Huge Upside Potential Despite Recent Rallies

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of Oncolytics Biotech (NASDAQ: ONCY) have risen by more than 35% since last Thursday. This phenomenal rally started just after the company announced successful Phase III trial results for its primary drug candidate Reolysin. The company's stock has almost doubled in the last couple of months.

This success of Reolysin shows that the company's stock has the ability to go even higher. Due to its cheap valuations and huge potential it is also an attractive acquisition target. Pfizer (NYSE: PFE) and Amgen (NASDAQ: AMGN) are the two most likely companies, amongst others, to be interested in acquiring this promising biopharmaceutical.

Oncolytics

Oncolytics is a biopharmaceutical company focused on the development of innovative methods to fight cancer, and its primary drug candidate is Reolysin. Reolysin has been tested in 32 different clinical trials for various forms of cancer. Out of these 32 trials nearly 16 have been completed, and the remaining trials are still ongoing.

The drug is a formulation of the reovirus which is, most of the time, already present in adult humans but doesn’t show any adverse symptoms. The virus has the ability to replicate in cells that have RAS pathways and kill such cells. The infection keeps on spreading until all tumor cells are destroyed. According to studies approximately 67% of all cancers (and approximately all metastatic) in humans are Ras activated. Therein lays the mammoth potential of Reolysin, in its ability to effectively fight cancer through a virus-based mechanism.

Clinical Results

Oncolytics is testing its primary candidate Reolysin in a number of different clinical trials for various types of cancer. The company has released trial data for the effect of Reolysin on the Neck & Head Cancers and Carcinoma of the Lungs.

The company has released topline data for the Phase III clinical study of Reolysin on patients with head and neck cancer. The subjects were given the drug in combination with two chemotherapies, i.e. paclitaxel and carboplatin. The trials showed that patients with Reolysin regimen had a higher likelihood of having stable or smaller tumors as compared to patients only on paclitaxel and carboplatin. The trial involved 105 patients, out of which 86% being treated with Reolysin combination showed more stable/smaller tumors. On the other hand, only 67% patients on the conventional chemotherapy showed similar responses, making Reolysin approximately 19% more effective.

Last week the company also released data on Reolysin mid-stage Phase II trial for the treatment of squamous cell carcinoma of the lung (SCCLC). The trial tested the effects on Reolysin on SCCLC in combination of carboplatin and paclitaxel (REO 021). According to the released data, 95% of the patients experienced reduced tumor size. The announcement resulted in the second humongous rally in the stock price of Oncolytics in the last two months. 

Acquisition

It is still too soon to say that Oncolytics has hit the jackpot, but it can be safely said that it’s an attractive acquisition target. We are already in the middle of the patent cliff with a number of big boys facing imminent crisis due to a large number of expiring patents. Pfizer is one of the most affected companies with the loss of its major drug Lipitor, amongst others. The company currently has more than $20 billion in cash on hand and can easily afford a company priced at $300 million. Pfizer already has a strong oncology pipeline and has recently announced Phase II results for its breast cancer candidate PD-0332991. Reolysin is also in Phase II trials for the treatment of metastatic breast cancer and can be a good acquisition target for Pfizer.

There are numerous big pharmaceuticals working on treatments for cancer that could have an interest in this company. Amgen is one of the largest bio-pharmaceutical companies in the world and has a number of oncology candidates in various stages of the clinical trials. The company has 5 oncology candidates in Phase II and 7 candidates in Phase III trials, with Vectibix in Phase II for Head & Neck Cancer and Motesanib in Phase III for first-line non-small Lung Cancer. Therefore the trial results of Oncolytics not only make it a potential threat but an attractive buyout option, especially considering the small cap of the company. 

Amgen is already interested in this form of cancer treatment because it had acquired BioVex for approximately $1 billion in 2011. The company was purchased primarily for its developments in Oncolytic virus, especially encouraging results in clinical trials of OncoVEX GM-CSF. Although the company has since halted the OncoVEX H&N study, it can still be a serious contender for acquiring Oncolytics. The company's previous involvement in the purchase of BioVex will make this purchase easier in terms of synergy and valuations. Moreover, after its BioVex failure Amgen will be in the best position to judge the potential of these trial results.  

Bottom-line

The stock of Oncolytics has appreciated more than 110% in the last couple of months. The market has responded positively to the clinical data on its two studies. The company is still testing the virus on numerous forms of cancer, and results for those trials can further push up the stock. Despite these appreciations the stock is still trading at 50% to mean a sell side target price of $8.50. I believe the price appreciation of Oncolytics is not a fluke because the drug has already successfully shown its ability to fight cancer, based on the recently released data. The company is also a major acquisition target considering the large number of organizations working towards better cancer cures. Therefore I believe that despite the recent rallies Oncolytics is still a buy for long term growth and acquisition prospects. 


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