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Edison Research Template
Viralytics Outlook for 2015 Building the clinical data package Pharma & biotech 8 January 2015 The potential combination of Cavatak (oncolytic virus) with checkpoint inhibitors represents a substantial commercial and partnering opportunity for Viralytics. The company is currently focused on building the clinical data package on Cavatak, which could prove attractive to big pharma Price A$0.31 Market cap A$57m companies seeking complementary therapies to boost immune responses to their checkpoint inhibitors. We see a potential deal for Cavatak in 2016 and value Viralytics at A$141m, or A$0.76 per share. Net cash (A$m) at 30 September 2014 Year end 06/13 06/14 06/15e 06/16e Revenue (A$m) 2.5 2.5 2.0 3.8 PBT* (A$m) (3.7) (4.7) (8.2) (3.2) EPS* (c) (4.5) (3.9) (4.4) (1.7) DPS (c) 0.0 0.0 0.0 0.0 P/E (x) N/A N/A N/A N/A Yield (%) N/A N/A N/A N/A A$1.23/US$ Shares in issue 23.8 184.0m Free float 86% Code VLA Primary exchange ASX Secondary exchange OTCQX Share price performance Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Cavatak therapy shrinks untreated tumours… Injection of Cavatak into melanoma tumours in the skin or superficial lymph nodes led to an impressive overall response rate of 28% in injected and un-injected lesions in the CALM Phase II study. A key goal in melanoma treatment is to control disease that has spread to the lung, brain or other organs. The results of the CALM trial are also encouraging in this regard: we estimate that the response rate in un-injected metastatic tumours in Stage 4 melanoma patients was at least 11%. % 1m 3m 12m Abs 3.3 1.6 3.9 …with potential checkpoint inhibitor combinations… Rel (local) 2.9 0.7 3.6 Checkpoint inhibitors seem set to dramatically change the therapeutic landscape for melanoma and many other cancers by releasing the handbrake on the body’s natural immune response to tumours. Yet efficacy, and a broader patient response, could be boosted by the addition of other agents such as oncolytic viruses. 52-week high/low …that may boost partnering prospects Amgen acquired Biovex and its T-Vec oncolytic virus in 2011 for US$425m upfront (+US$575m potential milestones) on the basis of Phase II data similar to Cavatak. We expect the leading checkpoint inhibitor developers – Merck & Co, Bristol-Myers Squibb, Roche and AstraZeneca – to be seeking products that would enhance immune responses. Viralytics is therefore building a data package that addresses the key questions of interest to potential partners, with further data from CALM, STORM trial results (IV Cavatak) in solid tumours, and a Phase Ib study of Cavatak in combination with a checkpoint inhibitor (Yervoy), expected in 2015. Valuation: rNPV of A$141m (A$0.76 per share) Our risk-adjusted NPV is largely unchanged at A$141m or A$0.76 per share (previously A$0.77/share). We have delayed our forecast launch of Cavatak for melanoma by a year to 2021 to allow for Phase Ib check point inhibitor combination trials, although the weaker Australian dollar has largely offset the negative impact on valuation. We assume a 35% success probability in melanoma. A$0.36 A$0.27 Business description Viralytics is an ASX-listed biopharmaceutical developing virus applications using a common cold producing virus to target late-stage melanoma and other solid tumour types. The Phase II CALM trial is evaluating intratumoural administration of lead candidate Cavatak in patients with metastatic melanoma. Next events Initiate Yervoy combination study Q115 Initial results STORM Phase I/II Q115 Final results CALM Phase II Q115 Initiate CANON bladder cancer Q115 Analysts Dr Dennis Hulme +61 (0)2 9258 1161 Christian Glennie +44 (0)20 3077 5727 Dr Mick Cooper +44 (0)20 3077 5734 [email protected] Edison profile page Viralytics is a research client of Edison Investment Research Limited Investment summary: Targeting metastatic melanoma Company description: Oncolytic virotherapy developer Viralytics is focused on developing oncolytic virotherapy to treat a range of cancers. Lead candidate Cavatak is a proprietary formulation of a common cold virus, Coxsackievirus A21 (CVA21), which is in clinical development for late-stage melanoma and a range of other solid tumours. A US Phase II study of Cavatak (CALM) achieved a 28% objective response rate, including an estimated response rate of at least 11% in non-injected tumours in the lung and other organs. A UK Phase I/II study (STORM) of intravenous Cavatak in advanced solid tumours (melanoma, prostate, lung, bladder) is expected to report preliminary results in H115. Viralytics will begin a Phase Ib study of Cavatak in combination with the checkpoint inhibitor Yervoy in early Q115, and we expect additional combination studies with other checkpoint inhibitors to follow. Viralytics raised A$27m in March 2014 including investments from 12 specialist healthcare institutional investors, and had A$24m cash at 30 September 2014. Valuation: rNPV of A$141m, or A$0.76 per share (undiluted) We value Viralytics at A$141m, or A$0.76 per share (undiluted), using a risk-adjusted net present value method to discount future cash flows through to 2033 in metastatic melanoma, bladder cancer, non-small cell lung cancer and prostate cancer. A 35% probability of success has been applied to reflect Cavatak’s phase of clinical development with projected cash flows discounted at 12.5%. Our approach assumes a partnering deal or out-licensing of Cavatak post-release of the checkpoint inhibitor combo trial data in 2016, with all costs of subsequent clinical development borne by the partner/licensee. Of note, while our model does include upfront payments and clinical/regulatory milestones (but not sales milestones) from a potential licensing deal, these have been risk-adjusted. Sensitivities: STORM and combo trial outcomes the key Viralytics is subject to typical biotech company development risks, including the unpredictable outcome of trials, regulatory decisions, success of competitors, financing and commercial risks. In particular, it has a very high single-product risk, with the entirety of its value residing in Cavatak. The investment case hinges on the outcome of clinical trials and, assuming data are positive, the company’s ability to secure a partnership (or further capital) to advance Cavatak into late-stage trials. Ideally, a partner would have an established oncology franchise with the resources and experience to evaluate Cavatak in multiple cancer indications. The rapidly evolving treatment landscape for melanoma means that the greatest commercial opportunity for Cavatak is likely to be in combination with checkpoint inhibitors or other targeted agents – selection of the appropriate therapy to combine with Cavatak could be critical to future clinical and commercial success. Financials: Sufficient cash for a Phase IIb trial Viralytics reported cash of A$24m at the end of September 2014. The company has the resources to complete the ongoing CALM and STORM trials, and the planned CANON and Phase Ib Cavatak combination trials, as well as a randomised Phase IIb study in advanced melanoma. Viralytics received a rebate of A$2.5m under the Australian R&D tax incentive scheme in December 2014. If a partner or licensee is not secured for Cavatak, Viralytics has sufficient resources to conduct the Phase IIb trial (we expect it to be in combination with a checkpoint inhibitor). Given the positive signs of efficacy to date, the prospects for attracting a big pharma partner appear promising. Viralytics | 8 January 2015 2 Outlook: Answering key questions of potential partners Viralytics’ investment case centres on the successful development and commercialisation of its lead product Cavatak to treat advanced melanoma and potentially other solid cancers. Interim results from the CALM Phase II melanoma trial show that Cavatak has encouraging anti-cancer efficacy as a single agent. However, the main commercial opportunity is for its use in combination with checkpoint inhibitors such as Yervoy, Opdivo or Keytruda, or other targeted agents such as the BRAF inhibitor Zelboraf. Viralytics is attempting to build a solid data package that answers the key questions that would be of interest to potential partners such as Merck & Co, Bristol-Myers Squibb, Roche and AstraZeneca. As that data set matures, and if the trials continue to deliver positive results, we see a high likelihood of a licensing deal or M&A transaction. We see the immuneprofiling extension of the CALM Phase II trial, the STORM trial of intravenous Cavatak (initial results due in Q115), and the upcoming combination trial with the checkpoint inhibitor Yervoy as potential triggers for a partnering deal or M&A transaction. Oncolytic virus – kills cancer cells, triggers immune response Dual mechanism of anti-cancer activity Oncolytic virotherapy is an emerging class of anti-cancer therapy that harnesses viruses to eradicate tumour cells while sparing their normal counterparts. Oncolytic viruses exert anti-cancer effects against both local (primary) and distant (metastatic) tumour cells, by preferentially infecting and destroying cancer cells while simultaneously activating a tumour-specific immune response. Presentations at the recent Society for Melanoma Research Conference highlighted the potential for the release of tumour antigens following the lysis of cancer cells by oncolytic viruses to act as a multivalent vaccine, releasing antigens potentially specific to the tumour. The presentations highlighted that these therapies have a potential use as immune priming agents prior to the use of checkpoint inhibitors, and recommended that they should be evaluated in combination with those drugs. Amgen recently applied for FDA and EU marketing approval for its oncolytic virus T-Vec (talimogene laherparepvec) in metastatic melanoma, so oncolytic virotherapy may soon become a commercial reality. Amgen acquired Biovex, T-Vec’s developer, in 2011, in a deal valued at up to US$1bn (US$425m upfront, US$575m potential milestones). Oncolytic viruses could offer a broad and targeted anti-cancer activity that address the limitations of current treatment or, more likely, provide additive efficacy when combined with existing agents. Cavatak – new role for a common cold virus Cavatak is a proprietary formulation of the Coxsackievirus A21, a wild-type (genetically unaltered) common cold-producing enterovirus, of the family Picornaviridae. Immunohistochemical tissue studies suggest CVA21 preferentially infects cells with high surface levels of the receptor intercellular adhesion molecule-1 (ICAM-1). CVA21 was one of several viruses identified by Professor Darren Shafren, Viralytics’ chief scientific officer, as having oncolytic activity against in vitro cultures of cancer cells and in vivo xenografts of human cancers in mouse models of melanoma, multiple myeloma,prostate and breast cancer, all of which exhibit high surface expression of ICAM-1. CALM Phase II trial shows Cavatak shrinks melanomas The US-based, single-arm, open-label Phase II CALM study is evaluating intratumoural (IT) injections of Cavatak administered as a monotherapy over 18 weeks, in patients with advanced Viralytics | 8 January 2015 3 melanoma. The initial CALM study enrolled 57 subjects with Stage IIIc (42%) or IV (58%) disease that have failed previous therapy (average of three treatments). The primary endpoint of CALM is stable disease (or better) at six months after the first dose of Cavatak, as measured by irPFS; this includes patients with a complete response (CR), partial response (PR) or stable disease. To meet its primary endpoint the study had to achieve an irPFS at six months in at least 18.5% of patients; this benchmark was based on a meta-analysis of 42 Phase II trials in metastatic melanoma. Exhibit 1 shows that Cavatak easily met the primary endpoint of the CALM trial, with 39% (22/57) of patients achieving the six-month irPFS endpoint. Importantly, no Grade 3 or 4 drug-related adverse events were seen. Exhibit 1 also shows that the efficacy for CAVATAK is similar to that for T-Vec where comparable data are available. In particular, the overall response rate of 28% for CAVATAK (both injected and non-injected lesions) is very similar to the 26% overall response rate reported to T-Vec in its Phase II and Phase III trials. Exhibit 1: Cavatak efficacy matches or exceeds Amgen’s T-Vec Number of patients Stage of disease ir Progression-Free Survival – six months ir Progression-Free Survival – three months One-year survival rate Overall response rate Durable (six months) response rate Complete response rate (all tumours) Complete response rate (target lesions) Response rate un-injected distant metastases (Stage IV) Response rate visceral metastases (Stage IV m1b, m1c) Viralytics CAVATAK Phase II CALM Melanoma interim data 57 IIIC-IV 39% (22/57) 50%# 73% (33/45) 28% (16/57) Amgen/Biovex TVec Phase II Melanoma final data^ 50 IIIC-IV Not reported 50%^^ 58% 26% (13/50) T-VEC Phase III OPTiM results 439 26% 16% 11% 14% ≥12% (≥4/33)* ≥11% (≥2/19)* Source: Viralytics investor presentation October 2014, Viralytics ESMO poster September 2014, Amgen announcement, Edison Investment research. Note: ^Data from Senzer et al, 2009. J. Clin.Oncol., (34):5763-7; ^^Referred to as Disease control rate in Senzer et al, 2009. J. Clin.Oncol., (34):5763-7; #50% irPFS when assessed in 38 patients in November 2013; *estimated by Edison Investment Research from conference poster presentation. Cavatak shrinks un-injected melanoma tumours in major organs Importantly, in addition to its effect on injected lesions, Cavatak treatment shrank un-injected metastatic melanoma tumours in major organs such as the lungs. Viralytics has not yet released a detailed breakdown of the response rates in Stage 3 and Stage 4 melanoma. However, based on case reports included in conference poster presentations, we estimate that in patients with Stage 4 metastatic melanoma, where the disease has spread beyond the skin and nearby lymph nodes we estimate that the response rate in un-injected distant metastases is at least 12% (Exhibits 1, 2 and 3). Furthermore, with patients with the most serious disease where the melanoma has spread to the lungs or other visceral organs, the response rate was at least 11%.This is a meaningful response rate for an immune therapy – Yervoy improved overall survival in a Phase III trial following an 11% overall response rate. Viralytics has shown that the responses in un-injected distant tumours occurred when there were already high levels of neutralising antibodies against the CVA21 virus; this suggests that the tumour shrinkage was caused by an immune response and was not due to subsequent viral infection. Viralytics is currently enrolling a further 12 participants in an extension to the CALM study that will study the immune profile of treated patients and seek to confirm that Cavatak therapy triggers an immune response against melanoma cells. Viralytics | 8 January 2015 4 Exhibit 2: Non-injected chest wall distant lesion surgical complete response Source: Viralytics investor presentation October 2014 Exhibit 3: Non-injected lung lesion partial response Source: Viralytics investor presentation October 2014 Cavatak can activate the cancer immunity cycle The immune system incorporates a number of inhibitory factors that act as ‘checkpoints’ to guard against autoimmunity and to protect tissues from damage by an over-exuberant immune response to an infection. Tumours can take advantage of these natural inhibitory protective mechanisms to evade an immune response. The generation of an immune response to cancer cells has been described as a cyclic process that can be divided into seven major steps (Exhibit 4). In step one, cancer-specific antigens are released following cancer cell death and captured by antigen-presenting dendritic cells for processing. Next, dendritic cells present the captured antigens to T cells (step two) resulting in the priming and activation of effector T cell responses against the cancer-specific antigens in the lymph node (step three). Finally, the activated T cells migrate to the tumour, where the cytotoxic T cells kill cancer cells in step seven. Exhibit 4 shows that each step in the cancer immunity cycle is influenced by a number of stimulatory or inhibitory factors. Stimulatory factors, shown in green, promote immunity, whereas inhibitors, shown in red, reduce immune activity and/or prevent immunity. In addition to directly killing cancer cells by cell lysis, we expect Cavatak to stimulate the cancer immunity cycle in a number of ways. Firstly, the lysis of infected tumour cells increases the release of tumour antigens. Secondly, the immune response directed against viral antigens expressed on Viralytics | 8 January 2015 5 infected tumour cells would stimulate the release of signals that would also stimulate an immune response rather than tolerance of cancer-specific antigens and thereby increase the production of T effector cells in step 3 of the cycle. The immune profiling extension to the CALM trial is gathering additional information about the way that Cavatak stimulates the immune system. Exhibit 4: Stimulatory and inhibitory factors in the cancer immunity cycle Source: Chen and Mellman, 2013. Immunity 39, 25 July 2013. http://dx.doi.org/10.1016/j.immuni.2013.07.012. Note: Each step of the Cancer-Immunity Cycle requires the coordination of numerous factors, both stimulatory and inhibitory in nature. Stimulatory factors shown in green promote immunity, whereas inhibitors shown in red help keep the process in check and reduce immune activity and/or prevent autoimmunity. Checkpoint inhibitors take the brakes off the cancer immunity cycle Two classes of immune-checkpoint inhibitors have been developed that activate an immune response by blocking inhibitory factors. The first, the anti-CTLA-4 antibody ipilimumab (Yervoy), predominantly upregulates T-cell activation in the priming phase at step three of the cancerimmunity cycle by blocking the action of the major negative regulator of T cells (CTLA-4). Yervoy treatment as a single agent has a modest 11% response rate in melanoma patients and has a number of toxic side effects because it upregulates the overall immune system. The newer PD-1 and PD-L1 checkpoint inhibitors, block the ‘programmed death’ (PD-1) signalling protein or the factor (ligand) that binds to it, PD-L1. Blocking the PD-1/PD-L1 complex predominantly upregulates effector T-cell activity within the tumour tissue at step seven of the cancer-immunity cycle. PD-L1 is expressed on 20-50% of human cancers and is an important pathway by which cancers evade the immune system. PD(L)-1 checkpoint inhibitors have achieved response rates of 13-40% across a range of cancers, including melanoma, when used as a single agent, and the responses are often long-lasting. Because they disable immune inhibition in the tumour microenvironment they cause fewer toxic side effects than the CTLA-4 inhibitor Yervoy. Viralytics | 8 January 2015 6 Cavatak poised to join the checkpoint inhibitor revolution PD(L)-1 checkpoint inhibitors work well in patients who have an active immune response that is being suppressed by PD(L)-1; however, the biggest survival benefits are typically observed in just a subset of patients. Evidence is building that the efficacy of checkpoint inhibitors can be increased by combining them with therapies that stimulate the earlier steps in the cancer immunity cycle. For example, the combination of Yervoy and the PD-1 inhibitor Opdivo (nivolumab) reported a 43% response rate in a Phase Ib trial. However, the combination therapy also amplified the toxic side effects already seen with Yervoy as a single agent. The potential benefits of combining oncolytic virotherapy with a checkpoint inhibitor was highlighted by a recent Phase Ib trial where the combination of Amgen’s T-Vec with Yervoy shrank tumours in 56% of the 19 participating melanoma patients, compared to the 26% response rate seen in trials of T-Vec as a single agent. Cavatak is an ideal candidate for combining with checkpoint inhibitors because it has few toxic side effects and it has already shown that it can shrink or eliminate distant un-injected tumours, including those in major organs such as the lungs. Viralytics has shown that CAVATAK given in combination with mouse versions of PD-1 and CTLA-4 produced superior efficacy in a mouse melanoma model, compared to the efficacy of either agent alone. We expect Viralytics to initiate a series of Phase 1b trials of Cavatak in combination with a range of different checkpoint inhibitors. Active clinical trial programme enhancing the data package Viralytics is actively pursuing a clinical trial programme to confirm the potential of Cavatak as an anticancer therapy. Exhibit 5 summarises the ongoing and planned Cavatak clinical trials: CALM trial – immune-profiling extension Biopsies will be taken from both injected and non-injected melanoma tumours in an additional 12 patients recruited in this extension of the CALM Phase II trial. This trial will provide crucial information about the extent to which Cavatak treatment stimulates an immune response against distant melanoma tumours. The results will have important implications for the combination of Cavatak with checkpoint inhibitors. STORM – intravenous Cavatak Phase I/II trial The STORM (Systemic Treatment Of Resistant Malignancies) began recruiting patients with latestage melanoma, non-small cell lung cancer, bladder and prostate cancer in March 2014. The first stage of the trial will seek to identify the most responsive cancer type for Stage 2. Stage 2 of the trial will focus on one selected cancer type and patients will receive repeated IV doses of Cavatak in conjunction with chemotherapy. Preliminary results of Stage 1 are expected in Q115. Phase I bladder cancer trial in 2015 Viralytics has received regulatory approval to initiate a Phase I trial of the administration of Cavatak directly into the bladder in patients with non-muscle invasive bladder cancer. Preclinical studies showed that adding Cavatak to either radiation or chemotherapy increased the anticancer activity in bladder cancer cell lines compared to either radiation or chemotherapy alone. Viralytics | 8 January 2015 7 Exhibit 5: Cavatak clinical trial programme Route of admin Intratumoural Indication Intratumoural Melanoma Intratumoural Melanoma Intravenous Intratumoural Intratumoural Intravesicular Intratumoural Melanoma Melanoma, breast, lung, prostate Melanoma Melanoma Non muscleinvasive bladder cancer Head and neck Stage Development notes Phase IIb Randomised Phase IIb study in malignant melanoma in final planning. May be monotherapy, but more likely to be in combination with checkpoint inhibitor. Phase IIa Phase II CALM study in malignant melanoma (n=57, interim results: six-month irPFS 39%; ORR 28%). Monotherapy. Final results due in Q115 [Phase II CALM extension study with dosing up to 48 weeks in total]. Phase IIa Phase II CALM immune-profiling extension study in malignant melanoma (n=12). Collect tumour biopsies and other immune response measures Phase IIa Phase I/II STORM trial (two stages, initial results of first stage due in Q115). Test indication: Chemo-combo. Phase Ib Phase Ib study in combination with Yervoy to begin recruitment in Q115. Phase Ib Additional Phase Ib studies in combination PD(L)-1 checkpoint inhibitors likely in 2015 Phase I Phase I CANON study to initiate Q115 (n=28-50). Single agent and with mitomycin C, in two stages. Preclinical studies showed signs of synergy of CVA21 and radio/chemotherapy in bladder cell lines. Phase I On hold Phase I head and neck cancer complete. Source: Edison Investment Research Combination trials with checkpoint inhibitors are a critical recent addition The Phase Ib trials of Cavatak in combination with checkpoint inhibitors are a crucial component of Viralytics’ clinical trial programme. On 4 December 2014 Viralytics announced that it had received ethics approval for a Phase Ib trial of Cavatak in combination with the CTLA-4 checkpoint inhibitor Yervoy (ipilimumab). The trial will begin recruiting patients early in Q115, and will treat 26 patients with late-stage melanoma for whom Yervoy would be considered the standard of care. We expect Viralytics to initiate a series of trials of Cavatak in combination with other checkpoint inhibitors, with the likely contenders including the recently approved PD-1 inhibitors Opdivo and Keytruda. BRAF/MEK inhibitors may also be tested. Randomised Phase IIb trial may be deferred while best combo is sought Viralytics is planning a randomised Phase IIb trial of Cavatak in melanoma patients. Given the promising preclinical data for Cavatak in combination with CTLA-4 and PD-1 checkpoint inhibitors in mouse models of melanoma, our view is that this trial is likely to combine Cavatak with a checkpoint inhibitor. One potential strategy would be to defer the trial until the best combination is identified in the Phase Ib trials. Alternatively, several Phase IIb trials testing combinations with different checkpoint inhibitors could be conducted, but this would probably require additional funding. On the other hand, the Phase Ib combination trials are likely to be of intense interest to potential partners, so there could potentially be a transaction prior to the initiation of a Phase IIb trial. Metastatic melanoma –a rapidly evolving treatment landscape Malignant melanoma has an incidence of around 0.02% and c 77,000 Americans are diagnosed each year with an estimated 9,500 deaths. Until recently, the standard agents for metastatic melanoma were limited to dacarbazine (DTIC) and interleukin-2 (IL-2) and neither agent significantly improved survival. Six targeted therapies have been approved for malignant melanoma in the past three years, which has changed the competitive environment for new therapies (Exhibit 6). The CTLA-4 checkpoint inhibitor Yervoy has been approved for first line use in metastatic melanoma due to its proven OS benefit, although its use is often delayed due to its toxic side effects, including severe diarrhoea. The PD-1 checkpoint inhibitors Keytruda and Opdivo have both recently gained accelerated approval as second- or third-line therapies, but if ongoing trials prove an OS benefit they are likely to become standard of care. Viralytics | 8 January 2015 8 The BRAF inhibitors, Zelboraf (vemurafenib) and Tafinlar (dabrafenib), and the MEK inhibitor, Mekinist (trametinib) have been approved for the c 40% of patients whose melanomas carry BRAF mutations. The most advanced oncolytic virotherapy product is Amgen’s T-Vec, which showed a 26% tumour response rate following intratumoural injection in a Phase III trial, but just missed on proving an overall survival (OS) benefit. Amgen has applied for marketing approval for T-Vec, with a decision due by 28 July 2015. Another oncolytic virotherapy, Oncolytics’ Reolysin, has obtained promising preliminary Phase II data in melanoma and lung cancer, but has paused development in melanoma while it evaluates potential combinations with newer agents, including checkpoint inhibitors. Exhibit 6: Approved treatments for malignant melanoma Product Zelboraf (vemurafenib) Company Roche Mechanism of action BRAF inhibitor Yervoy (ipilimumab) Tafinlar (dabrafenib) BMS GSK anti-CTLA-4 checkpoint inhibitor BRAF inhibitor Mekinist (trametinib) GSK MEK inhibitor Keytruda (pembrolizumab) Merck anti-PD-1 checkpoint inhibitor Opdivo (nivolumab) anti-PD-1 checkpoint inhibitor BMS Notes FDA (2011)/EU (2012) approved for unresectable or metastatic melanoma in patients with the BRAFV600E mutation. FDA (2011)/EU (2011) approved for unresectable or metastatic melanoma. FDA approved (May 2013) for unresectable melanoma or metastatic melanoma in adult patients with BRAF V600E mutation. FDA approved (May 2013) for unresectable or metastatic melanoma in adult patients with BRAF V600E or V600K mutation. FDA (Sep 2014). Approved for unresectable or metastatic melanoma following ipilimumab and, if BRAF V600 mutation positive, a BRAF inhibitor. FDA (Dec 2014)/Japan (July 2014). For unresectable or metastatic melanoma following ipilimumab and, if BRAF V600 mutation positive, a BRAF inhibitor. Source: Edison Investment Research Exhibit 7: Competing development programmes for malignant melanoma Product T-Vec (talimogene laherparepvec) Company Amgen Mechanism Oncolytic virus Nivolumab /ipilimubab Vemurafenib Vemurafenib/ GDC-0973 BMS Immunotherapy Roche Roche Binimetinib Novartis BRAF inhibitor BRAF/MEK inhibitor MEK inhibitor LGX818 MPDL3280A MEDI4736 Novartis Roche AstraZeneca BRAF inhibitor Anti PD-L1 Anti PD-L1 MSB0010718C Merck KGaA Anti PD-L1 Development stage/notes 439-pt Phase III trial comparing intratumoural TVEC to subcutaneous GM-CSF in previously treated unresectable Stage IIIb/c and IV melanoma. Results: met primary endpoint of durable response rate (DRR: rate CR or PR lasting continuously for ≥6 months). Statistically significant difference in DRR: 16% in the TVEC arm vs 2% in the GM-CSF arm. OS analysis showed a trend of 4.4 months in favour of TVEC as compared to GM-CSF(HR=0.79; p=0.051). Amgen has filed for approval in the US (PDUFA date 28 July 2015) and EU. 915-pt Phase III trial of nivolumab vs nivolumab + ipilimumab vs ipilimumab in previously untreated unresectable or metastatic melanoma. Phase 1b component reported 43% ORR. Results: Q416. 725-pt Phase III trial in resected, BRAF mutant melanoma at high risk for recurrence. Results: Q316. 500-pt Phase III trial of vemurafenib ± GDC-0973 in untreated BRAF mutant unresectable advanced or metastatic melanoma. Results: Q316. 393-pt Phase III trial of binimetinib (MEK162) vs dacarbazine in NRAS mutant advanced unresectable or metastatic melanoma. Recruitment ongoing. 900-pt Phase III trial of LGX818 ± MEK162 vs vemurafenib in BRAF mutant melanoma. Results: Q217. 45-patient Phase I in melanoma reported 29% ORR. Is currently in Phase III in non-small cell lung cancer. Phase I melanoma study underway in combination with dabrafenib and trametinib. Is currently in Phase III in non-small cell lung cancer. 590-patient Phase I trial in melanoma and other solid tumours. Phase II in Metastatic Merkel Cell Carcinoma. Source: Edison Investment Research Valuation Our valuation of Viralytics is virtually unchanged at A$141m, or A$0.76/share (undiluted, previously A$0.77/share). The fall in the Australian dollar against the US dollar (now 1.23 per US$ vs 1.12 previously) has largely offset the impact of delaying our market launch for Cavatak by one year for all products, and revised milestone payment assumptions. Our valuation is predominantly based on an assessment of the clinical and commercial prospects of Cavatak. With A$24m cash at the end of September 2014 the company has the resources to complete the ongoing CALM and STORM trials, and the planned CANON and Phase Ib Cavatak combination trials, as well as a randomised Phase IIb study in advanced melanoma. These factors are all positive for investor sentiment. Viralytics | 8 January 2015 9 Our valuation uses a risk-adjusted net present value (rNPV) method to discount future cash flows through to 2033 of the cancer indications shown in Exhibit 8, using a 12.5% discount rate. It assumes a partnering deal or out-licensing of Cavatak in 2016 post-release of Phase Ib checkpoint inhibitor combination trials, with the costs of all subsequent clinical development borne by the partner/licensee. Our model does includes risk-adjusted upfront payments and clinical/regulatory milestones (but not sales milestones) from a potential licensing deal, based on average Phase II deal metrics from BioCentury (US$25m upfront payment, US$240m total milestones – we assume half of those payments (US$120m) are for clinical and regulatory milestones). Exhibit 8: Viralytics rNPV valuation Value driver rNPV (A$000s) rNPV per share Probability of Key assumptions (A$) success CAVATAK in metastatic melanoma 100,494 0.55 CAVATAK in NSCLC 14,278 0.08 CAVATAK in CRPC 10,676 0.06 CAVATAK in bladder cancer 2,104 0.01 31,344 0.17 (7,511) (2,461) (32,547) 116,377 24,336 140,712 (0.04) (0.01) (0.18) 0.63 0.13 0.76 Milestones R&D expenses Admin Tax Total rNPV Net cash (end-FY14e) Total 35% Launch in 2021, with peak market penetration Assumes simultaneous product of 20% five years after launch. Peak global launches in US, Europe and sales of US$646m. RoW; average price of drug 15% Launch in 2023, with peak market penetration $75k in US and $45k in other markets. of 2% five years after launch. Peak global One cycle of treatment per sales of US$369m. 15% Launch in 2023, with peak market penetration patient. Out-licensing in 2016 with all of 2% five years after launch. Peak global development costs borne by sales of US$276m. 15% Launch in 2023, with peak market penetration licensee and a 15% royalty on sales due to Viralytics. of 2% five years after launch. Peak global sales of US$50m. $25m upfront payment (50% risk adjustment); $20m milestones on Phase III start, $40m filing and $60m on approval (35% risk adjustment) Australian corporate tax of 30% Source: Edison Investment Research Sensitivities Viralytics is subject to typical biotech company development risks, including the unpredictable outcome of trials, regulatory decisions, success of competitors, financing and commercial risks. In particular, it has a very high single product risk, with the entirety of its value residing in Cavatak. The investment case hinges on the outcome of ongoing clinical trials the company’s ability to secure a partnership to advance Cavatak into late-stage trials. Another key sensitivity is the rapidly evolving treatment landscape for melanoma, which means that future trials of Cavatak will likely be in combination with targeted agents and/or immunotherapies – selection of the appropriate therapy to combine with Cavatak could be critical to future clinical and commercial success. Viralytics’ current issued patents expire in 2022. While additional patents may be granted, the 12 years of data exclusivity granted to biological products is likely to be the main protection from competition. Financials Viralytics reported cash of A$24m at end of September 2014. The company has the resources to complete the ongoing CALM and STORM trials, and the planned CANON and Phase Ib Cavatak combination trials, as well as a randomised Phase IIb study in advanced melanoma. Viralytics received a rebate of A$2.5m under the Australian R&D tax incentive scheme in December 2014. If a partner or licensee is not secured for Cavatak, Viralytics has sufficient resources to conduct the Phase IIb trial (potentially in combination with a checkpoint inhibitor). Viralytics | 8 January 2015 10 Exhibit 9: Financial summary Year end 30 June PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Intangible Amortisation Exceptionals Other Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3) A$000s 2013 IFRS 2014 IFRS 2015e IFRS 2016e IFRS 2017e IFRS 2,493 0 2,493 (3,912) (3,934) (390) 0 0 (4,324) 257 (3,678) (4,068) 0 (3,678) (4,068) 2,508 0 2,508 (4,928) (4,956) (390) 0 0 (5,346) 296 (4,660) (5,050) 0 (4,660) (5,050) 2,045 0 2,045 (8,867) (8,896) (390) 0 0 (9,286) 730 (8,166) (8,556) 0 (8,166) (8,556) 3,803 0 3,803 (3,670) (3,696) (390) 0 0 (4,086) 499 (3,197) (3,587) 0 (3,197) (3,587) 2,250 0 2,250 (1,422) (1,430) (390) 0 0 (1,820) 403 (1,027) (1,417) 0 (1,027) (1,417) Average Number of Shares Outstanding (m) EPS - normalised (c) EPS - normalised fully diluted (c) EPS - (IFRS) (c) Dividend per share (c) 81.5 (4.5) (4.5) (5.0) 0.0 119.2 (3.9) (3.9) (4.2) 0.0 184.0 (4.4) (4.4) (4.6) 0.0 184.0 (1.7) (1.7) (1.9) 0.0 184.0 (0.6) (0.6) (0.8) 0.0 BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets 2,931 2,863 68 0 7,281 0 2,202 5,079 0 (1,235) (1,235) 0 0 0 0 8,978 2,523 2,475 48 0 27,120 0 2,784 24,336 0 (767) (767) 0 0 0 0 28,877 2,111 2,085 26 0 19,405 0 2,784 16,621 0 (767) (767) 0 0 0 0 20,750 1,702 1,695 8 0 16,227 0 2,784 13,443 0 (767) (767) 0 0 0 0 17,163 1,312 1,304 8 0 15,201 0 2,784 12,416 0 (767) (767) 0 0 0 0 15,746 CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash) (3,934) 0 0 (40) 0 3,169 0 (806) (5,884) 0 0 (5,079) (5,486) 0 0 (8) 0 25,180 0 19,686 (5,079) 0 (429) (24,336) (8,866) 730 0 (8) 0 0 0 (8,144) (24,336) 0 429 (16,621) (3,669) 499 0 (8) 0 0 0 (3,178) (16,621) 0 (0) (13,443) (1,422) 403 0 (8) 0 0 0 (1,026) (13,443) 0 0 (12,416) Source: Viralytics accounts, Edison Investment Research Viralytics | 8 January 2015 11 Contact details Revenue by geography Suite 305, Level 3 66 Hunter Street Sydney 2000 Australia +61 2 9988 4000 www.viralytics.com/ N/A CAGR metrics Profitability metrics EPS 11-15e EPS 13-15e EBITDA 11-15e EBITDA 13-15e Sales 11-15e Sales 13-15e N/A N/A N/A N/A N/A N/A ROCE 14e Avg ROCE 11-15e ROE 14e Gross margin 14e Operating margin 14e Gr mgn / Op mgn YY Balance sheet metrics N/A N/A N/A N/A N/A N/A Gearing 14e Interest cover 14e CA/CL 14e Stock days 14e Debtor days 14e Creditor days 14e Sensitivities evaluation N/A N/A N/A N/A N/A N/A Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices Management team CEO: Dr Malcolm McColl CSO: Professor Darren Shafren CEO since January 2013. Previously VP business development at Starpharma and responsible for partnering activities and programmes. Other roles include director of business development for Hospira (formerly Mayne Pharma) and CSL, where he was Global VP business development for the Animal Health Division. Dr Shafren is associate professor of virology in the faculty of health, University of Newcastle, and the inventor of the technology acquired by Viralytics. He is responsible for research, development and intellectual property management. CFO: Robert Vickery Mr Vickery is a chartered accountant with over 20 years’ experience in industry and professional practice. During the past decade he has held senior finance roles with several biotech and innovation-based businesses. Principal shareholders (%) BVF Partners Cormorant Global Healthcare Abingworth Sabby Healthcare Hunter Hall Investment Armco Barriers Dr Nicholas Smith 13.55 8.92 6.13 5.80 4.34 1.74 1.30 Companies named in this report Amgen (AMGN), Oncolytics Biotech (ONCY), Pfizer (PFE), Roche, Merck (MRK), Merck KGaA, Bristol-Myers Squibb (BMS), GlaxoSmithKline (GSK) Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. 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