VNRX: Q1 2020 Financial and Business Update

By Anita Dushyanth, PhD

NYSE:VNRX

READ THE FULL VNRX RESEARCH REPORT

Financial Update

On May 7th, VolitionRx VNRX reported financial results for their fiscal 2020 first quarter ending March 31st. Q1 OpEx was $5.8M, and significantly higher than Q4 2019. Net income and EPS were ($5.5) M and ($0.14).

Although VNRX is conducting several studies related to COVID-19 and veterinary medicine, guidance is for expenses to remain flattish as the company maintains their diligence on expense and cash control. We continue to model little to no revenue until end of 2020 although if all the pieces fall squarely in place relative to completing these studies and tying up any other loose ends, it is not unreasonable that VNRX could recognize initial COVID revenue in the current year.

Cash used in operating activities was $4.8M. Management is guiding for near-term burn (operating and investing) of ~$4M per quarter. The firm exited the quarter with $12M in cash and cash equivalents.

Equity at quarter end consisted of approximately 41.2 million common shares outstanding. In addition, there were approximately 4.2 million warrants and options outstanding (of which approximately 1.3 million are in-the-money at the current $3.47/share price).

Business Update

‣ Octamer: In early 2020, Volition acquired Octamer GmbH for approximately $725k consisting of both cash and restricted shares of Volition's common stock. This strategic acquisition provided Volition with the capability to manufacture recombinant nucleosomes, one of the key components of Volition's Nu.Q tests, in-house. By internalizing the process of chemiluminescence antibody labeling and coating of magnetic beads, Volition has secured its supply chain which, in turn, provides flexibility to speed up assay development work. From this strategic business collaboration, Volition is able to leverage the extensive expertise of Dr. Adrian Schomburg while combining the cost benefits of inhouse manufacturing. Since the beginning of the year, Volition's team has been undergoing intensive training with Octamer's team. The firm plans to produce histones and DNA templates that can be used for custom applications in epigenetic research and drug discovery. We expect this to be the long-term driver of revenue and earnings.

‣ Canine cancer diagnostic: In early 2019, VolitionRx partnered with Texas A&M University (TAMU) and formed a new U.S. subsidiary, Vetco, which focuses on the veterinarian diagnostics market. As per the agreement, TAMU will receive an equity stake in Vetco. Currently, there is a dearth in the availability of accurate, simple and affordable cancer screening tests in veterinary medicine. The goal is to provide all veterinarian clinics with blood tests that can help identify disease early.

Currently, VNRX is working with TAMU's College of Veterinary Medicine to conduct a study of Nu.Q Vet. Preclinical work with Nu.Q Vet is completed. At a specificity of 90%, a single Nu.Q Vet assay detected almost 70% of two cancers, Canine Hemangiosarcoma and Canine Lymphoma. These two diseases represent a third of all canine cancers. The development strategy is to process the samples in Q2 and have the data readout in Q3. Management believes that a canine cancer test could be a relatively fast-moving program given the less-stringent U.S. regulatory pathway for animal diagnostics (via USDA versus FDA's PMA or 510k). If all goes as per plan, management believes they could have a Nu.Q test for the diagnosis of animal cancers (initially canines but potentially also other animals including cats, horses) on the market before end of 2020.

Canine cancer represents a sizeable market as more than four million cases of canine cancer are diagnosed each year in the U.S., which is nearly 2.5x as many human cancers. Pricing is likely to be similar to a human Nu.Q test (~$100-$200 per test). The canine cancer opportunity could be in the many hundreds of millions of dollars.

‣ Nu.Q re-engineered: In the beginning of the year, the company announced that it has completely re-engineered its Nu.Q assays. The assay was previously using the ELISA plate format that provided a traditional colorimetric endpoint but now uses a magnetic particle-based assay format that gives a luminescent endpoint. Luminescent assays are known to be very sensitive and have a wide dynamic range. Further, the benefits of using blood plasma instead of serum has aided in reducing interferences. When compared to Volition's ELISA plate Nu.Q assay format, the magnetic particle-based assay format shows a 10 to 20-fold improvement in analytical sensitivity. It also shrinks the turnaround time of test results to one hour and 20 minutes from six hours, allowing much higher throughput. The within-day reproducibility of the test results is excellent; now is just below 3% as compared to previous test which yielded below 10%. The magnetic particle-based chemiluminescence assay format offers significant merits such as high sensitivity, improved specificity, reproducibility, reduced background noise and reduced assay time, all of which translates into improved clinical performance. The new format has enabled the use of Nu.Q on a wide range of commercial, fully-automated platforms. The FDA approved automated immunoassay analyzer with all of the above improvements for clinical use in the U.S. and Europe. Currently, the company has developed eight different bead-based Nu.Q assays that will be used in clinical studies. We expect to see data forthcoming from these studies in 2Q 2020.

‣ Expanded Scientific Advisory Board: Volition expanded its Scientific Advisory Board to include Dr. Adrian Schomburg, an epigenetics entrepreneur and the founder and CEO of Octamer. Dr. Schomburg has over a decade of experience in histone and nucleosome production. He was at the NIH, Bethesda and the Max Planck Institute in Göttingen. Dr. Schomburg was instrumental in developing candidates in oncology and neuroscience.

Clinical Update

COVID-19 could be a new opportunity: Nu.Q assay has already demonstrated its ability to detect epigenetically altered circulating nucleosomes in the blood of cancer patients. In patients with Severe Acute Respiratory Syndrome (SARS) and pneumonia, the body elicits an inappropriate hyperimmune response to the virus that causes white blood cells to produce a very high level of Neutrophil Extracellular Traps (NETs), which are made of nucleosomes. Therefore, Nu.Q assay can be used to detect even minute quantities of nucleosomes in COVID-19 patients. The ongoing pandemic caused by coronavirus presents a potential opportunity for Volition.

A proof of concept study was conducted to investigate if the Nu.Q blood test could be used as a diagnostic or prognostic tool against SARS-CoV-2, the novel coronavirus causing COVID-19. On the earnings call, Management noted that the study involving 34 polymerase chain reaction (PCR) COVID-19 positive subjects and 50 control subjects tested with the Nu.Q assay showed that nucleosomes were highly elevated in the PCR positive subjects (area under the curve (AUC) for a single Nu.Q assay of 98.7% for PCR positive COVID versus control subjects). The results of the study are very encouraging as they demonstrated 100% sensitivity and 94% specificity. A second Nu.Q assay also showed promising results with an AUC of 86.2%.

Preliminary studies are underway in Belgium and Germany. Volition believes the Nu.Q blood test may be able to predict the progression of SARS-CoV-2 pneumonia and complications including Acute Respiratory Distress Syndrome (ARDS) in COVID-19 patients. Volition is working with collaborators to investigate whether existing Nu.Q epigenetic assays can provide early insight into which patients with COVID-19 may require higher levels of monitoring, including hospitalization and critical care resources, versus those who will not develop serious symptoms. Subject to successful results from these initial proof of concept studies that are currently underway, Volition plans to conduct further studies using its fully automated Nu.Q assay platform to ascertain the best use of these tests in different geographies. Also, management believes Nu.Q has the potential to detect in other respiratory infections such as flu and pneumonia given the similarity of having elevated levels of NETs.

The regulatory path for triage test related to COVID-19 may be somewhat dynamic and largely driven by knowing the clinical utility of the test, whether it will be used as a diagnostic, prognostic or predictive test. We may hear more on the regulatory pathway on future calls. While COVID-19 could be a potential opportunity for Volition, we are not sure if this is a near-term opportunity to grow revenues. We are keeping a close watch on the progress of Nu.Q assay's investigation against COVID-19.

Lung Cancer studies: In an initial proof-of-concept data with 76 subjects, the Nu.Q assay detected lung cancer, including stage 1 cancer, with an AUC of 85% as compared to healthy tissue. The same (single) Nu.Q assay, when used in a confirmatory cohort of 152 subjects detected lung cancer with an AUC of 79%.

As noted, VNRX signed a formal contract with the National University of Taiwan to conduct the first large-scale lung cancer study. The study will include 1,200 participants receiving low-dose CT scan, 1,000 of which have lung cancer. The study could provide the first statistically-powered evidence of the potential utility of Nu.Q diagnostics as a screen for lung cancer or as an adjunct/triage test for low-dose CT. LDCT, currently the only recommended screening test for lung cancer, has drawbacks including its relatively high cost, patient exposure to radiation, overdiagnosis and a potential for meaningful rates of false-positives. As such, an adjunct or triage test that could improve accuracy of lung cancer screening and/or reduce the need for LDCT (without compromise to diagnosis) could have massive appeal, in our opinion. VNRX currently expects to announce preliminary data from this study in 2H2020.

Colorectal cancer studies: The proof-of-concept data from an in 123 subjects using a single Nu.Q assay detected CRC with an AUC of 72%. A two-assay panel, which included this initial product grade Nu.Q assay and an inflammatory biomarker test, had an AUC of 84%. These are relatively tiny POC studies but the data is certainly encouraging. The goal will be to replicate these results with reproducible product grade assays in larger, fully powered studies.

As a reminder, VolitionRx already has a relationship with National Taiwan University and previously finalized agreements to conduct two large CRC studies; 5k-sample asymptomatic screening study and a 2ksample symptomatic study.

Blood Cancer Studies: A single pre-clinical Nu.Q assay was used to investigate whether it could detect hematopoietic cancer. In 54 subjects, the same Nu.Q assay detected blood cancer with an AUC of 91% (cancer vs healthy). More specifically, the test detected 80% of newly diagnosed Non-Hodgkins Lymphoma and Leukemia cases (mixture of Acute Lymphocytic Leukemia and Acute Myeloid Leukemia) at 95% specificity among healthy subjects. A number of other assays in development also demonstrated promising individual assay results with AUCs ranging from 79% to 91%.

The Nu.Q assay has overcome the limitation of relying on multiple assay panels to detect different cancer types. It is now possible to screen for three different hematopoietic cancers using a single assay, which decreases both the overall costs as well as samples required to detect mutations. This single assay seems to have high sensitivity and specificity that offers a much-needed effective diagnostic technique. The results of this preliminary study suggest that the Nu.Q assay could be potentially used to screen people for early detection of a wide variety of cancers.

Data on enhanced Nu.Q Capture technology:

Recently, Volition shared data at the ASCO meeting from studies conducted to detect lung and blood cancers using the newly enhanced Nu.Q assay.

Enrichment of circulating tumor DNA from cell-free DNA of hematopoietic origin

The research team at Volition used the Nu.Q Capture technology to enrich tumor-derived nucleosomes. Chromosomes from healthy cells differ from those in cancer cells based on the genetic sequence and protein structure. The key difference between the DNA of the healthy nucleosomes (background cell free DNA) is slightly longer than the ones from tumor cells (circulating tumor DNA (ctDNA)). The Nu.Q Capture technology is designed to remove this healthy nucleosomes so that the sample has enriched cancer-derived nucleosomes which have cancer specific mutations. After isolation the sample can undergo mass spectrometry to help identify biomarker targets or the DNA can be sequenced for diagnostic applications, treatment selection as well as to monitor the disease. This methodology offers the benefit of higher sensitivity to detect different types of cancers.

Volition's team tested this process on samples obtained from CRC patients and the clearly showed the separation of short and long nucleosomes from cancer cell lines and no difference in samples from healthy controls. The Nu.Q Capture offers a simple way to enrich the samples used for testing. has the potential

Performance in lung cancer detection

Dr Mark Eccleston, scientist at Volition, explained how the removal of healthy nucleosomes creates an enriched sample that allows for detection of cancer nucleosomes with greater accuracy. A pilot study was conducted with Dr Anne Sibille and the team at Liege University Hospital in Belgium, to assess the performance of a Nu.Q assay to discriminate lung cancer and Chronic Obstructive Pulmonary Disease (COPD) patients from normal subjects.

A total of 142 samples were collected, comprising of 45 from normal subjects, 44 from lung cancer and 53 from COPD patients. The circulating level of intact nucleosomes containing the histone H3.1 isoform (Nu.Qª-H3.1) was individually tested as well as in combination with cytokines for its performance in discriminating subjects for their underlying condition. The results demonstrated that the Nu.Q assay was able to discriminate between lung cancer and normal samples with an Area Under the Curve (AUC) of 88%. Further, the test also revealed a difference between lung cancer and COPD samples with an AUC of 85%.

Circulating nucleosomes in hematological malignancy

The pilot study investigated the circulating levels of intact nucleosomes containing the histone H3.1 isoform (Nu.Q-H3.1) in a variety of solid tumors including Non Hodgkin Lymphoma (NHL), Acute Myeloid Leukemia (AML), Acute Lymphocytic Leukemia (ALL) and in healthy subjects. Blood cancers are generally difficult to detect as they can present non-specific symptoms. In order to be definitive about the diagnosis whether it is indeed cancer or not requires the patient to undergo biopsy. Having a test that is able to discriminate blood cancer from other infections, not only speeds up the time to obtain treatment for cancer but also saves the patient from undergoing invasive biopsy tests unnecessarily and get the required treatment for their underlying condition.

A drop of blood is about 50-60 µl. only a fraction of this amount, about 20µl of plasma samples, were taken from 62 healthy controls and 329 patients (271 solid tumor, 25 NHL, 25 AML and 8 ALL) diagnosed with various types of cancer and analyzed. The results were very encouraging as they revealed elevated levels of the Nu.Q assay in patients diagnosed with different types of cancers. To be specific, the median levels of circulating nucleosomes were more than 275ng/ml in NHL, AML and ALL patients and more than 200ng/dl in 14 solid tumor patients, while the healthy control patients averaged only 40ng/ml. All other solid tumor patients exhibited higher level of circulating nucleosomes than normal control subjects. The exceptionally exciting about this study was the extremely high level, of circulating nucleosomes, 7x-14x that of healthy subjects.

The AUC (accuracy of the test) for all patients diagnosed with cancer vs healthy volunteers was 91% with 74% sensitivity and 95% specificity. This study showed far better results than widely accepted cancer detection tests. Samples collected from newly diagnosed patients revealed even better results. The AUC was 92.6% with 80.6% sensitivity and 95% specificity. This result is key as it is extremely difficult to diagnose blood cancer in a patient who has shown no history of cancer in the past. Analyzing the subgroup only from NHL patients revealed that AUC was ~94% with very low variability, 80% sensitivity and 95% specificity. The above results have demonstrated that the Nu.Q technology may be a useful diagnostic tool in detecting cancers early. However, we think this technology needs to be further investigated. Management intends to file for regulatory approval to commence clinical studies for NHL as it is the most commonly occurring blood cancer.

Volition in Asia: In addition to the studies in Taiwan, VNRX has made a significant stride towards conducting large studies in China. Asia is a market which we have always viewed as holding significant potential value for blood-based cancer diagnostics (given a cultural aversion to fecal handling and relatively high rates of lung cancer in certain areas of that continent).

Volition signed a memorandum of understanding (MOU) with Shanghai Fosun Long March Medical Science Co, Ltd, a diagnostics division of Chinese pharmaceutical company, Shanghai Fosun Pharmaceutical (Group) Co., Ltd. Per the MOU, Fosun is expected to be instrumental in the development and subsequent regulatory activities and commercialization of the company's colorectal cancer assays in China. Initially this will include conducting clinical studies in colorectal, lung and ovarian cancers in China. Per the press release, it will also include evaluating the development of Nu.Q assays on Fosun's existing chemiluminescence platform (LUMIART-II Automated Chemiluminescence Immunoassay System). The fully-automated, high throughput system is commercialized in China.

While development timelines related to the large studies in colorectal and lung cancer in Taiwan have remained on track, despite the COVID-19 pandemic, they have slipped a bit in the U.S. (with EDRN) from guidance provided on the previous earnings call. However, we think the studies in the U.S. are having a temporary pause in the interest of helping ensure safety of clinical staff and patients. While we think this pause could likely be a temporary one, we are eagerly awaiting updates on all of VNRX's programs. Given the recent highly encouraging data in blood studies, we think this Nu.Q blood cancer assay could be another commercial opportunity. Whether that may still be in the cards, we don't know, but will be something we hope to know more about as well.

Upcoming Milestones

We expect the company to accomplish some of the near-term milestones below:

‣ Q2 Clinical performance data from individual assays and in the panel combinations across the range of cancers

‣ Q2/3 Clinical data from COVID-19 studies currently underway

‣ Advance large-scale colorectal and lung cancer trials in Europe, Asia and the U.S.

‣ Determine the level of tumor associated nucleosomes using mass spectrometry and identify NEW biomarker targets

‣ Q2 Utilize Nu.Q sequencing to identify tumor of origin and specific mutations

‣ Q3 Utilize in conjunction with Nu.Q immunoassay approach to enhance performance

‣ Q4 Launch Nu.Q Vet

IP protection: The company currently has 23 patent families related to diagnostic test, with a total of 44 patents granted, including eight in the U.S., nine in Europe and a further 27 worldwide. The company has 105 patent applications pending including 13 in the U.S., 10 in Europe, and further 82 worldwide. The patent portfolio also covers veterinary medicine applications.

VALUATION

Based on updates to our financial model and DCF methodology, which forecasts out to year 2030, uses a 9.5% discount rate (based on CAPM) and 2% terminal growth rate, VNRX is valued at $6.70/share. Our model and assumptions will be updated if appropriate based on news flow which could also influence valuation.

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