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VNRX: Q4 Results / Operational and Business Update

By Brian Marckx, CFA


VolitionRx (NYSE:VNRX) reported Q4 results and provided a business update.  Relative to the financials, results continue to come in well within our expectations with Q4 operating expenses and EPS coming in at $4.2M and ($0.15), compared to our $4.2M estimate and ($0.15) estimates.  

Notable is the relatively small increase in cash burn during 2017 as compared to the prior year despite the significant operational achievements made over the last 12 months.  Cash used in operating activities was $3.9M and $12.2M ($3.3M and $11.7M, ex-changes in working capital) in the three and 12 months ending 12/31/17, which compares to $2.2M and $8.9M ($2.3M and $9.8M, ex-changes in working capital) in the comparable prior year periods. 

Cash balance was $10.1M at 2017 year-end, which represents ~8 months’ worth of operating capital at the current burn rate. VNRX has an additional 750Euros available under the SOFINEX loan.     

Relative to the operational update, much of the most recent highlights relate to the early validation of what is expected to be the company’s first frontline CRC screen.  Initial data from that program was announced early last week, and as we explained in our Investor Note (Feb 27th, NuQ Shows Compelling Asymptomatic Detection of Pre/Early Cancers), could lead to at least two development-related inflection opportunities during 2018.  Along with prompting inclusion of a CRC NuQ screen in our model, this promising asymptomatic CRC data has also fueled even greater anticipation of evaluation of NuQ in the ongoing 27-cancers study, initial data from which is also expected later.     

In the meantime, VNRX forges ahead with moving Triage closer to commercialization, recent progress of which included completion of the logistics and pathway design study.  While immediate next-steps for Triage appear to be somewhat fluid, on the Q4 call management again reiterated their expectation that the product would launch in Europe before the end of the current year.  

Triage clinical programs are also expected to begin in Asia, which we think could represent an even more substantial opportunity than Europe given the relatively massive populations and characteristics which may lend particular appeal to the benefits of NuQ versus fecal-based (occult-blood and DNA) CRC testing.  If all goes to plan, initial introduction commercial introduction in Asia could happen sometime next year.  

In terms of the U.S., while there was no significant new news on the Q4 call related to the recently announced 13.5k-sample U.S.-based clinical trial, we were not anticipating any given that the study is still in early stages.  We do, however, expect there will be some interim progress updates throughout the year.   

Summary of development programs…

NuQ Compelling Asymptomatic Detection of Pre/Early Cancers: goal is to refine, validate, launch in EU in 2018  

In a 680-subject study, which includes ~100 with cancer, a panel of three NuQ assays detected 80% of stage 1 cancers and 66% of high-risk pre-cancer adenomas at 78% specificity.  Data of the later-stage cases and detection across all cancers was not released, although we expect that more comprehensive data will be included in future announcements.

For context of the performance of some of the leading non-invasive CRC screening diagnostics in detecting pre-cancers; Exact Sciences (stool-based) ColoGuard showed 42% sensitivity in detection of advanced precancerous adenomas at 87% specificity, FIT showed 24% sensitivity in detection of advanced precancerous adenomas at 94% specificity and Septin9 showed 18% sensitivity in detection of advanced precancerous adenomas at 80% specificity.  While the differences in specificity of all of the studies makes head-to-head performance comparison difficult, we think this at least provides some insight into the relatively poor pre-cancer detection abilities of currently available non-invasive diagnostics and helps illustrate the unmet need for a more accurate test.  

As it relates to performance in detecting CRC (of any stage) published studies showed sensitivity / specificity of these tests at; ColoGuard 92% / 87%, FIT 79% / 94% and Septin9 68% / 80%.  Again, we provide this only for some context and also note that, as we have discussed in detail in prior reports, all non-invasive CRC diagnostics suffer from one or more meaningful drawbacks – some of which include low accuracy, high cost and requisite fecal handling.  As such, sensitivity / specificity, while important, is not the only criteria in gauging the potential utility of a CRC screen – instead as long NuQ can increase compliance of CRC screening at an acceptable cost, it should have commercial appeal.     

VNRX will look to further improve upon the performance of their asymptomatic screen.  Additional assays and panels will be evaluated in the 680-patient training study.  A larger 4.3k subject training study will then afford powering the evaluation of a larger panel – the final panel is expected to include 5 or 6 assays.  The next step will then be to validate that panel in a 12k subject study.  In the meantime, VNRX will put as many pieces as possible in place towards applying for CE Mark so as to facilitate launch ASAP.  We note that while VNRX’s new R&D facility and additional resources should facilitate validation and regulatory activities, we suspect that their timeline for launch of the CRC screen may prove somewhat aggressive and would not be surprised to eventually see final pieces of this move by ~6 months.    

But, assuming no significant delays to management’s anticipated timelines (below), we think there could be at least two value-inflection opportunities (including data read-outs of the panel in the 4.3k and 12k studies) related to this EU CRC asymptomatic screen development program over the next 6 to 9 months.  Performance updates, including relative sensitivity/specificity compared to FIT and the other CRC screens (particularly for pre and early-stage cancer), will be of obvious particular interest but as noted above, it is not the only criteria that dictate potential commercial appeal.  Management’s current anticipated timelines are;

• Q2 2018: report results of 4.3k training study
• 2H 2018: commence 12k subject study
• 2H 2018: launch asymptomatic CRC screen in EU

VNRX has yet to provide specifics regarding thoughts on launch and initial commercialization strategy of a CRC frontline screen, although did mention that they have already done some legwork in assessing opportunities.  Some of the ‘where, when and hows’ may be dictated by performance in these larger validation studies – so hopefully we will get some more details with upcoming data announcements, if not sooner.    

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 our Appendix for a detailed discussion about Exact and Epi proColon.  If VNRX can 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, that could be a true game-changer for CRC screening.  The added benefit of NuQ versus that of FIT is ease of use and the fact that fecal handling is completely avoided.    

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.    

- Europe (Triage):  Successful completion of the logistics and pathway design study happened in early February – meaning that Triage might soon enter Denmark’s colorectal cancer screening programs.  VNRX also continues to work to update Triage, following which the CE Mark will need to be updated.  While we continue to model launch of Triage in Q4 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.  This remains a “stay tuned” situation. 

- Asia:  VNRX's first significant discussion that Asia was a near-term target was only about six 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.  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.  Some of the initial legwork includes nailing down 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.  In November 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 Appendix for background and discussion).  Study design has now been approved and is expected to be on in the near-term.  

But, in the meantime, VNRX has indicated that they plan to pursue initial U.S. commercialization with a symptomatic CRC test.  Current thoughts on a symptomatic-related regulatory strategy include pursuit of a 510(k) pathway.  Management has previously mentioned that they believe a symptomatic study can be relatively small (600 - 700 patients, given the much higher positives CRC rates vs. asymptomatic) and cost 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 2020 and quite possibly, not until 2021.   

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), although management has indicated that they have had meaningful interest, particularly for companion diagnostic development purposes.  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 model only very incremental related revenue from RUO sales.  We will update this if appropriate.   

Moving Price Target to $8.00/share with inclusion of frontline CRC screen…
While we had not previously modeled contribution from a frontline CRC screen given that we felt there was not yet enough information to judge the likelihood of successful development and regulatory approval(s), we have updated our assumptions.  The feasibility of ‘validation’, regulatory approval, launch and substantive commercial appeal of an initial NuQ-based CRC screen should become more clear with data from the two larger studies, although performance of the three-marker panel from the 680-sample training study was compelling enough evidence of utility, in our opinion, to warrant inclusion in our model. The model updates added approximately $.50/share to our calculated fair value, moving our price target from $7.50 to $8.00 per share.  See below for free access to our updated report on VNRX which includes our modeling assumptions and valuation methodology.


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