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VNRX: Frontline CRC Studies Read-Out ~1H 2018, Could Be Value-Inflection Event

11/22/2017
By Brian Marckx, CFA

NYSE:VNRX

Q3 Results / Operational and Business Update: 

VolitionRx (NYSE:VNRX) reported Q3 results and provided a business update.  Relative to the financials, results were very much inline with our estimates (we note that R&D expense was $283k higher than what we modeled, although $250k of this relates to the initial payment related to the U.S. colorectal cancer EDRN study).  EPS was ($0.15) vs. our ($0.14) estimate.  We model roughly flat OpEx from Q3 to Q4 and continue to expect no revenue until 2018.  

Cash used in operating activities was $2.8M and $8.3M ($3.1M and $8.5M, ex-changes in working capital) in the three and nine months ending 9/30/2017, respectively.  Another $105k and $1.3M was used in investing activities - primarily for upfitting the new R&D facility, over the same periods.  Cash balance was $13.8M at quarter-end, which represents ~14 months’ worth of operating capital.  Additional capital is available from a recently secured (yet currently-untapped) $1.2M loan and ~$300k non-repayable grant from SOFINEX (a Belgian public organization) and the Walloon Region (Belgium), respectively.  VNRX expects to continue to seek non-dilutive sources of funds such as this.  

Relative to the operational update, there were no big surprises either in the earnings release or on the call and most of the main-focused development programs appear to be largely tracking earlier anticipated timelines.  The one exception may be the forecasted timeline for launch of Triage in Europe, which we feel may have become a bit ambiguous given that the pathway design study has dragged on longer than expected and development of the frontline screen has progressed.  But, given that we consider Triage as somewhat of a tire-kicking, test-run at the European colorectal cancer market as VNRX completes development of a front-line screen, the ongoing delays to the symptomatic test are not overly concerning. 

While no major revelations, the call was informative.  Management laid out timelines and plans for development of a frontline screen for Europe, including planned validation studies.  They also offered a little bit more insight into nuances of the different countries that they hope to target with both CRC tests.  That included some general thoughts and information related to accuracy thresholds and regulatory requirements.     

- Europe:  Pathway design study in Denmark for Triage is in “final stages” and expected to conclude by the end of November – the company will announce the findings when completed.  VNRX also continues to work to update Triage, following which the CE Mark will need to be updated.  The goal is to have Triage completed by around the time that the pathway design study finishes.  While we continue to model launch of Triage in 2H 2018, we also think buttoning-up remaining development and CE Marking of Triage may take a backseat to the frontline test, the market for which is significantly larger.  Management indicated that the commercialization game-plan for Triage may be somewhat fluid and influenced by that of the frontline test – this is definitely a “stay tuned” situation. 

In terms of a frontline CRC screen for Europe, VNRX noted on the Q3 call that they made significant headway during the quarter and they now hope to have the panel chosen by current year-end.  That panel will then be validated against 4.3k samples (expected in Q1 2018) and followed by 10k samples (expected in Q2 2018).  If all goes smoothly they think they can get the test CE Marked by Q3 2018.  

We note that while VNRX’s new R&D facility and additional resources should facilitate validation and regulatory activities, we suspect that this timeline may prove somewhat aggressive and would not be surprised to eventually see final pieces of this move by ~6 months.  But, there should one or more incremental-value milestones related to the EU CRC screen over the next few quarters – including completion of the panel and, certainly, data read-outs (interim read-outs may not be feasible given this is an asymptomatic test, therefore initial data may also be final data).  If sensitivity/specificity is competitive with FIT, expect that could be a significant value-inflection event.  As such, we will be highly interested to hear updates on the panel selection and then, on results of the validation studies.     

Management also provided some insight relative to accuracy thresholds, noting that many countries in Europe are more concerned with specificity, although some others may lean more on sensitivity.  While some countries still utilize relatively antiquated and inaccurate FOBT tests, many others use FIT in national screening programs.  The general theme seems to be that VNRX hopes to be competitive with FIT, which is considered relatively accurate (depending on the study cited accuracy can vary) – management cited FIT sensitivity/specificity of ~70%/90% - so we think that provides some general guidance on the level that VNRX will be shooting for with their EU CRC frontline screen.  

We think VNRX may also refine a CRC frontline screen over time (to further increase accuracy) and in the event that sensitivity/specificity of initial NuQ frontline panels are not competitive with that of FIT, the non-compliant population (i.e. those of CRC screening age that do not get tested) may represent an initial market opportunity, particularly among those with concerns over fecal handling.    

Importantly, we do not view certain recently commercialized novel technologies, including Exact Sciences’ ColoGuard and EpiGenomics’ Epi proColon, as significant potential competitive threats to VNRX in most European markets.  National screening programs are highly budget sensitive, which largely excludes the relatively expensive ($300 - $500 per test) ColoGuard while relatively poor accuracy of Epi proColon means it is unlikely to unseat FIT as the non-invasive testing standard.  (See link below to our full report for a detailed discussion about Exact and Epi proColon).  Meanwhile, VNRX expects to develop a frontline screen that is competitive with FIT in accuracy and manufacture it at a cost that will qualify it for national screening programs.  The added benefit of NuQ versus that of FIT is ease of use and the fact that fecal handling is completely avoided.     

- Asia:  VNRX's first significant discussion that Asia was a near-term target was only a few months ago.  Since then they noted that their first clinical evaluation of Triage is underway in Taiwan and the regulatory process has started in both Taiwan and Singapore - approval in Singapore would also open up sale of the test to nine other S.E. Asian countries.  VNRX also recently hired a V.P. to lead efforts in that region of the world.  The company also mentions in their Q3 10-Q that they are preparing "the submission of our tests to numerous Asian authorities" and that they "aim to announce several trials in Asia for our various potential CRC products in the coming quarters."  Clearly management's message on recent conference calls has been that they believe Asia, which in aggregate has very low compliance to CRC testing, represents a highly attractive market.  Cost and risks associated with colonoscopies as well as cultural barriers to handling feces (i.e. with fecal tests) appear to be hindrances to CRC testing adherence in many Asian countries.

We ballpark the market opportunity in Taiwan and Singapore at approximately $7.2M and $1.7M, respectively – but, perhaps more important could be that these might represent just the initial foray into Asia which could be a harbinger for eventual introductions into countries with larger populations, including India and China.  
     
The game plan for Asia is similar to that of Europe - that is, to bring both Triage as well as a CRC screen to market.  But, as with Europe, plans for Triage may be somewhat dynamic and largely driven by the pace of a CRC frontline screen.  In terms of the regulatory pathway - management noted that most Asian countries (ex-China) will register the tests using the CE Mark but may also require additional deliverables, potentially including clinical evaluation with Asian populations to support registration.  They indicated on the Q3 call that they are in-process of nailing down exactly what to expect in terms of regulatory requirements for each of the Asian countries that they may initially target – so we may hear more on that subject on future calls.

But, in the meantime, they are wasting no time with preparing to validate their technology with Asian populations.  Earlier this month VNRX signed an MOU with National Taiwan University (binding contract expected to be signed in Q1 2018) to conduct two studies encompassing a total of 7k blood samples related to CRC.  The first study will include 5k samples from asymptomatic individuals while the second is 2k samples from symptomatic CRC patients.  These studies are only for marketing/commercialization purposes and not regulatory-related.     

Relative to the U.S…., the recently announced 13.5k-sample U.S.-based clinical trial is expected to serve as support for an eventual FDA (PMA) filing for a NuQ frontline CRC screen (see link to our full report below for further background and discussion).  Study design has now been approved and is expected to be on clinicaltrials.org in the near-term.  

But, in the meantime, VNRX plans to pursue initial U.S. commercialization with a symptomatic CRC test.  The symptomatic-related regulatory strategy seems to be firming up, although still needs to be finalized.  Current thoughts are to pursue a 510(k) pathway.  Management believes a symptomatic study can be relatively small (600 - 700 patients, given the much higher positives CRC rates vs. asymptomatic) and ballparks cost at about $1.2M.  The U.S. symptomatic program is not expected to begin until after launch of an asymptomatic test in Europe and Asia - as such, we do not expect any related U.S. revenue until at least 2019 and quite possibly, not until 2020.   

Research Use Only Kits:  In September VNRX announced the introduction and first sale of Nu.Q-based RUO kits.  The first sale was made to a (unnamed) “large multinational pharmaceutical company”.  The company noted that the customer requested a customized kit, which is how the initial sale materialized.  From our experience, it is almost impossible to judge potential demand for RUO products (at least at initial launch).  So while it is possible significant and consistent demand could materialize, (particularly if, for example, they were used as a companion diagnostic for a new popular drug), we currently do not model any related potential contribution.  We will update this if appropriate.       

We are maintaining our $7.50/share price target. See below for free access to our most recent report on VNRX.


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