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Oncolytics (ONCYF) Raises CAD$11 Million

07/05/2017
By John Vandermosten, CFA

OTC:ONCYF

Public Offering of Shares Strengthens Balance Sheet

In late May, 2017, Oncolytics Biotech, Inc. (OTC:ONCYF) announced and priced 16.4 million units at CAD$0.70 per share raising CAD$11.5 million in gross proceeds and CAD$10.6 million net.  Each share included a 5-year warrant, exercisable at CAD$0.95 per share.  Oncolytics continues to interact with potential partners who may develop REOLYSIN outside of North America and provide sufficient capital in terms of an upfront payments to fully fund the upcoming Phase III trial if needed.  

The underwriting closed on June 1st following a number of positive announcements in March and an abstract and presentation submission in April.  The news outlined the positive overall survival (OS) data from the Phase II IND 213 clinical trial.  The data from this trial showed an improvement in overall survival from 10.4 months in the control arm to 17.4 months in the test arm.  In patients with the mutated p53 protein, the results were even more pronounced, with median overall survival more than doubling from 10.4 months in the control arm to 20.9 months for patients using REOLYSIN in combination with paclitaxel.  Following the release of data and the abstract submission, the company presented the data at the annual meeting of the American Association of Cancer Research (AACR).

Shares Undervalued

Since the capital raise, shares on the TSE have declined from the issue price by approximately 34%, despite the company exercising its full allotment option and raising sufficient capital to support clinical trials and operations through the end of 2018 and perhaps slightly longer.  Oncolytics is also coming up on its end-of-Phase II meeting with the FDA, which is expected to take place in the first half of August, depending upon scheduling.  Following the meeting, the FDA may approve Oncolytics’ submission of a biologics license application (BLA) or grant breakthrough status, which will allow for priority review and closer collaboration with the FDA.  Generally, the FDA takes 60 days to respond to the submission and Oncolytics anticipates making an announcement on the path forward regarding REOLYSIN for metastatic breast cancer in the fourth quarter of 2017.

Our estimates take a conservative stance and assume that no special status will be granted resulting in a target price of US$2.00.  If special status is granted, there is upside to our estimates due to lower costs incurred and faster time to market.  We also note that even under our base case scenario, where the Phase III trial is required, our target price will increase upon the start of the trial based on a higher probability of success for candidates that reach Phase III.  There has been positive news so far for the company and we note several upcoming potentially positive catalysts as well.  Given this backdrop combined with the results of the IND 213 trial and the opportunities ahead of the company, we highlight the valuation discrepancy between the current price for ONCYF and our target price of US$2.00.  

Summary

Oncolytics’ capital raise places the company in position to make substantial headway in its interactions with the FDA and in starting its Phase III trial for REOLYSIN for metastatic breast cancer.  The cash position enables management to maintain a strong negotiating position with potential partners who would develop the oncolytic virus outside of North America.  While not incorporated in our valuation assumptions, the upcoming end-of-Phase II meeting in August may yield a faster path to market and justify a higher valuation.  We maintain our target price of US$2.00, and highlight the substantial upside from current levels.

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