Data Gives Oncolytics a Short-term Pop

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It may really be time to short Oncolytics Biotech (NASDAQ: ONCY). It was definitely time to short on Dec. 12, when the stock was briefly up 77% from the previous day's close price of $2.17. But that's easy to see in the rearview mirror -- the challenge going forward is waiting for another opportunity to sell it down the river.

The recent news on Calgary, Canada-based Oncolytics involved Reolysin, a cancer treatment in Phase III trials. Like a lot of biotechs, Oncolytics trumpets a "novel" approach. Yet Oncolytics isn't the only one working on treatments that use oncolytic viruses to combat cancer.

Oncolytic viruses can invade and essentially break down tumor cells. Biotechs have been toying with the concept for at least 50 years, and regulators in China approved Shanghai Sunway Biotech's H101 for certain cancers in 2005.

More recently, as in last week, Oncolytics announced positive trial results for Reolysin, a reovirus (Respiratory Enteric Orphan Virus) that can selectively break down cancer cells without harming healthy ones.

Note: Don't confuse Oncolytics with OncoSec . This is a huge trading error waiting to happen. OncoSec is also working on a novel way to attack cancer cells, but it's working on a technology called electroporation. This approach uses an electrical pulse to open pores in cancer cells to increase the efficacy of treatments such as chemotherapy. It remains to be seen if OncoSec will compete directly with Oncolytics by treating the same cancers in the same stages.

What is clear is the possibility of competition from a well-known name in the biotech world. Last year Amgen (NASDAQ: AMGN) acquired BioVex Group, then a private company developing an oncolytic cancer treatment called OncoVex, which is aimed at melanoma.

Amgen has said little about Oncovex since the acquisition, but the latest Amgen 10-Q filing describes a multi-milestone arrangement that could cause the company to pay up to $575 million to former BioVex shareholders. The filing says there are eight sales and regulatory milestones for melanoma treatment talimogene laherparepvec, currently in Phase III trials.

OncoSec has done clinical trials involving Melanoma, though it characterizes its recent Phase III news as involving platinum-refractory, taxane-naive head and neck cancers -- cancers that are resistant to certain kinds of chemotherapy. Obviously, if Amgen wanted to head in this direction with BioVex, Amgen has massive R&D and financial resources that could make life very hard for Oncolytics.

In any case, the recent Oncolytics release on two tests provides some basic numbers and p-values suggesting that the results are statistically significant.

Of the 105 total patients with evaluable metastatic tumors, 86% (n=50) of those in the test arm of the study exhibited tumor stabilization or shrinkage, compared with 67% of patients (n=55) in the control arm. This was statistically significant, with a p-value of 0.025.

The second analysis examined the magnitude of tumor response on a per patient basis using a comparison of percentage tumor shrinkage at six weeks in each patient with evaluable metastatic tumors. This analysis showed that REOLYSIN in combination with carboplatin and paclitaxel was statistically significantly better than carboplatin and paclitaxel alone at stabilizing or shrinking metastatic tumors, yielding a p-value of 0.03.

You can slice and dice p-values all day, but it's unclear how these numbers translate into a 40% gain in one day. What is clear is that Oncolytics' stock has become quite volatile.

In the short term, this means the stock is worth watching for day traders who really enjoy white knuckle rides and the kind of risk that can lead to eating generic cat food in retirement.

It would be insane to short this stock as a long term play, though NASDAQ data indicates a consistent five or six million shares in short interest, versus 76 million shares outstanding. But for those who like to trade volatile stocks intraday and end the session flat, it's worth watching this one to see how it blows up on news -- and falls down after the hysteria passes.

In the longer term, it's worth watching for a couple of reasons. One, this Reolysin may be approved for commercialization. Then the company can start working on profitability -- the stock might actually go up and stay that way if the company achieved profitability. It's losing money hand over fist today. That may change, but not in the near future.

Springer23 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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