VolitionRx — Update 6 January 2017

Healthcare

VolitionRx

Triage test ready for launch

Commercial update

Healthcare equipment & services

6 January 2017

Price	US$5.26
Market cap	US$137m

Net cash ($m) at end Q316		12.5

Shares in issue	26.1m
Free float	74%
Code	VNRX

Primary exchange	NYSE MKT
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	19.8	8.0	22.6
Rel (local)	16.4	2.8	9.0

52-week high/low

US$5.6

US$3.1

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 may enter the European market in 2017.

Next events

Additional triage trial results at ENDO congress	February 2017
Additional CRC data	H117
FDA feedback on 510(k) pathway	H117

Analysts

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

healthcare@edisongroup.com

Edison profile page

VolitionRx is a research client of Edison Investment Research Limited

VolitionRx reported in January 2017 that it had received a CE mark for its Nu.Q™ triage test for colorectal cancer (CRC). The company is targeting commercialization of the test initially in EU member states that have established fecal immunochemical testing (FIT) programs (of which there are 14 in total), and the CE mark should enable launches in these territories as early as 2017.

Year end	Revenue ($m)	PBT* ($m)	EPS* ($)	DPS ($)	P/E (x)	Yield (%)
12/14	0.0	(8.4)	(0.62)	0.0	N/A	N/A
12/15	0.0	(9.7)	(0.54)	0.0	N/A	N/A
12/16e	0.0	(14.0)	(0.61)	0.0	N/A	N/A
12/17e	1.6	(16.6)	(0.62)	0.0	N/A	N/A

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

Triage test can reduce colonoscopies by 25%

In October 2016 VolitionRx presented data at the European Society for Medical Oncology detailing the results from a 1,907-person prospective clinical trial of the Nu.Q™ triage test. The results demonstrated that when combined with a FIT, the protocol could maintain 96.6% of CRC diagnoses compared to current regimens, while reducing unnecessary colonoscopies by 25%. Additional results are to be released in February 2017 at the ENDO 2017 World Congress of GI Endoscopy.

VolitionRx: Market of €150m in triage tests per year

The company announced initial pricing and market estimates for the triage test on the Q316 conference call. The assay will be priced at €50 per test, and VolitionRx estimates approximately three million people with positive FITs across Europe, which is similar to our estimates of 2.5 million individuals. The company expects individual contracts with central health authorities to translate into 30k to 200k tests per year apiece, depending on the size of the country.

Big prospective trial on deck

The company announced plans to initiate a prospective trial of 30,000 Danish individuals for the study of the front-line Nu.Q™ test in collaboration with Hvidovre Hospital. The trial will follow patients for a minimum of two years with an option to extend up to six years, and will cost DKK7.5m per year in fees to the hospital.

Valuation: $267m or $10.23 per basic share

We have increased our valuation to $267m from $246m, but the per-share valuation has reduced to $10.23 from $10.46 per basic share due to the recent 2.5m share offering. We have increased our peak sales estimates for the triage test to $42m from $30m based on company pricing guidance, and increased our valuation for the program to $17m from $12m. The remainder of the increase is due to advancing our NPVs to Q316, and the October 2016 offering ($11.7m net). We expect the company to need $45m in cash before becoming cash flow positive in 2021.

CE mark received for triage test in Europe

VolitionRx announced in January 2017 that it had received a CE mark for the Nu.Q™ triage colorectal cancer (CRC) test and it is now authorized for sale in Europe. The triage test will be the company’s first product available for purchase and the first sales are expected in H117.

The test uses the Nu.Q™ nucleosome testing platform and two assays that were previously used in the first-line Nu.Q™ CRC test currently in development. The triage test is designed to decrease the number of unnecessary colonoscopies by providing an additional layer of screening on top of the standard fecal immunochemical test (FIT). FIT screening is the standard first-line detection method across Europe, and approximately 2.6% of patients receive a false positive for the test in trials, but the rate of positive tests is much higher in retrospective studies: up to 7%.1,2 Based on the underlying rate of CRC, the company estimates that 95% of all positive FITs are false positives, due to the low underlying prevalence of CRC. There is therefore a substantial burden placed on healthcare systems due to unnecessary colonoscopies. This is particularly the case in systems that have government-sponsored FIT screening, which is present in 14 of the 28 EU member states.

Quintero E, et al. (2012) Colonoscopy versus Fecal Immunochemical Testing in Colorectal-Cancer Screening. New Eng. J. Med. 366, 697-706.

Imperiale TF, et al. (2014) Multitarget Stool DNA Testing for Colorectal-Cancer Screening. New Eng. J. Med. 370, 1287-1297.

The company released results at the European Society for Medical Oncology (ESMO) from a 1,907-person prospective study demonstrating that the triage test, when combined with a FIT, can reduce the rate of unnecessary colonoscopies by 25%, while correctly identifying 96.6% of CRC cases (compared to current colonoscopy rates). Additionally, the two tests combined are better at positively identifying patients with CRC: 29% more cases of CRC were caught using the triage test and FIT compared to FIT alone. This corresponds to a sensitivity of 88% and specificity of 98.1%, when extrapolated using historical FIT data (Exhibit 1). The full results of the triage clinical trial will be presented at the ENDO 2017 World Congress of GI Endoscopy in February.

Exhibit 1: CRC screening technology comparison

Test	Sensitivity (%)	False negative rate (%)	Specificity (%)	False positive rate (%)	Cost per test
Colonoscopy	95	5	95	5	$1,000-3,000
FOBT	50	50	98	2	$5
FIT	68	32	97.4	2.6	$23
Cologuard (Exact Sciences)	92	8	87	13	$649
Nu.Q™ triage + FIT*	88	12	98.1	2.0	€50

Source: FDA, World Gastroenterology Organisation, Exact Sciences, VolitionRx. Note: *These data extrapolated from VolitionRx reported improvements and historical FIT measurements.

On the Q316 conference call, VolitionRx provided preliminary pricing and market estimates. VolitionRx stated that it is aiming to price the test in the €50 range, which is higher than our earlier estimates of €20 per test, and the company provided a range of gross margins for the test: “north of 70% or 80%”. The test will be commercialized by targeting central health authorities across the EU, beginning with the states that have established FIT testing protocols. The company estimated a potential market of 3m tests per year, which is similar to our earlier estimates of 2.5m across EU member states. The company stated that individual markets in the initial set of targeted territories correspond to “chunks of between 30k and 200k tests, depending on the size of the country”.

Biggest CRC trial yet

In other developments, VolitionRx announced that it will be initiating a 30,000-person prospective screening study in Denmark with its long-time collaborator Hvidovre Hospital of the front-line Nu.Q™ CRC test. The study is the company’s largest to date and its prospective nature should provide significant evidence of the test’s utility for widespread screening. The previous prospective CRC study enrolled only 121 patients, but showed 91% sensitivity and 90% specificity.

The patients on the study will be selected from the Danish FIT screening program on the basis of a negative FIT, and will receive a Nu.Q™ test on enrolment and each subsequent year. The program has an initial duration of two years with the option to continue for up to six years. We expect at least one year for enrollment, corresponding to a maximum seven-year clinical program. The company will pay the hospital DKK7.5m per year ($1.1m) for the study. These expenses are within our estimates for the development costs for the front-line test. Depending on results, such a study may support marketing efforts in Europe, but marketing approval and payer adoption in the US may require additional studies, although in the near term the company may avoid some clinical trials by pursuing a 510(k) approval, albeit with a more restrictive label. Feedback from the FDA on the US approval pathway, starting with guidance on a 510(k) application, is expected in H117. We also expect results from two other studies being performed at Hvidovre Hospital in H117: a 4,800-person study of biomarkers to differentiate CRC from other bowel diseases, and a 14,000-person study in patients with a positive FIT test.

Valuation

We have increased our valuation to $267m from $246m, although this represents a reduction in the per-share valuation to $10.23 from $10.46 per basic share because of the October 2016 offering of 2.5m shares for a net $11.7m. Approximately $6m of this increase is due to the integration of the pricing and margins reported by the company for the Nu.Q™ CRC triage test. The price increase has been made at the cost of a slower rate of adoption, although we have increased our peak sales estimates to $42m (from $30m). The gross margin estimates from the company have reduced our expected peak margin estimates from 54% to 50%. The remainder of the increase in valuation is due to advancing our NPVs to Q316, offset by a lower cash balance. We expect to update our valuation following feedback from the FDA on the 510(k) pathway, as well as reports of the Nu.Q™ triage launch.

Exhibit 2: VolitionRx valuation

Product	Main indication	Status	Prob. of commercial success	Launch year	Peak sales ($m)	Patent protection	Economics	rNPV ($m)
Nu.Q™	Colorectal	Development	30%	2017	$404	2034	56% peak margin	$175
	Colorectal triage	Pre-commercialization	30%	2016	$42	2034	50% peak margin	$17
	Lung	Development	30%	2018	$145	2034	61% peak margin	$41
	Pancreatic	Development	30%	2018	$37	2034	58% peak margin	$10
Total								$243

Cash and cash equivalents (Q316 + offering) ($m)								$24.2
Total firm value ($m)								$267
Total basic shares (m)								26.1
Value per basic share ($)								$10.23
Warrants and options (9/2016, m)								2.1
Weighted average exercise price ($)								$2.36
Cash on exercise ($m)								$5.0
Total firm value ($m)								$272
Non-warrant options (6/2016, m)								2.5
Total number of shares (m)								30.7
Diluted value per share ($)								$8.86

Source: VolitionRx reports, Edison Investment Research

Financials

The company ended Q316 with $12.5m in cash following an operating loss for the quarter of $3.5m. This loss is an increase over previous quarters ($3.0m in Q216 and $2.5m in Q116), reflecting an increase in R&D spending associated with advancement of the Nu.Q™ CRC development program ($2.0m for the quarter). However, the increase in spending during the quarter was lower than expected, and we have reduced 2016 full year operational loss estimates to $14.0m from $15.1m, although there is little carry-over into future years. The company has subsequently completed an offering (2.5m shares at $5.00 for $11.7m in net proceeds). This raise has reduced our expected funding requirement to $45m ($15m in 2017, $15m in 2018, and $15m in 2019) from previous estimates of $60m. We expect that the company will be cash flow positive in 2021.

Exhibit 3: Financial summary

	$000s	2012	2013	2014	2015	2016e	2017e
Year end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		55	0	15	0	0	1,622
Cost of Sales		0	0	0	0	0	(229)
Gross Profit		55	0	15	0	0	1,393
Research & Development		(2,843)	(2,504)	(4,044)	(6,102)	(8,002)	(9,902)
Sales, General & Administrative		(1,295)	(2,072)	(1,908)	(3,904)	(6,051)	(8,171)
EBITDA		(4,083)	(4,576)	(5,937)	(10,006)	(14,027)	(16,679)
Operating Profit (before GW and except.)		(4,083)	(4,576)	(5,937)	(10,006)	(14,027)	(16,679)
Intangible Amortization		0	0	0	0	0	0
Other		0	0	0	0	26	0
Exceptionals		0	0	0	0	0	0
Operating Profit		(4,083)	(4,576)	(5,937)	(10,006)	(14,027)	(16,679)
Net Interest		0	0	0	0	0	97
Other		(39)	840	(2,320)	471	(34)	0
Profit Before Tax (norm)		(4,083)	(4,576)	(8,358)	(9,666)	(14,027)	(16,583)
Profit Before Tax (FRS 3)		(4,122)	(3,736)	(8,258)	(9,535)	(14,060)	(16,583)
Tax		0	0	(0)	5	0	0
Deferred tax		0	0	(0)	(0)	(0)	(0)
Profit After Tax (norm)		(4,083)	(4,576)	(8,358)	(9,661)	(14,027)	(16,583)
Profit After Tax (FRS 3)		(4,122)	(3,736)	(8,258)	(9,530)	(14,060)	(16,583)

Average Number of Shares Outstanding (m)		9.4	10.8	13.5	17.7	23.1	26.6
EPS - normalised (c)		(43.62)	(42.24)	(62.08)	(54.49)	(60.78)	(62.31)
EPS - FRS 3 ($)		(0.44)	(0.34)	(0.61)	(0.54)	(0.61)	(0.62)
Dividend per share ($)		0.0	0.0	0.0	0.0	0.0	0.0

BALANCE SHEET
Fixed Assets		1,522	1,065	1,097	1,489	1,423	1,269
Intangible Assets		1,430	1,002	809	705	656	656
Tangible Assets		91	63	289	784	768	613
Other		0	0	(0)	(0)	(0)	(0)
Current Assets		416	941	2,192	6,070	19,502	19,591
Stocks		0	0	0	0	0	11
Debtors		0	0	0	0	0	289
Cash		376	889	2,139	5,916	19,349	19,137
Other		39	53	53	154	154	154
Current Liabilities		(695)	(957)	(2,713)	(1,120)	(1,907)	(1,740)
Creditors		(695)	(957)	(2,713)	(1,120)	(1,907)	(1,740)
Short term borrowings		0	0	0	0	0	0
Long Term Liabilities		(635)	(433)	(352)	(548)	(460)	(15,460)
Long term borrowings		0	0	0	0	0	(15,000)
Other long term liabilities		(635)	(433)	(352)	(548)	(460)	(460)
Net Assets		607	617	224	5,891	18,559	3,660

CASH FLOW
Operating Cash Flow		(2,315)	(3,084)	(4,141)	(8,766)	(11,578)	(15,373)
Net Interest		0	0	0	0	0	0
Tax		0	0	0	0	0	0
Capex		(91)	(1)	(303)	(352)	(89)	(30)
Acquisitions/disposals		0	0	0	0	0	0
Financing		2,576	2,828	5,627	12,498	25,206	0
Dividends		0	0	0	0	0	0
Other		0	0	0	0	(62)	0
Net Cash Flow		171	(257)	1,183	3,379	13,477	(15,403)
Opening net debt/(cash)		(348)	(376)	(889)	(2,139)	(5,916)	(19,349)
HP finance leases initiated		0	0	0	0	0	0
Exchange rate movements		(40)	4	(44)	13	33	0
Other		(103)	765	111	385	(77)	191
Closing net debt/(cash)		(376)	(889)	(2,139)	(5,916)	(19,349)	(4,137)

Source: VolitionRx reports, Edison Investment Research

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