VolitionRx — 13,500-person prospective US trial on deck

Healthcare

VolitionRx

13,500-person prospective US trial on deck

Earnings update

Healthcare equipment
& services

21 August 2017

Price	US$2.52
Market cap	US$67m

Net cash ($m) at 30 June 2017		15.3

Shares in issue	26.6m
Free float	73.4%
Code	VNRX

Primary exchange	NYSE American
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(22.2)	(25.9)	(28.2)
Rel (local)	(21.1)	(27.7)	(35.3)

52-week high/low

US$5.6

US$2.5

Business description

VolitionRx is a diagnostics company focused on developing blood-based cancer diagnostics using its proprietary Nu.Q™ technology. Its lead program is in colorectal cancer, which is being advanced for both triage and frontline testing in Europe and the US.

Next events

Danish CRC screening steering committee meeting

September 2017

Analysts

Nathaniel Calloway	+1 646 653 7036
Maxim Jacobs	+1 646 653 7027

healthcare@edisongroup.com

Edison profile page

VolitionRx is a research client of Edison Investment Research Limited

VolitionRx will be participating in a 13,500-patient prospective trial investigating its colorectal Nu.Q™ test (and other biomarkers) in the US. The trial will be run in collaboration with the National Cancer Institute (NCI) and the University of Michigan, which will be bearing the majority of its cost. VolitionRx will only pay $3m over the two to three years the trial is expected to take to complete. We are reducing our valuation to $236m (from $272m) or $8.89 per basic share due to the long timeline in the US.

Year end	Revenue ($m)	PBT* ($m)	EPS* ($)	DPS (c)	P/E (x)	Yield (%)
12/15	0.0	(9.7)	(0.54)	0.0	N/A	N/A
12/16	0.0	(12.3)	(0.53)	0.0	N/A	N/A
12/17e	0.0	(13.7)	(0.51)	0.0	N/A	N/A
12/18e	1.3	(18.5)	(0.67)	0.0	N/A	N/A

Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.

US trial to support PMA filing

For the US trial, 4,677 samples have already been collected and up to an additional 9,000 samples will be prospectively collected from asymptomatic individuals aged 50 years and over. At this scale, this is one of the largest ever trials for a colorectal cancer screening product. After feedback from the FDA, Exact Sciences ran a 10,000-person prospective clinical trial. VolitionRx has stated that it believes its trial should support a PMA, although it has not confirmed this with the FDA.

Trial to be run by experienced biomarker researchers

The US trial will be run by the Great Lakes New England (GLNE) Clinical Validation Center at the University of Michigan. The NCI established these centers to test the clinical utility of biomarkers for the detection of cancer, and the GLNE has significant experience in performing large colorectal cancer screening trials. It previously performed the independent validation study of Cologuard with 6,000 patients and has published over 30 papers on its findings on cancer biomarkers.

Moving forward with the triage test in Asia

VolitionRx announced in its Q217 earnings report that it has initiated the regulatory process in both Singapore and Taiwan for approval of the Nu.Q™ colorectal cancer screening triage test, and that trials are ongoing in Taiwan. Both of these countries have national screening networks that could utilize the test. Also, approval in Singapore would provide access to the nine other ASEAN markets (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand and Vietnam).

Valuation: Lowered to $236m or $8.89 per basic share

We have lowered our valuation to $236m or $8.89 per basic share, from $272m or $10.32 per basic share. This is driven by a longer timeline for approval of the colorectal test for the US, which we now expect to enter the market in 2022. This has also increased our financing requirement to $67m (from $45m) due to the delay in profitability to 2022 (from 2021).

Big US trial for frontline colorectal test

In July 2017, VolitionRx announced that it will be participating in a 13,500-person trial in the US investigating biomarkers for colorectal cancer screening. The Nu.Q™ colorectal screening test will be incorporated into the panel, and the company has stated that it believes the data from this study should be sufficient to support US PMA approval, although it has not met with the FDA to delineate the actual approval requirements. 4,677 samples have already been collected for the study and up to an additional 9,000 samples will be prospectively collected from asymptomatic individuals 50 years and over who have not undergone a colonoscopy. The study is being run in collaboration with the National Cancer Institute's (NCI) Early Detection Research Network (EDRN) and the Great Lakes New England (GLNE, of the University of Michigan) Clinical Validation Center and is expected to take two to three years to complete.

A positive aspect of this clinical trial plan is the cost savings to VolitionRx. The company has committed only $3m to the collaboration expenses. This is exceptionally inexpensive considering the size and scope of the trial. This will be one of the largest clinical studies to support the approval of a colorectal cancer screening product. The stool-screening test, Cologuard (Exact Sciences), was approved using the data from a 10,000-person prospective trial.

The precise details of the clinical program have not been announced yet. However, GLNE, which will be performing the trial, is highly experienced at similar large colorectal biomarker screening projects. It previous performed validation testing on Cologuard (along with other biomarkers) in a 6,000-person study. The center has published over 30 papers based on research from its biomarker clinical trials.

We expect the FDA to evaluate data from this trial similarly to the pivotal trial for Cologuard. This study had primary endpoints that the lower bound of the 95% confidence interval for sensitivity exceed 65% for colorectal cancer and exceed 85% specificity for advanced neoplasias.

Exhibit 1: CRC screening technology comparison

	Sensitivity (%)	False negative rate (%)	Specificity (%)	False positive rate (%)	Cost per test ($)	Number of tests in US annually (m)	Negatives
Colonoscopy	95	5	95	5	1,000-3,000	4.3	Invasive, adverse events, cost
FOBT	50	50	98	2	5	5.6	Fecal-based test, high false negative, accuracy depends on which specific FOBT variant used
FIT	68	32	97.4	2.6	23	4.6	Fecal-based test, high false negative
Cologuard (Exact Sciences)	92	8	87	13	428	0.55*	Fecal-based test, high cost
Epi proColon (Epigenomics)	72	28	81	19	141	small	Blood based
Nu.Q™ (VolitionRx)	81-91	9-19	78-90	10-22	40-80	N/A	Blood based, low cost

Source: FDA, World Gastroenterology Organisation, Exact Sciences, VolitionRx. Note: *2017 guidance. FOBT=fecal occult blood test; FIT=fecal immunochemical test.

In other news

VolitionRx announced on 27 June 2017 that it would be replacing some of the immunoassays present in its Nu.Q™ colorectal cancer screening triage test. This decision followed reanalysis of the data from the 8,000-person clinical trial of the test announced in May 2017. Certain immunoassays in the test had high p-values, and the company is replacing them. The redesign of the panel will necessitate an updated or new CE mark, which will take a few months. This process may affect the upcoming decision from the Danish colorectal cancer screening steering committee, which is planned to meet in September 2017. If the test does not have a CE mark at this time, it may affect the committee’s decision to adopt it or not. Additionally, it is unclear at this time to what degree data from the previous version of the test can be used to support the approval of the new test.

The company also announced that it had initiated the process of seeking approval in Taiwan and Singapore. The regulatory process has been initiated in both locations. An approval in Singapore would allow the test to be marketed into the nine other markets that are part of ASEAN with a total population of 625 million people, although we should note that national screening programs are not widespread. The triage test has entered the clinic in Taiwan. Both of these countries have nationalized screening programs that employ the FIT test as a first-line screen, and are therefore ideal target markets.

Finally, the company announced that it has opened a new research facility in Belgium, which will increase the R&D capacity of the company. This will enable increased development into other indications, such as prostate, lung, and pancreatic cancer tests.

Valuation

We have lowered our valuation to $236m or $8.89 per basic share, from $272m or $10.32 per basic share. We have reduced our valuation for the frontline Nu.Q™ colorectal screening test to $148m (from $170m) based on the timeline for the pivotal US trial, which has delayed our US launch date to 2022. We previously modelled that the company would pursue approval initially though a 510(k) pathway with early albeit more limited sales in 2018. We should note that although the company believes that the US trial will support a PMA, it has not confirmed this with the FDA, and any changes to the development plan may result in further delays.

We have also reduced the valuation for the Nu.Q™ colorectal cancer screening triage test to $21m from $29m. This adjustment was made to account for the redesign of the test, which we believe will result in delays of initial revenue from 2017 to 2018. This will have little impact on near-term cash flow, as this revenue was small, but will delay the eventually acceptance of the test by European screening programs and the sales ramp. We have also delayed the launch of the Nu.Q™ lung and pancreatic test to 2019 based on lack of advancement in these programs. Other adjustments to our valuation include lower net cash ($15.3m from $17.7m), and rolling forward our NPVs to the most recent quarter. We have not added Asian markets to our valuation until we have an understanding of the company’s commercialization plan in this region.

Exhibit 2: Valuation

Product	Main indication	Status	Prob. of commercial success	Launch year	Peak sales ($m)	Patent protection	Economics	rNPV ($m)
Nu.Q™	Colorectal	Development	30%	2018	$404	2034	56% peak margin	$148
	Colorectal triage	Development	50%	2018	$42	2034	50% peak margin	$21
	Lung	Development	30%	2019	$145	2034	61% peak margin	$42
	Pancreatic	Development	30%	2019	$37	2034	58% peak margin	$10
Total								$221

Cash and cash equivalents (Q217) ($m)								$15.3
Total firm value ($m)								$236
Total basic shares (m)								26.5
Value per basic share ($)								$8.89
Warrants and options (m)								4.9
Weighted average exercise price ($)								$3.45
Cash on exercise ($m)								$16.9
Total firm value ($m)								$253
Total number of shares (m)								31.4
Diluted value per share ($)								$8.04

Source: Edison Investment Research, VolitionRx reports

Financials

VolitionRx reported a loss from operations of $3.5m for Q217, which is a slight increase over the previous period ($3.4m). Spending was roughly split evenly between G&A and R&D. Our projections for R&D spending for 2017 have been reduced by $1m as we have shifted spending to support the 13,500-person US trial into later years. The company ended the quarter with $15.3m in net cash. Due to the longer timeframe for approval in the US, we now expect that the company will reach profitability in 2022 (from 2021) and will require $67m (modeled as $15m in illustrative debt in each of 2017, 2018 and 2019, and $22m in 2020) in additional financing (from $45m).

Exhibit 3: Financial summary

	$000s	2015	2016	2017e	2018e
Year end 31 December		US GAAP	US GAAP	US GAAP	US GAAP
PROFIT & LOSS
Revenue		0	0	0	1,332
Cost of Sales		0	0	0	(166)
Gross Profit		0	0	0	1,166
Research & Development		(6,102)	(6,838)	(7,521)	(8,273)
Sales, General & Administrative		(3,904)	(5,429)	(6,131)	(10,213)
EBITDA		(10,006)	(12,267)	(13,652)	(17,320)
Operating Profit (before amort. and except.)		(10,006)	(12,267)	(13,652)	(17,320)
Intangible Amortization		0	0	0	0
Other		0	0	0	0
Exceptionals		0	0	0	0
Operating Profit		(10,006)	(12,267)	(13,652)	(17,320)
Net Interest		0	0	0	(1,165)
Other		471	252	93	0
Profit Before Tax (norm)		(9,666)	(12,267)	(13,652)	(18,485)
Profit Before Tax (FRS 3)		(9,535)	(12,014)	(13,559)	(18,485)
Tax		5	0	0	0
Deferred tax		(0)	(0)	(0)	(0)
Profit After Tax (norm)		(9,661)	(12,267)	(13,652)	(18,485)
Profit After Tax (FRS 3)		(9,530)	(12,014)	(13,559)	(18,485)

Average Number of Shares Outstanding (m)		17.7	23.0	26.7	27.7
EPS - normalised (c)		(54.49)	(53.22)	(51.23)	(66.69)
EPS - FRS 3 ($)		(0.54)	(0.52)	(0.51)	(0.67)
Dividend per share (c)		0.0	0.0	0.0	0.0

BALANCE SHEET
Fixed Assets		1,489	2,721	3,735	2,996
Intangible Assets		705	602	599	599
Tangible Assets		784	2,119	3,136	2,397
Other		(0)	(0)	(0)	(0)
Current Assets		6,070	21,846	26,480	26,906
Stocks		0	0	0	8
Debtors		0	0	0	237
Cash		5,916	21,679	26,333	26,514
Other		154	167	147	147
Current Liabilities		(1,120)	(2,033)	(2,352)	(3,030)
Creditors		(1,120)	(2,003)	(2,214)	(2,892)
Short term borrowings		0	(31)	(138)	(138)
Long Term Liabilities		(548)	(1,524)	(17,145)	(32,145)
Long term borrowings		0	(432)	(16,065)	(31,065)
Other long term liabilities		(548)	(1,092)	(1,080)	(1,080)
Net Assets		5,891	21,009	10,718	(5,273)

CASH FLOW
Operating Cash Flow		(8,766)	(9,056)	(10,655)	(14,806)
Net Interest		0	0	0	0
Tax		0	0	0	0
Capex		(352)	(415)	(1,235)	(13)
Acquisitions/disposals		0	0	0	0
Financing		12,498	25,302	879	0
Dividends		0	0	0	0
Other		0	(553)	(61)	0
Net Cash Flow		3,379	15,279	(11,072)	(14,819)
Opening net debt/(cash)		(2,139)	(5,916)	(21,216)	(10,131)
HP finance leases initiated		0	0	0	0
Exchange rate movements		13	146	(100)	0
Other		385	(125)	87	0
Closing net debt/(cash)		(5,916)	(21,216)	(10,131)	4,688

Source: Edison Investment Research, VolitionRx reports

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