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VNRX: More Compelling Prostate Cancer Data, Opportunities Remain for Near-Term Data-Driven Value Inflection

By Brian Marckx, CFA



Q2 Results / Operational and Business Update:

VolitionRx (NYSE:VNRX) reported Q2 financial results and provided a business update. Relative to the financials, operating expenses were right on the nose with our $4.57M estimate and flat from Q1 of this year. Despite the significant operational progress, including that related to their numerous (and growing number of) trials in various cancers, operating spend through the first six months of 2018 was up just $2.4M (+35%) from the prior year period, to $9.2M.

R&D expenses increased by just $1.5M (+43%) to $5.1M in 1H ’18. For some context of the efficiency of VNRX’s product development, we estimate their average cost per sample (of all ongoing trials) is approximately $100 – a small fraction of the estimated ~$3.5k per sample cost of pivotal studies of other non-invasive CRC diagnostics. And while later stage, larger, prospective registration studies may cost significantly more than $100/sample, we find it impressive how much progress has been made with relatively minimal spend to-date.

The efficiency of product development is even more obvious in the relatively light cash-burn. Cash used in operating activities was $2.9M and $6.5M ($3.9M and $7.5M, ex-changes in working capital) in the three and six months ending 6/30/18, compared to $2.8M and $5.5M ($2.7M and $5.3M, ex-changes in working capital) in the prior year periods.

The balance sheet is solid. Cash balance was $11.9M at Q2 quarter-end, subsequent to which VNRX received $700k of non-dilutive funding from the Walloon Regional Government and $9M in gross proceeds from the sale of 5M common shares (@$1.80/share).

Relative to the operational update, one of the most exciting recent announcements relates to compelling prostate cancer data – while from a small, proof-of-concept(esque), single-arm trial, the results suggest NuQ could substantially improve upon the (proven) poor performance of PSA biomarker testing. It also builds on earlier data, which also showed encouraging accuracy of NuQ in prostate cancer.

Prostate cancer data
With the mid-August announcement of new and compelling prostate cancer data, we think VNRX could be moving much closer to the real possibility of large, prostate cancer validation studies – success of which could be a tremendous value driver. Results of the n=84 proof of concept study showed a panel of five assays (two NuQ, PSA and two unidentified inflammatory biomarkers) identified 94% of ‘high-grade’ prostate cancers at 88% specificity. This compares to PSA-alone, which identified just 33% of high-grade cancers. ‘High-grade’, as defined by the Gleason score, are prostate cancers that are likely to grow and spread rapidly and, therefore, require aggressive treatment.

Unlike most cancers, prostate cancer is usually too slow-growing to be lethal and, therefore, the potential benefits of treatment are often outweighed by the possible risks (such as impotence and urinary incontinence). The exception are high-grade cancers, which often require aggressive treatment. VNRX hopes to confirm results in larger follow-on studies – which may also provide more insight into per-stage performance. Given the poor performance of PSA and lack of alternatives, we think an accurate and reliable test which could differentiate between low and high-grade prostate cancers (and which would guide treatment vs. watchful-waiting decision-making) could see immediate widespread adoption. We continue to view prostate cancer as one of the most attractive targets and will be eager to hear updates on VNRX’s validation studies.

As a reminder, this is not the first indication that NuQ could have utility in prostate cancer. The first real evidence of NuQ’s potential in prostate cancer was the April 2016 announcement of results from a retrospective study of 537 blood samples. The data, which were presented at AACR that year, showed a single NuQ assay detected 71% of early stage I (and 86% of late stage IV) prostate cancer cases at 93% specificity. This is significantly more accurate than that of the widely used PSA test. PSA tests are the most widely used front-line diagnostic with ~20 million tests performed each year in U.S. and ~45 million worldwide. But PSA is fraught with accuracy issues as studies have shown that PSA testing has a sensitivity and specificity of approximately 85% and 30%, respectively, indicating that while it is fairly good at detecting cancer (detects 85% of cases) it is very poor at differentiating between what is, and what is not cancer (i.e. - very low specificity, resulting in high false-positive rate).

Colorectal cancer
While certain delays have slowed timelines in Europe, progress does continue – including in Asia. Most recently that included finalizing agreements (that had previously been under MOUs) with National Taiwan University to conduct two large, CRC studies; a 5k-sample asymptomatic CRC screening study and a 2k-sample symptomatic CRC study. As previously noted, these are marketing-oriented (as opposed to regulatory) studies. Given the large populations of the Asia Pacific region and other characteristics favorable to blood-based CRC testing in that part of the world, we continue to believe that Asia represents a highly attractive market (and potentially even more so than Europe) for VNRX. So, continued development progress, even incremental progress such as turning the MUOs into formal agreements, should be viewed as meaningfully positive steps forward. If all goes to plan, initial commercial introduction in Asia could happen sometime next year.

Europe: Triage and Frontline CRC
As it relates to the larger validation CRC validation studies and regulatory activities of the initial commercial CRC tests, management noted that progress has been somewhat slower-going than anticipated due to the time-consuming work necessary to ensure their ‘discovery assays’ (i.e. those used to determine final assays in trials) can be validated for practical commercial use (and used in any lab).

This has pushed back timelines of Triage and the frontline CRC screen. While CE Marking of Triage was previously anticipated to happen by late-2018, that is now pushed back to Q1 ’19. Read-out of the 4.3k-sample (i.e. pre-validation study) and 12k-sample screening studies is now expected in Q1 and Q2 ’19, respectively. CE Marking of the frontline screen is now expected in Q2 ’19 – pushed back from Q1. As our modeled timelines were already about 3 – 6 months behind those of management’s, these recent delays only have a moderate impact on our forecasts. However, we still think that even the revised timelines, particularly as related to CE Marking of the frontline screen, are likely to prove optimistic.

Relative to commercialization strategies – the frontline should evolve as data becomes available. The strategy for Triage appears to continue to evolve - the initial gameplan for which had revolved around national CRC screening programs in certain European countries. This may now be more of a stay-tuned for updates situation and something we could hear more about with the upcoming data release.

And despite the ongoing delays, there should be opportunity for near-term data-driven value inflections. In addition to these large CRC validation studies, initial data from the ongoing Bonn27 (27 most prevalent cancers) cancer study could be upcoming (early 2019) as could data from an endometriosis proof-of-concept study (late 2018), which completed sample collection (from 350 patients over three years) in August.

RUO Kits
In the meantime, initial revenue from sale of RUO kits is expected in 2H 2018. As a reminder, last September VNRX announced the introduction of Nu.Q-based RUO kits. In May VNRX signed a licensing agreement with Activ Motif which (per their website) “is the industry leader in developing and delivering innovative tools to enable epigenetics and gene regulation research.” Activ brings a vast distribution network that includes large research institutions and commercial life sciences customers. Under this arrangement, VNRX licenses their technology to Activ and Activ does all of the work – from manufacturing to sales and to distribution. VNRX will receive a royalty on sales. On August 1st VNRX announced that the initial RUO kit was available for purchase through Activ Motif.

We cover VNRX with a $7.50/share price target. See above for free access to our updated report on the company which includes our outlook, valuation methodology and financial model.

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