralytics is actively pursuing a clinical trial programme to confirm the potential of Cavatak as an
anticancer therapy. Exhibit 5 summarises the ongoing and planned Cavatak clinical trials:
CALM trial – immune-profiling extension
Biopsies will be taken from both injected and non-injected melanoma tumours in an additional 12
patients recruited in this extension of the CALM Phase II trial. This trial will provide crucial
information about the extent to which Cavatak treatment stimulates an immune response against
distant melanoma tumours. The results will have important implications for the combination of
Cavatak with checkpoint inhibitors.
STORM – intravenous Cavatak Phase I/II trial
The STORM (Systemic Treatment Of Resistant Malignancies) began recruiting patients with latestage melanoma, non-small cell lung cancer, bladder and prostate cancer in March 2014. The first
stage of the trial will seek to identify the most responsive cancer type for Stage 2. Stage 2 of the
trial will focus on one selected cancer type and patients will receive repeated IV doses of Cavatak
in conjunction with chemotherapy. Preliminary results of Stage 1 are expected in Q115.
Phase I bladder cancer trial in 2015
Viralytics has received regulatory approval to initiate a Phase I trial of the administration of Cavatak
directly into the bladder in patients with non-muscle invasive bladder cancer. Preclinical studies
showed that adding Cavatak to either radiation or chemotherapy increased the anticancer activity in
bladder cancer cell lines compared to either radiation or chemotherapy alone.
Viralytics | 8 January 2015
7
Exhibit 5: Cavatak clinical trial programme
Route of
admin
Intratumoural
Indication
Intratumoural
Melanoma
Intratumoural
Melanoma
Intravenous
Intratumoural
Intratumoural
Intravesicular
Intratumoural
Melanoma
Melanoma, breast,
lung, prostate
Melanoma
Melanoma
Non muscleinvasive bladder
cancer
Head and neck
Stage Development notes
Phase IIb Randomised Phase IIb study in malignant melanoma in final planning. May be monotherapy, but more likely to
be in combination with checkpoint inhibitor.
Phase IIa Phase II CALM study in malignant melanoma (n=57, interim results: six-month irPFS 39%; ORR 28%).
Monotherapy. Final results due in Q115 [Phase II CALM extension study with dosing up to 48 weeks in total].
Phase IIa Phase II CALM immune-profiling extension study in malignant melanoma (n=12). Collect tumour biopsies and
other immune response measures
Phase IIa Phase I/II STORM trial (two stages, initial results of first stage due in Q115). Test indication: Chemo-combo.
Phase Ib Phase Ib study in combination with Yervoy to begin recruitment in Q115.
Phase Ib Additional Phase Ib studies in combination PD(L)-1 checkpoint inhibitors likely in 2015
Phase I Phase I CANON study to initiate Q115 (n=28-50). Single agent and with mitomycin C, in two stages.
Preclinical studies showed signs of synergy of CVA21 and radio/chemotherapy in bladder cell lines.
Phase I On hold Phase I head and neck cancer complete.
Source: Edison Investment Research
Combination trials with checkpoint inhibitors are a critical recent addition
The Phase Ib trials of Cavatak in combination with checkpoint inhibitors are a crucial component of
Viralytics’ clinical trial programme. On 4 December 2014 Viralytics announced that it had received
ethics approval for a Phase Ib trial of Cavatak in combination with the CTLA-4 checkpoint inhibitor
Yervoy (ipilimumab). The trial will begin recruiting patients early in Q115, and will treat 26 patients
with late-stage melanoma for whom Yervoy would be considered the standard of care.
We expect Viralytics to initiate a series of trials of Cavatak in combination with other checkpoint
inhibitors, with the likely contenders including the recently approved PD-1 inhibitors Opdivo and
Keytruda. BRAF/MEK inhibitors may also be tested.
Randomised Phase IIb trial may be deferred while best combo is sought
Viralytics is planning a randomised Phase IIb trial of Cavatak in melanoma patients. Given the
promising preclinical data for Cavatak in combination with CTLA-4 and PD-1 checkpoint inhibitors in
mouse models of melanoma, our view is that this trial is likely to combine Cavatak with a checkpoint
inhibitor. One potential strategy would be to defer the trial until the best combination is identified in
the Phase Ib trials. Alternatively, several Phase IIb trials testing combinations with different
checkpoint inhibitors could be conducted, but this would probably require additional funding.
On the other hand, the Phase Ib combination trials are likely to be of intense interest to potential
partners, so there could potentially be a transaction prior to the initiation of a Phase IIb trial.
Metastatic melanoma –a rapidly evolving treatment landscape
Malignant melanoma has an incidence of around 0.02% and c 77,000 Americans are diagnosed
each year with an estimated 9,500 deaths. Until recently, the standard agents for metastatic
melanoma were limited to dacarbazine (DTIC) and interleukin-2 (IL-2) and neither agent
significantly improved survival. Six targeted therapies have been approved for malignant melanoma
in the past three years, which has changed the competitive environment for new therapies (Exhibit
6).
The CTLA-4 checkpoint inhibitor Yervoy has been approved for first line use in metastatic
melanoma due to its proven OS benefit, although its use is often delayed due to its toxic side
effects, including severe diarrhoea. The PD-1 checkpoint inhibitors Keytruda and Opdivo have both
recently gained accelerated approval as second- or third-line therapies, but if ongoing trials prove
an OS benefit they are likely to become standard of care.
Viralytics | 8 January 2015
8
The BRAF inhibitors, Zelboraf (vemurafenib) and Tafinlar (dabrafenib), and the MEK inhibitor,
Mekinist (trametinib) have been approved for the c 40% of patients whose melanomas carry BRAF
mutations.
The most advanced oncolytic virotherapy product is Amgen’s T-Vec, which showed a 26% tumour
response rate following intratumoural injection in a Phase III trial, but just missed on proving an
overall survival (OS) benefit. Amgen has applied for marketing approval for T-Vec, with a decision
due by 28 July 2015. Another oncolytic virotherapy, Oncolytics’ Reolysin, has obtained promising
preliminary Phase II data in melanoma and lung cancer, but has paused development in melanoma
while it evaluates potential combinations with newer agents, including checkpoint inhibitors.
Exhibit 6: Approved treatments for malignant melanoma
Product
Zelboraf (vemurafenib)
Company
Roche
Mechanism of action
BRAF inhibitor
Yervoy (ipilimumab)
Tafinlar (dabrafenib)
BMS
GSK
anti-CTLA-4 checkpoint inhibitor
BRAF inhibitor
Mekinist (trametinib)
GSK
MEK inhibitor
Keytruda (pembrolizumab) Merck
anti-PD-1 checkpoint inhibitor
Opdivo (nivolumab)
anti-PD-1 checkpoint inhibitor
BMS
Notes
FDA (2011)/EU (2012) approved for unresectable or metastatic melanoma in
patients with the BRAFV600E mutation.
FDA (2011)/EU (2011) approved for unresectable or metastatic melanoma.
FDA approved (May 2013) for unresectable melanoma or metastatic melanoma
in adult patients with BRAF V600E mutation.
FDA approved (May 2013) for unresectable or metastatic melanoma in adult
patients with BRAF V600E or V600K mutation.
FDA (Sep 2014). Approved for unresectable or metastatic melanoma following
ipilimumab and, if BRAF V600 mutation positive, a BRAF inhibitor.
FDA (Dec 2014)/Japan (July 2014). For unresectable or metastatic melanoma
following ipilimumab and, if BRAF V600 mutation positive, a BRAF inhibitor.
Source: Edison Investment Research
Exhibit 7: Competing development programmes for malignant melanoma
Product
T-Vec
(talimogene
laherparepvec)
Company
Amgen
Mechanism
Oncolytic virus
Nivolumab
/ipilimubab
Vemurafenib
Vemurafenib/
GDC-0973
BMS
Immunotherapy
Roche
Roche
Binimetinib
Novartis
BRAF inhibitor
BRAF/MEK
inhibitor
MEK inhibitor
LGX818
MPDL3280A
MEDI4736
Novartis
Roche
AstraZeneca
BRAF inhibitor
Anti PD-L1
Anti PD-L1
MSB0010718C
Merck KGaA
Anti PD-L1
Development stage/notes
439-pt Phase III trial comparing intratumoural TVEC to subcutaneous GM-CSF in previously treated
unresectable Stage IIIb/c and IV melanoma. Results: met primary endpoint of durable response rate (DRR:
rate CR or PR lasting continuously for ≥6 months). Statistically significant difference in DRR: 16% in the
TVEC arm vs 2% in the GM-CSF arm. OS analysis showed a trend of 4.4 months in favour of TVEC as
compared to GM-CSF(HR=0.79; p=0.051). Amgen has filed for approval in the US (PDUFA date 28 July
2015) and EU.
915-pt Phase III trial of nivolumab vs nivolumab + ipilimumab vs ipilimumab in previously untreated
unresectable or metastatic melanoma. Phase 1b component reported 43% ORR. Results: Q416.
725-pt Phase III trial in resected, BRAF mutant melanoma at high risk for recurrence. Results: Q316.
500-pt Phase III trial of vemurafenib ± GDC-0973 in untreated BRAF mutant unresectable advanced or
metastatic melanoma. Results: Q316.
393-pt Phase III trial of binimetinib (MEK162) vs dacarbazine in NRAS mutant advanced unresectable or
metastatic melanoma. Recruitment ongoing.
900-pt Phase III trial of LGX818 ± MEK162 vs vemurafenib in BRAF mutant melanoma. Results: Q217.
45-patient Phase I in melanoma reported 29% ORR. Is currently in Phase III in non-small cell lung cancer.
Phase I melanoma study underway in combination with dabrafenib and trametinib. Is currently in Phase III
in non-small cell lung cancer.
590-patient Phase I trial in melanoma and other solid tumours. Phase II in Metastatic Merkel Cell
Carcinoma.
Source: Edison Investment Research
Valuation
Our valuation of Viralytics is virtually unchanged at A$141m, or A$0.76/share (undiluted, previously
A$0.77/share). The fall in the Australian dollar against the US dollar (now 1.23 per US$ vs 1.12
previously) has largely offset the impact of delaying our market launch for Cavatak by one year for
all products, and revised milestone payment assumptions. Our valuation is predominantly based on
an assessment of the clinical and commercial prospects of Cavatak. With A$24m cash at the end of
September 2014 the company has the resources to complete the ongoing CALM and STORM
trials, and the planned CANON and Phase Ib Cavatak combination trials, as well as a randomised
Phase IIb study in advanced melanoma. These factors are all positive for investor sentiment.
Viralytics | 8 January 2015
9
Our valuation uses a risk-adjusted net present value (rNPV) method to discount future cash flows
through to 2033 of the cancer indications shown in Exhibit 8, using a 12.5% discount rate. It
assumes a partnering deal or out-licensing of Cavatak in 2016 post-release of Phase Ib checkpoint
inhibitor combination trials, with the costs of all subsequent clinical development borne by the
partner/licensee. Our model does includes risk-adjusted upfront payments and clinical/regulatory
milestones (but not sales milestones) from a potential licensing deal, based on average Phase II
deal metrics from BioCentury (US$25m upfront payment, US$240m total milestones – we assume
half of those payments (US$120m) are for clinical and regulatory milestones).
Exhibit 8: Viralytics rNPV valuation
Value driver
rNPV (A$000s) rNPV per share Probability of Key assumptions
(A$)
success
CAVATAK in metastatic
melanoma
100,494
0.55
CAVATAK in NSCLC
14,278
0.08
CAVATAK in CRPC
10,676
0.06
CAVATAK in bladder
cancer
2,104
0.01
31,344
0.17
(7,511)
(2,461)
(32,547)
116,377
24,336
140,712
(0.04)
(0.01)
(0.18)
0.63
0.13
0.76
Milestones
R&D expenses
Admin
Tax
Total rNPV
Net cash (end-FY14e)
Total
35% Launch in 2021, with peak market penetration Assumes simultaneous product
of 20% five years after launch. Peak global
launches in US, Europe and
sales of US$646m.
RoW; average price of drug
15% Launch in 2023, with peak market penetration $75k in US and $45k in other
markets.
of 2% five years after launch. Peak global
One cycle of treatment per
sales of US$369m.
15% Launch in 2023, with peak market penetration patient.
Out-licensing in 2016 with all
of 2% five years after launch. Peak global
development costs borne by
sales of US$276m.
15% Launch in 2023, with peak market penetration licensee and a 15% royalty on
sales due to Viralytics.
of 2% five years after launch. Peak global
sales of US$50m.
$25m upfront payment (50% risk adjustment); $20m milestones on Phase III
start, $40m filing and $60m on approval (35% risk adjustment)
Australian corporate tax of 30%
Source: Edison Investment Research
Sensitivities
Viralytics is subject to typical biotech company development risks, including the unpredictable
outcome of trials, regulatory decisions, success of competitors, financing and commercial risks. In
particular, it has a very high single product risk, with the entirety of its value residing in Cavatak.
The investment case hinges on the outcome of ongoing clinical trials the company’s ability to
secure a partnership to advance Cavatak into late-stage trials. Another key sensitivity is the rapidly
evolving treatment landscape for melanoma, which means that future trials of Cavatak will likely be
in combination with targeted agents and/or immunotherapies – selection of the appropriate therapy
to combine with Cavatak could be critical to future clinical and commercial success. Viralytics’
current issued patents expire in 2022. While additional patents may be granted, the 12 years of
data exclusivity granted to biological products is likely to be the main protection from competition.
Financials
Viralytics reported cash of A$24m at end of September 2014. The company has the resources to
complete the ongoing CALM and STORM trials, and the planned CANON and Phase Ib Cavatak
combination trials, as well as a randomised Phase IIb study in advanced melanoma. Viralytics
received a rebate of A$2.5m under the Australian R&D tax incentive scheme in December 2014. If a
partner or licensee is not secured for Cavatak, Viralytics has sufficient resources to conduct the
Phase IIb trial (potentially in combination with a checkpoint inhibitor).
Viralytics | 8 January 2015
10
Exhibit 9: Financial summary
Year end 30 June
PROFIT & LOSS
Revenue
Cost of Sales
Gross Profit
EBITDA
Operating Profit (before amort. and except.)
Intangible Amortisation
Exceptionals
Other
Operating Profit
Net Interest
Profit Before Tax (norm)
Profit Before Tax (FRS 3)
Tax
Profit After Tax (norm)
Profit After Tax (FRS 3)
A$000s
2013
IFRS
2014
IFRS
2015e
IFRS
2016e
IFRS
2017e
IFRS
2,493
0
2,493
(3,912)
(3,934)
(390)
0
0
(4,324)
257
(3,678)
(4,068)
0
(3,678)
(4,068)
2,508
0
2,508
(4,928)
(4,956)
(390)
0
0
(5,346)
296
(4,660)
(5,050)
0
(4,660)
(5,050)
2,045
0
2,045
(8,867)
(8,896)
(390)
0
0
(9,286)
730
(8,166)
(8,556)
0
(8,166)
(8,556)
3,803
0
3,803
(3,670)
(3,696)
(390)
0
0
(4,086)
499
(3,197)
(3,587)
0
(3,197)
(3,587)
2,250
0
2,250
(1,422)
(1,430)
(390)
0
0
(1,820)
403
(1,027)
(1,417)
0
(1,027)
(1,417)
Average Number of Shares Outstanding (m)
EPS - normalised (c)
EPS - normalised fully diluted (c)
EPS - (IFRS) (c)
Dividend per share (c)
81.5
(4.5)
(4.5)
(5.0)
0.0
119.2
(3.9)
(3.9)
(4.2)
0.0
184.0
(4.4)
(4.4)
(4.6)
0.0
184.0
(1.7)
(1.7)
(1.9)
0.0
184.0
(0.6)
(0.6)
(0.8)
0.0
BALANCE SHEET
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stocks
Debtors
Cash
Other
Current Liabilities
Creditors
Short term borrowings
Long Term Liabilities
Long term borrowings
Other long term liabilities
Net Assets
2,931
2,863
68
0
7,281
0
2,202
5,079
0
(1,235)
(1,235)
0
0
0
0
8,978
2,523
2,475
48
0
27,120
0
2,784
24,336
0
(767)
(767)
0
0
0
0
28,877
2,111
2,085
26
0
19,405
0
2,784
16,621
0
(767)
(767)
0
0
0
0
20,750
1,702
1,695
8
0
16,227
0
2,784
13,443
0
(767)
(767)
0
0
0
0
17,163
1,312
1,304
8
0
15,201
0
2,784
12,416
0
(767)
(767)
0
0
0
0
15,746
CASH FLOW
Operating Cash Flow
Net Interest
Tax
Capex
Acquisitions/disposals
Financing
Dividends
Net Cash Flow
Opening net debt/(cash)
HP finance leases initiated
Other
Closing net debt/(cash)
(3,934)
0
0
(40)
0
3,169
0
(806)
(5,884)
0
0
(5,079)
(5,486)
0
0
(8)
0
25,180
0
19,686
(5,079)
0
(429)
(24,336)
(8,866)
730
0
(8)
0
0
0
(8,144)
(24,336)
0
429
(16,621)
(3,669)
499
0
(8)
0
0
0
(3,178)
(16,621)
0
(0)
(13,443)
(1,422)
403
0
(8)
0
0
0
(1,026)
(13,443)
0
0
(12,416)
Source: Viralytics accounts, Edison Investment Research
Viralytics | 8 January 2015
11
Contact details
Revenue by geography
Suite 305, Level 3
66 Hunter Street
Sydney 2000
Australia
+61 2 9988 4000
www.viralytics.com/
N/A
CAGR metrics
Profitability metrics
EPS 11-15e
EPS 13-15e
EBITDA 11-15e
EBITDA 13-15e
Sales 11-15e
Sales 13-15e
N/A
N/A
N/A
N/A
N/A
N/A
ROCE 14e
Avg ROCE 11-15e
ROE 14e
Gross margin 14e
Operating margin 14e
Gr mgn / Op mgn YY
Balance sheet metrics
N/A
N/A
N/A
N/A
N/A
N/A
Gearing 14e
Interest cover 14e
CA/CL 14e
Stock days 14e
Debtor days 14e
Creditor days 14e
Sensitivities evaluation
N/A
N/A
N/A
N/A
N/A
N/A
Litigation/regulatory
Pensions
Currency
Stock overhang
Interest rates
Oil/commodity prices






Management team
CEO: Dr Malcolm McColl
CSO: Professor Darren Shafren
CEO since January 2013. Previously VP business development at Starpharma
and responsible for partnering activities and programmes. Other roles include
director of business development for Hospira (formerly Mayne Pharma) and
CSL, where he was Global VP business development for the Animal Health
Division.
Dr Shafren is associate professor of virology in the faculty of health, University of
Newcastle, and the inventor of the technology acquired by Viralytics. He is
responsible for research, development and intellectual property management.
CFO: Robert Vickery
Mr Vickery is a chartered accountant with over 20 years’ experience in industry
and professional practice. During the past decade he has held senior finance
roles with several biotech and innovation-based businesses.
Principal shareholders
(%)
BVF Partners
Cormorant Global Healthcare
Abingworth
Sabby Healthcare
Hunter Hall Investment
Armco Barriers
Dr Nicholas Smith
13.55
8.92
6.13
5.80
4.34
1.74
1.30
Companies named in this report
Amgen (AMGN), Oncolytics Biotech (ONCY), Pfizer (PFE), Roche, Merck (MRK), Merck KGaA, Bristol-Myers Squibb (BMS), GlaxoSmithKline (GSK)
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