ONCIMMUNE. A new gold standard for early cancer detection INDEPENDENT RESEARCH. Healthcare Fair Value 154p (price p) BUY

Transcription

1 INDEPENDENT RESEARCH 23rd October 2017 ONCIMMUNE A new gold standard for early cancer detection Healthcare Fair Value 154p (price p) BUY Coverage initiated Bloomberg ONC LN Reuters ONCON.L 12-month High / Low (p) / Market capitalisation (GBPm) 66 Enterprise Value (BG estimates GBPm) 62 Avg. 6m daily volume ('000 shares) Free Float 53% 3y EPS CAGR NM Gearing (12/17) -10% Dividend yields (12/18e) NM YE December 12/17 12/18e 12/19e 12/20e Revenue (GBPm) EBIT(GBPm) Basic EPS (GBPP) Diluted EPS (GBP) EV/Sales NM 29.6x 11.0x 5.8x EV/EBITDA NS NS NS 60.3x EV/EBIT NS NS NS 76.4x P/E NS NS NS 68.0x ROCE NS NS NS 17.6 Oncimmune (ONC) is a pioneering UK-based biotech developing and commercialising its EarlyCDT blood tests for early cancer detection. ONC s EarlyCDT -Lung test, extensively validated in high-risk individuals, can detect lung cancers up to 4 years earlier than other tests, including the US recommended low-dose CT scans (with their high false-positive rate). ONC is poised for substantial growth as it delivers on its operational plans to expand its portfolio of cancer tests, develop a kit version of EarlyCDT -Lung, and enter additional global markets. We initiate coverage today with a BUY rating with potential upside of over 25% to our fair value estimate 85m (154p). Platform ONC s technology platform exploits the natural antibodies, so-called autoantibodies, produced against certain tumour-associated antigens (TAAs). Importantly, these TAA-specific autoantibodies can be detected in blood ~4yrs before the appearance of symptoms of cancer. This detection of cancer at an early stage provides huge benefit to patients (vastly improved survival outcomes when cancers are detected early, particularly in cancers usually diagnosed at a late stage such as lung cancer) and healthcare systems (significantly lower treatment costs) /04/16 20/07/16 20/10/16 20/01/17 20/04/17 20/07/17 20/10/17 ONCIMMUNE HDG. NASDAQ COMPOSITE Commercial phase ONC s EarlyCDT -Lung is available in the USA as a CLIA test and elsewhere as a kit (CE Marked) which is expected to deliver increased volumes and greater profit margins. Its pipeline includes new blood tests for the early detection of cancer, including liver and ovarian among others, positioning ONC as the global market leader in early cancer detection. Valuation our forecasts suggest strong revenue growth and profitability from 2020 forming the basis of our risk-adjusted FV of 154p. Since its IPO on the London Stock Exchange s AIM the company has executed its operational plans for product development and extending its market penetration capabilities in the USA, Europe and elsewhere. Analyst: Sector Analyst Team: Gary Waanders, PhD Jamila El Bougrini Eric Le Berrigaud gwaanders@bryangarnier.com Marion Levi Hugo Solvet r r

2 Simplified Profit & Loss Account (GBPm) e 2019e 2020e 2021e Revenues Change (%) -% -50.0% 867% 183% 87.1% 62.4% 57.6% Adjusted EBITDA (5.6) (5.2) (4.5) (2.2) EBIT (5.7) (5.3) (4.8) (2.4) Change (%) -% -7.7% -9.5% -49.0% -% 546% 150% Financial results (3.3) (0.04) (0.09) (0.10) Pre-Tax profits (9.0) (5.3) (4.9) (2.5) Exceptionals Tax Net profit (8.4) (5.0) (4.7) (2.4) Restated net profit (8.4) (5.0) (4.7) (2.4) Change (%) -% -40.5% -7.1% -48.5% -% 470% 146% 2022e Company description Oncimmune Holdings Plc is a cancer detection and diagnosis company. It is engaged in developing and commercializing its EarlyCDT platform technology based on autoantibody tests that can be applied to a range of solid tumour types. EarlyCDT -Lung is a blood test, which is ordered by a doctor to aid in the risk assessment and early detection of lung cancer in high-risk patients and to stratify indeterminate pulmonary nodules for the risk of malignancy. It has sold over 150,000 EarlyCDT -Lung tests in the United States and the United Kingdom. EarlyCDT -Lung is being evaluated in the National Health Service (NHS) Scotland ECLS study, the largest randomized trial (12,210 high-risk smokers) ever conducted using biomarkers for the early detection of lung cancer. ONC is also developing EarlyCDT tests for other cancers, including liver and ovarian cancers, among others. Cash Flow Statement (GBPm) Operating cash flows (3.2) (4.3) (4.4) (2.6) Change in working capital (0.18) 0.36 (0.20) (0.57) (0.30) (0.56) (0.62) Capex, net (0.06) (0.01) (0.10) (0.50) (0.20) (0.20) (0.30) Financial investments, net (0.10) (0.42) (0.30) (0.40) (0.40) (0.40) (0.40) Dividends Other Net debt (10.2) (5.1) (4.5) (1.4) (2.2) (7.3) (20.3) Free Cash flow (3.2) (4.3) (4.5) (3.1) Balance Sheet (GBPm) Tangible fixed assets Intangibles assets Cash & equivalents current assets Other assets Total assets L & ST Debt (0.89) (0.50) Others liabilities (0.59) (0.90) (0.60) (0.25) (0.15) Shareholders' funds Total Liabilities (1.5) (1.4) (0.60) (0.25) (0.15) Capital employed Ratios Operating margin (1,329) (2,453) (229) (41.35) Tax rate NM NM NM NM NM NM NM Net margin (1,963) (2,336) (224) (40.85) ROE (after tax) (286) (68.18) (91.38) (56.17) ROCE (after tax) (56.43) (105) (91.61) (72.61) Gearing (9.16) (10.03) Number of shares, diluted Data per Share (GBPp) EPS (23.54) (9.84) (8.58) (4.42) Restated EPS (23.54) (9.84) (8.58) (4.42) % change -% -58.2% -12.9% -48.5% -% 470% 146% BVPS Operating cash flows (8.86) (8.39) (7.62) (4.43) FCF (9.04) (8.40) (7.79) (5.29) Net dividend Source: Company Data; Bryan, Garnier & Co ests. 2

3 Table of contents 1. Investment Case Valuation Sales Model & Valuation Executive Summary Cancer Diagnostic Market Summary The Early Cancer Detection Challenge Oncimmune EarlyCDT Products EarlyCDT -Lung EarlyCDT -Lung Kit Other EarlyCDT tests completing development Global Cancer Diagnostics Market Science Tumours stimulate the immune system Detecting antibodies to TAAs Detection before symptoms Early intervention - cancer survival benefits ONC Product Portfolio Lung Cancer Current diagnostics and clinical practice EarlyCDT -Lung in use EarlyCDT -Lung performance and output EarlyCDT -Lung Sales Entry into new markets with Lung Kit Liver Cancer Current diagnosis and market EarlyCDT -Liver Ovarian Cancer Current diagnosis and market EarlyCDT -Ovarian Personalised Medicine Autoantibody Fingerprinting Companion diagnostics Competitive environment Liquid Biopsy What is Liquid Biopsy? Challenges of Liquid Biopsy Not a threat to EarlyCDT in cancer screening Liquid biopsies in cancer screening Bryan Garnier stock rating system

4 1. Investment Case The reason for writing now ONC has completed the development of a kit version of its EarlyCDT -Lung test which is also now CE-Marked. The company has also formed numerous distribution agreements in the US, Europe, and Asia. With these developments, additional product launches, and further clinical data from the largest ever biomarker study being conducted in a lung cancer screening trial (NHS ECLS trial), ONC is positioned to see sales begin to ramp during the next few years. Valuation We value ONC using a risk-adjusted DCF-based approach using a WACC of 15% and a 70% riskadjustment to allow for execution uncertainty. On this basis we have determined a fair value of GBP85m suggesting potential upside of at least 25%. Our forecasts for the company assume it will become profitable in the FY2020 while the minimum cash balance of GBP1.4m is reached in FY2019. Catalysts The launch of EarlyCDT -Lung in a kit version (now CE-Marked) is expected to be the first catalyst for sales to ramp in Asia and Europe. We expect US sales growth to be driven by adoption of the CLIA test by pulmonologists looking to stratify the risk of malignancy of indeterminate nodules detected by CT scan. Beyond these, in 2019 the complete data set from the NHS ECLS 12,210-patient lung cancer screening trial using biomarkers (i.e. EarlyCDT -Lung CLIA test) should encourage greater use in the screening context for patients at high-risk of developing lung cancer. Additional catalysts include the launch of the EarlyCDT -Liver cancer detection test in Asia in H1 2018, as well as products for other cancers e.g. ovarian and breast, and personalised medicine products. Difference from consensus The company is currently not covered from an equity research perspective, so no formal consensus is available and ours will be the first forecasts in the market. With the recent fundraising, we believe the company is cautiously funded to profitability and are confident to initiate coverage with a Buy rating. Risks to our investment case The main risks for ONC concern commercial adoption of the products. However, ONC has established its EarlyCDT -Lung cancer detection product as a best-in-class diagnostic tool supported by extensive commercial and clinical validation supporting the lung product and the others being developed. 4

5 2. Valuation 2.1. Sales Model & Valuation Our basic model assumes that sales of EarlyCDT -Lung grow in both the CLIA and Kit formats (shipping of first kits by the end of October 2017) and that new products for Liver and Ovarian Cancers are launched during the next 2 years. Low level sales are also forecast in the personalised medicine applications based on the autoantibody fingerprinting panel and companion diagnostics/trials. Fig. 1: Oncimmune sales model Sales (GBPm) (31/05) e 2019e 2020e 2021e 2022e 2023e 2024e EarlyCDT -Lung USA/UK (CLIA) EU/ROW (kit) EarlyCDT -Liver Global EarlyCDT -Ovary Global Fingerprinting Global Companion Diagnostics/Trials Global Net Revenue % growth 867% 183% 87% 62% 58% 47% 47% Source: Company Data; Bryan, Garnier & Co ests. Based on the sales forecasts presented above we have modelled the free cash flows for ONC to FY2025 with FY2025 as the reference year for the terminal value calculation. Fig. 2: Discounted FCF 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e Sales EBITDA (4.4) (2.1) Share-based payments (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) Change in WC (0.2) (0.6) (0.3) (0.6) (0.6) (0.9) (1.4) (2.1) Tax (2.0) (8.4) (13.0) Capex (0.1) (0.5) (0.2) (0.2) (0.3) (0.3) (0.1) (0.1) FCF (4.6) (3.1) Source: Bryan, Garnier & Co ests. To determine a risk-adjusted, discounted FCF-based Fair Value, we used a WACC ranging from 10-20%, a terminal growth rate from 0 1.0%, and a risk-weighting of 70%. At the mid-point of the range we establish a risk-adjusted FV of 85 million equating to 154p per share. 5

6 3. Executive Summary Oncimmune (ONC) was spun-out from the University of Nottingham in 2002 to focus on the development of products for the early detection of cancer. ONC began its operations including R&D and core production of tumour antigen proteins from laboratory facilities located on the campus of the University of Nottingham. The company also established a laboratory facility in Kansas, USA, to process research and clinical samples. Today ONC operates from the Nottingham and Kansas sites with a staff of over 45 people. From 2002 to 2009 the company established the foundations for its early cancer detection platform with an emphasis on an early detection test for lung cancer. This included in 2005 proving the concept that autoantibodies specific for human tumour associated antigens (TAAs) could be reliably detected in the blood of patients. This enabled ONC to successfully secure its first external investment round. The initial product for the early detection of lung cancer was developed and validated clinically as a Laboratory Developed Test (LDT). This enabled the first commercial test to be made available in the USA and ONC established its own CLIA laboratory (Clinical Laboratory Improvement Amendments) to conduct EarlyCDT -Lung tests on patient blood samples from Following test-marketing and the establishment of reimbursement by healthcare payers (including Medicare), the company launched its EarlyCDT -Lung test nationally in the USA in July Since then Oncimmune has sold over 150,000 commercial tests and now has 14 distributors covering much of the US market and an additional pilot distribution project underway with a major US pulmonology specialist sales force. The company has now raised over 47m for investment in its early cancer detection platform. ONC currently leads its commercialisation efforts with the EarlyCDT -Lung test (both as a CLIA test and a kit version). Other cancer detection products will be launched within the next 2 years including EarlyCDT -Liver and EarlyCDT -Ovarian, among others Cancer Diagnostic Market Summary The global market for cancer diagnostic products is forecast to grow from circa $124bn in 2016 to >$230bn in 2025 (CAGR of 7.2%). The underlying driver of this growth in cancer diagnostics is the dramatic improvement in patient survival when cancers are detected at earlier stages. This driver is being addressed by the evolution of technology platforms including those based on genomics / proteomics / transcriptomics / metabolomics / bioinformatics, and others, as well as changes in the delivery of clinically relevant information which has seen rapid growth in the point-of-care testing market. Worldwide there is also a greater emphasis on making medical care more cost-effective. Early cancer detection reduces treatment costs significantly and when diagnostic tests are paired with specific drug treatments or device-based medical interventions the clinical impact can be substantially improved resulting in better patient outcomes. This has been amply demonstrated in many cancers, notably colorectal, lung, and breast cancers as well as melanoma The Early Cancer Detection Challenge In the case of lung cancer, which ordinarily does not present clinical symptoms until late in the evolution of the disease, the need is urgent for a good diagnostic test offering early cancer detection. Currently, 5-year survival for lung cancer averages around 18% for all stages, but for patients diagnosed early (small localised nodules) this has been reported to improve to 56%. Around 85% of the >220,000 new cases 6

7 of lung cancer diagnosed annually in the USA are detected at an advanced stage, such that most patients have a very poor prognosis. Current US lung cancer screening guidelines use low-dose CT in high-risk patients, however this presents its own set of challenges including high costs, exposure to radiation and 97.5% false positives. Additionally, only 30% of the new cases would have been eligible for screening under the guidelines leaving many people in need of an alternative for early detection Oncimmune EarlyCDT Products EarlyCDT -Lung This is a physician-ordered blood test, based on the detection of autoantibodies in the blood of patients which react with one or more protein targets in a panel including 7 TAAs. It can detect cancer up to 4 years before CT scans such that disease can be caught earlier and surgical treatments initiated at relatively low-cost with vastly improved outcomes. The test is a standard semi-automated indirect ELISA performed in a CLIA laboratory by trained technicians. During development and validation approximately 120,000 patient samples were processed. In addition, since commercial launch in the USA in 2012, more than 150,000 tests have been sold. It is being used both as a screening tool by primary care physicians for patients at a high-risk of lung cancer and by pulmonologists to stratify indeterminate lung nodules detected by CT scans (of which there are many). Clearly, with the estimated >35 million smokers in the USA and high numbers of lung nodules being detected, the market opportunity for EarlyCDT -Lung is substantial and ONC is well positioned with excellent clinical trial data to drive further into the market EarlyCDT -Lung Kit The existing lung test has been developed as a kit (now CE-marked) which is expected to be launched in H Diagnostic test kits are preferred, particularly in Asia, and can be performed in a broader range of laboratory and clinical settings than the existing CLIA test. In this regard, we anticipate the kit will sell in greater volumes outside the USA and generate higher profit margins Other EarlyCDT tests completing development ONC has a portfolio of early cancer detection tests focusing on cancers which have poor survival statistics because the disease is late stage before symptoms show and diagnosis. The most advanced of these are tests for liver and ovarian cancer, where using an EarlyCDT test is likely to complement existing tools and significantly improve patient outcomes through early detection. We expect the liver and ovarian cancer tests to be launched in 2018 (H1 and H2, respectively). Following behind these are other products designed for the detection of a variety of additional cancers including breast and prostate cancers, and cancers of the digestive tract including the colon, stomach, and oesophagus. In addition, another product is being developed which would provide clinicians with personalised information about a patient s autoantibody profile over longer periods of time - Fingerprinting. This product would not necessarily be targeted at specific cancers or patient groups but measure a broader panel of autoantibodies to provide cancer risk alerts. Finally, ONC is also testing autoantibody panels for use as companion diagnostics and/or patient monitoring tools in collaboration with drug developers. Early data suggests such products may have utility in identifying responders ahead of therapy. 7

8 4. Global Cancer Diagnostics Market The global market for cancer diagnostics was estimated to be worth approximately $124 billion in 2016 and is forecast to grow at a CAGR of 7.2% to more than $230 billion by 2025 according to a 2017 report by Grand View Research entitled: Cancer Diagnostics Market Analysis by Type (laboratory Tests, Genetic Tests, Imaging, Endoscopy), By Application (Breast, Lung, Liver, Cervical, Colorectal, Skin), By Region, And Segment Forecasts, In addition to the growing prevalence of cancer cases, the underlying driver of growth of the cancer diagnostics market is the knowledge that early detection of cancer often leads to dramatic improvements in patient survival. This driver is being addressed by the evolution of technology platforms including those based on genomics / proteomics / transcriptomics / metabolomics / bioinformatics, and others, as well as changes in the delivery of clinically relevant information which has seen rapid growth in the point-of-care testing market. Lung cancer diagnostics (including X-ray imaging and CT scans as well as biopsy and other laboratory/pathology analyses), comprised the largest part of the global cancer diagnostics market by disease and were valued at approximately $26 billion in Fig. 3: Global cancer diagnostics by disease (2013 USD) USD Billions Total Lung Breast Colorectal Prostate Liver Ovarian Other 14 Source: Transparency Market Research: Cancer Diagnostics Market (Tumor Biomarker Tests, Imaging, Endoscopy and Biopsy) - Global Industry Analysis, Size, Share, Growth, Trends and Forecast, Given the sparsity of reliable and well tested blood tests for lung cancer, we believe the majority of spending on lung cancer diagnostics (within the $26 billion) is currently focused on investigations requested by primary practice physicians and lung specialists such as imaging (conventional chest radiography and low-dose CT scans) and analyses of biopsy material in central pathology laboratories. 8

9 5. Science 5.1. Tumours stimulate the immune system In the course of normal healthy cell function, the cell surface membrane is peppered with a wide variety of different molecules which help to mediate the functions of that cell and its interactions with its neighbours. The array of cell-surface molecules produced by one cell type will often overlap with other cell types as many of the functions are common. However, cells from one tissue type or organ will also express specific molecules on their surface related to the particular function of that organ or tissue. The array of cell surface molecules changes over time as cells enter various stages of their life cycle. During all of these processes, the immune system is generally unresponsive to and does not react against the different molecules produced by healthy cells of the body so called, immunological self-tolerance. This state of immunological self-tolerance reflects a continuous balance whereby the immune system is constantly monitoring cells around the body in a process of immune surveillance and reacting against cells which present molecular signals identifying them as abnormal. Key triggers for cells to be identified as abnormal by the immune system could include infection (usually viral but could also be bacterial), genetic mutation (causing dysregulated cell growth and proliferation i.e. tumorigenic transformation), dysregulated gene expression, abnormal intracellular protein processing (production or breakdown), or a combination of these. When normal cells develop into tumour cells a number of biological processes usually go awry and these give rise to the production of molecules which no longer conform to the pattern typical of healthy cells, in an immunological sense. These tumour cells stand out from the crowd because of the expression of abnormal molecules, collectively, TAAs, which induce an immunological reaction. Fig. 4: Tumour-associated antigen expression Source: Company Data and Bryan, Garnier & Co The specific recognition of cancer cells is due to the expression of TAAs which are not ordinarily seen on healthy cells. This immune recognition results in the stimulation of certain cells of the adaptive 9

10 immune system, namely B and T lymphocytes. The B cells so stimulated produce large amounts of specific antibodies against the TAAs. Indeed, these TAA-specific antibodies are probably the earliest component of an anti-tumour immune reaction which can be easily measured in the blood. The antibodies themselves are intrinsically no different compared to antibodies produced against infectious disease targets or vaccines. However, as these antibodies react specifically with proteins derived from within (i.e. host, self, or autologous proteins) they are often referred to as autoantibodies. From the perspective of what ONC s technology platform and products deliver to clinicians and patients, the important thing about these TAA-specific autoantibodies is: they are generated early in the development of solid tumours, the immune system produces lots of them (giving an excellent signal to noise ratio), and they can be easily and quickly measured in blood samples (if you have the right products). Fig. 5: Examples of tumour-associated antigens Type of Antigen Example TAAs Products of oncogenes, tumour suppressor genes Mutants of cellular genes not involved in tumorigenesis Products of genes that are silent on most normal tissues Products of overexpressed genes Products of oncogenic viruses Oncofetal antigens Glycolipids and glycoproteins Differentiation antigens normally present in tissue of origin Oncogenes: Ras mutations (~10% of carcinomas), p210 product of Bcr/Abl rearrangements (chronic myelogenous leukaemia, CML), overexpressed Her-2/neu (breast and other carcinomas) Tumour suppressor genes: mutated p53 (present in ~50% of human tumours) Various randomly mutated proteins recognised by cytotoxic T cells e.g. a mutated hsp70-2 protein in a renal cell carcinoma Cancer/testis antigens (e.g. NY-ESO1, MAGE, CAGE) expressed in many carcinomas; normally expressed mainly in the testis and placenta Tyrosinase, gp100, MART in melanomas (normally expressed in melanocytes) Papillomavirus E6 and E7 proteins (cervical carcinomas) EBNA-1 protein of Epstein-Barr Virus (EBV-associated lymphomas, nasopharyngeal carcinoma) Carcinoembryonic antigen (CEA) on many tumours; alphafetoprotein (AFP) in liver cancer GM2, GD2 on melanomas Prostate specific antigen (PSA); markers of lymphocytes: CD10, CD20 Source: Abbas, Lichtman and Pillai Cellular and Molecular Immunology, 8th ed; Bryan, Garnier & Co Detecting antibodies to TAAs The EarlyCDT range of blood tests for the detection of autoantibodies specific for the TAAs included within each tumour panel are relatively straightforward laboratory tests based on a commonly used Indirect Enzyme-Linked ImmunoSorbent Assay (ELISA) method (Fig 4). The presence of TAAspecific autoantibodies is revealed through the production of a blue coloured reaction product. The colour intensity is read using conventional plate readers commonly found in most clinical laboratories. 10

11 While the ELISA methodology itself is straightforward, the EarlyCDT tests are based on the binding of TAA-specific autoantibodies from a patient s blood sample to panels of TAAs tailored to Oncimmune s particular cancer test. The production of the panel of TAAs is technically not trivial and represents a competitive strength for the company. In addition, the incorporation of the TAAs into the ELISA requires specialist know-how in the areas of protein coating and stability and the preservation of antigenic quality each of which further differentiates Oncimmune from the field. Fig. 6: ELISA for detecting autoantibodies Substrate Secondary antibody (enzyme-conjugated) TAA TAA-specific autoantibody from patient s blood sample Source: Bryan, Garnier & Co. The detection of TAA-specific antibodies using an indirect ELISA, as represented schematically above, is a highly sensitive, specific and cost-effective approach given its relative simplicity. We believe the detection of such antibodies compares extremely favourably to other detection modalities on the basis that the signal to noise ratio is so high, reflecting the biology of tumour growth, TAA expression and antibody responses. For each tumour cell producing TAAs, we believe that immune B cells are capable of producing several orders of magnitude more antibody molecules than there are molecules of each TAA. This significant amplification in vivo is captured in the patient s blood sample meaning that little, if any, additional amplification is required in vitro in order to detect the clinical signal. This translates into time and cost savings for signal detection. Other cancer diagnostic blood tests are available or in development which measure the amount of a protein (e.g. CA-125 for ovarian cancer or PSA for prostate cancer) or the amount of circulating tumour DNA or the number of circulating tumour cells. We believe tests for TAA-specific autoantibodies are more sensitive and specific for early cancer detection for a number of reasons including: no discrete amplification process is required to detect the autoantibody signal, only extremely small amounts of protein or nucleic acid (or cells) are likely to be present in the blood at the earliest stages of disease, and antibodies are very stable in serum (whereas other proteins and DNA are constantly being degraded by enzymes in serum). 11

12 5.3. Detection before symptoms As mentioned above, the production of autoantibodies occurs early in the development of many tumours including those of the lung, liver, ovary and breast, among others. TAA-specific autoantibody production is triggered when even small amounts of TAAs are produced by tumour cells. The result of this is that tumour development can be picked up prior to the appearance of clinical symptoms of disease. In the schematic representation shown below, the EarlyCDT -Lung blood test can give a positive result before the appearance of symptoms and before the detection of a lung nodule by CT scan. For slow growing tumours approximately 4 years of advanced warning can be given before the appearance of a CT scan-detectable lung nodule. For fast growing tumours, the advance warning is reduced to approximately one year. In any case, patients with a positive EarlyCDT -Lung result prior to the appearance of a nodule detected by CT scan would ordinarily be placed under closer monitoring by their physician in order to enable a clinical intervention to be rapidly initiated when a nodule first appears or an existing small nodule changes. Fig. 7: Earliest detection before clinical symptoms Source: We spoke to a number of lung oncologists including Dr James Jett (Professor of Medicine, Division of Oncology, at National Jewish Health in Denver, CO, USA), Dr Richard Kucera (Pulmonary & Critical Care Associates, Greensburg, PA, USA) and Dr Neal Navani (Consultant in Thoracic Medicine, UCLH, London, UK) about the additional clinical information provided by EarlyCDT -Lung tests. Each of these specialists confirmed the great utility of the EarlyCDT -Lung result, particularly in the context of managing patients who have small nodules detected by CT scans but no clinical symptoms of disease. 12

13 The main problem for doctors relying solely on a single CT scan for diagnosis of lung cancer is the very high rate of detection of nodules, many of which are subsequently determined to be non-malignant i.e. over 95% false positive nodules. The decision to recommend an invasive surgical procedure can be fraught, particularly in frail patients with poor lung and cardiovascular function. Knowing that a patient has an elevated risk of malignancy, as determined by an EarlyCDT -Lung result, helps to stratify patients into those who need more intensive treatment and those who can be either eliminated from further follow-up or put on a watchful waiting programme Early intervention - cancer survival benefits The prevailing oncology doctrine holds that early cancer detection correlates with better survival and has been well established based on evidence from a variety of cancers. The best examples of these are probably colorectal cancer and melanoma where early detection through either screening or careful monitoring over time, respectively, enable early stage intervention. Curative treatments are possible when cancer is treated at a sufficiently early stage i.e. when a tumour is still at a small size and metastases have not appeared at other sites in the body. In the case of colorectal cancer, at-risk populations (defined as over 50 years of age in the USA) can be screened using a variety of tests including direct inspection of the entire colon via colonoscopy (gold standard), less extensive examination of the rectum and lower colon via flexible sigmoidoscopy (limited view), imaging of the colon via X-ray or CT scan (double-contrast barium enema and CT colonography), and a number of tests of stool looking for occult blood or DNA. All of these tests have their weaknesses and risks, but there is a substantial survival advantage for patients in whom colorectal cancer is detected at an early stage. Fig. 8: Earlier cancer detection = better 5-year survival Men Women 5yr survival % Stage I Stage II Stage III Stage IV All Stages Unknown Stage at Diagnosis - Colorectal Cancer Source: Cancer Research UK (The National Cancer Registration Service, Eastern Office. Personal communication) The lessons learned in the management of colorectal cancer offer some excellent indicators of what could be achieved in a variety of other cancers including those initially being targeted by Oncimmune lung, liver, and ovarian. 13

14 As shown, the probability of survival at 5 years following diagnosis increases dramatically with early cancer detection. This represents an obvious reason for adoption of cancer screening programmes, particularly for cancers which are more frequently diagnosed at a late stage because they tend to develop without causing overt symptoms. Additionally, there are considerable health economic reasons for instituting cancer screening programmes based on the high costs of caring for and treating advanced stage cancer patients (until they die) compared to early stage patients. The interventions involved in treating early stage cancers are generally relatively low cost and highly targeted surgical procedures, and depending on the case, often require no chemotherapy. Treating early stage cancer patients also usually involves less time in healthcare facilities. 14

15 6. ONC Product Portfolio Fig. 9: Oncimmune Product Portfolio Product Application / rationale Status / release Existing EarlyCDT -Lung In Development EarlyCDT -Liver (HCC) EarlyCDT -Ovarian Opportunities include - US and worldwide post-nodule risk stratification - Screening sales in the EU and USA Clear clinical need for early detection of HCC Cost-effective screening tool, complement or replace AFP test Clear clinical need for early detection of ovarian cancer Cost-effective screening tool, complement or replace CA-125 Commercialised, distributed in the UK and USA since Kit Ce-Marked, access to European and Asian markets shipped end Oct 2017 Launch anticipated in H Launch anticipated in H Breast Addresses key weaknesses of mammographic screening Ongoing development Prostate To differentiate between aggressive and benign tumours Ongoing development Colon, stomach, oesophagus Currently no cost-effective screening tools available Ongoing development Personalised medicine Fingerprinting Companion diagnostics Personalised autoantibody detection Fingerprint - Greater overall accuracy (>99% targeted) - Earlier disease detection Opportunity to use ONC s blood tests for directed therapeutic interventions Development partners can explore therapeutic applications of autoantibody profiles Processes being validated Ongoing development and collaborations Results late 2017 Collaborations ongoing Source: Company Data 6.1. Lung Cancer The prevalence of lung cancer is highly correlated with smoking behaviours in any given population. It is estimated that approximately 1.8 million new cases of lung cancer are diagnosed globally each year and that around 1.6 million patients will die of lung cancer, more than twice the next two biggest cancer killers combined. Around the world lung cancer is the single largest cancer killer by a substantial margin in every country. It is believed that this will remain the case for the foreseeable future unless changes are made to smoking habits (this is beginning in Western countries) and to the way in which people at high-risk are screened to enable earlier detection and increased success in the treatment of cancers. High-risk is now defined by the US Preventive Services Task Force (USPSTF) as people between the ages of 55 and 80 with a 30 pack-year smoking history who are existing smokers or who have given up within the last 15 years. One pack year is equivalent to smoking an average of one pack of cigarettes per day for 1 year i.e. 2 packs per day for one year would equal 2 pack years. Under this definition of 15

16 high-risk, only approximately 40% of patients diagnosed with lung cancer would have been eligible for routine screening by low-dose CT leaving 60% of patients without a screening alternative. Fig. 10: Lung cancer tops global cancer deaths Thousands per annum Lung Liver Stomach Colorectal Breast Oesophagus Prostate Source: International Agency for Research on Cancer, WHO (Globocan 2012) The high impact of lung cancers in key geographic territories is shown below in Figure 11 where it is clear that newly diagnosed cases are almost matched by an equivalent number of deaths annually. This highlights the generally late stage of diagnosis of most lung cancers and the poor prognosis associated with such late diagnoses. It also demonstrates that there is a clear need for better detection of early stage cancers to reduce the high rate of mortality associated with lung cancer. Fig. 11: Lung cancer statistics in key territories Incidence Deaths Thousands per annum USA EU-28 China Region Source: International Agency for Research on Cancer, WHO (Globocan 2012) 16

17 Current diagnostics and clinical practice A pivotal moment was reached in 2011 with the publication in the New England Journal of Medicine of the results of a lung cancer screening trial in over 53,000 subjects in the USA (the National Lung Screening Trial NEJM, ). The NLST study ran for 7 years in multiple clinical centres and compared low-dose helical computed tomography (CT, also spiral CT) to conventional chest X-rays for the detection of lung cancers. It was conducted to determine whether low-dose CT screening could reduce mortality due to lung cancer. The result of the study was the demonstration of a 20% reduction in the mortality of lung cancer through the use of low-dose CT screening, despite both groups showing a high rate of approximately 95% of positive screening results being false positive. The 20% reduction in mortality associated with low-dose CT was primarily achieved through the detection of earlier stage lung cancers and the consequent earlier interventions this enabled. As shown below, detection of lung cancer at earlier stages correlates strongly with improved survival outcomes. The NLST study was hailed by the medical community as a great demonstration of the value of early cancer detection by low-dose CT scanning and has led to a big improvement on prevailing clinical practice. Since then, screening of high-risk populations using low-dose CT scans has been recommended by the USPSTF 2. Despite this, around 60% of the patients diagnosed with lung cancer annually would not have been eligible for screening as they would not have matched the selection criteria (age range or smoking history). Despite decreases in smoking habits over recent years, the US Centers for Disease Control and Prevention (CDC) estimates that there are still over 42 million smokers in the USA currently, and over 220,000 new cases of lung cancer will be diagnosed annually. Of these around 85% are detected at an advanced stage of the disease, meaning that most patients will have a very poor prognosis (overall, 5- year survival is around just 17.5%). In the USA, approximately 2 million individuals are diagnosed annually with lung nodules as a result of increased screening with low-dose CT scans, but over 96% of the nodules are not cancerous (i.e. falsepositive). This represents a potential dilemma for doctors because of the difficulty in establishing a risk assessment for lung nodules. Any additional information derived from other tests e.g. EarlyCDT - Lung, enables pulmonologists to improve their nodule risk assessments and guides them in the most appropriate course of action (intervention/treatment or further monitoring) The USPSTF recommends annual screening for lung cancer with low-dose computed tomography (LDCT) in adults aged 55 to 80 years who have a 30 pack-year smoking history and currently smoke or have quit within the past 15 years. Screening should be discontinued once a person has not smoked for 15 years or develops a health problem that substantially limits life expectancy or the ability or willingness to have curative lung surgery. 17

18 Fig. 12: Lung cancer 5-year survival by stage at diagnosis year survival % All Stages Distant Tumours Localised Source: Howlader et al. SEER Cancer Statistics Review, , National Cancer Institute. Bethesda, MD, based on November 2014 SEER data submission, posted to the SEER web site, April 2015 ( ) EarlyCDT -Lung in use EarlyCDT -Lung is a blood test based on the detection of autoantibodies in the blood of patients which react with one or more targets in a panel including 7 TAAs. It can detect cancer up to 4 years before CT scans such that disease can be caught earlier and surgical treatments initiated at relatively low-cost with vastly improved outcomes. The TAA panel is made up of 7 specific protein targets (CAGE, GBU4-5, HuD, MAGE A4, NY-ESO- 1, p53, and SOX-2) which are each coated separately onto the surface of 96-well plastic plates. The existing test is a standard semi-automated indirect ELISA which is performed in a CLIA laboratory by trained technicians. During development and validation of the EarlyCDT -Lung test approximately 120,000 patient samples were processed. Since mid-2012 when EarlyCDT -Lung was launched nationally in the USA, more than 145,000 tests have been sold. These numbers highlight both the extensive efforts Oncimmune has made in developing the test and the high unmet need for a test to aid in the earlier detection of lung cancer. On average, over 40,000 tests have been sold annually in the USA and UK combined each year. These tests are ordered by both primary care physicians and pulmonologists, mainly for high-risk patients (in the USA those over 55 years of age with at least a 30-pack year history) and those who have had CT scans and are being monitored. The test has been used in clinical practice (outside of clinical trials) in two main contexts: the screening of patients at high-risk of developing lung cancer, and in nodule work-up as an adjunct to low-dose CT scans for patients in whom indeterminate lung nodules have been found on CT, but where little additional evidence exists for the physician to assess the nodule(s). In the case of nodule work-up EarlyCDT -Lung is being used to help pulmonologists stratify the risk of malignancy in patients in whom pulmonary nodules have been detected on lung CT scans. In the 18

19 USA approximately 2 million individuals are diagnosed annually with lung nodules as a result of increased screening with low-dose CT scans, but approximately 97.5% of the nodules are false-positive. Overlaying the additional information derived from an EarlyCDT -Lung blood test enables pulmonologists to assess the risk of a nodule being malignant and therefore determine the most appropriate course of action (treatment or further monitoring). To date, results have shown that EarlyCDT -Lung combined with CT scans have good positive predictive value allowing pulmonologists to significantly improve their assessment of the risk of malignancy of smaller nodules, particularly those less than 20mm in size (Massion et al., J. Thoracic Oncology, available online since September 8 th ). Clearly, with such a large population of smokers in the USA and high numbers of lung nodules being detected, the market opportunity for EarlyCDT -Lung is substantial and Oncimmune is well positioned with excellent new data to drive further into the market EarlyCDT -Lung performance and output Interim data has been reported from the largest, prospectively designed clinical trial evaluating the performance of a blood test for the early detection of lung cancer. This landmark trial, the ECLS study (Early Cancer detection test Lung cancer Scotland) is being conducted in the Glasgow region and has enrolled 12,210 participants, all of whom have had a blood sample taken. These have been randomised 1:1 to be tested with EarlyCDT -Lung or not. All participants will be followed-up for at least 2 years. The interim data reported in December 2016 is shown below. Final results are expected in mid-2019 after 2 year of follow-up and CT scan. Fig. 13: Interim data from NHS ECLS study Dec 2016 Control Early CDT -Lung test result Negative Positive Total Non- Lung Cancer n/a 5, ,083 Lung Cancer n/a Total 6,108 5, ,102 Source: ECLS Interim results presented at the World Lung Cancer conference (IASLC) meeting in Vienna, December Note: no control arm cancer diagnosis information yet; Non-Lung Cancer means no cancer confirmed yet. From these Interim results the blood test appears to have functioned very well demonstrating high sensitivity, specificity and negative predictive value: Sensitivity of 84.2% (or 16 positive results detected out of 19 true positives) Specificity of 90.8% (or 5,527 negatives results out of 6,083 true negatives) Negative Predictive Value of 99.9% (or 5,524 true negatives out of 5,527 negative tests) It must be emphasised that these are interim results. The study cohort consists of participants whose smoking history places them at high-risk of developing lung cancer. As the study progresses it is expected that new cancers will be detected on subsequent CT scans in participants who were negative at the previous visit. As a result, we expect the sensitivity and specificity performance characteristics for 19

20 EarlyCDT -Lung will change, potentially moving closer to the anticipated levels (based on earlier trials). This may reduce sensitivity and Negative Predictive Value but Positive Predictive Value (PPV) might also increase (from the 2.8% so far or 16/559) as prevalence increases. In ONC s other studies in high-risk patients EarlyCDT -Lung has achieved a PPV of 1 in 7 (14.3%). The interim performance characteristics of EarlyCDT -Lung in the ECLS study compare very favourably with the results of the initial low-dose CT scan screening established in the NLST trial 3. In that study low-dose CT had a sensitivity of 93.8% and specificity of 73.4%. The challenge of lung cancer screening using low-dose CT remains the high proportion of false positives and being able to differentiate between true and false positives. The format of the EarlyCDT -Lung test results has recently been updated to provide further information about the level of risk for the presence of lung cancer (see below). Fig. 14: EarlyCDT -Lung lab report example Source: Company Data 3 Church et al N. Engl. J. Med. 368:

21 EarlyCDT -Lung Sales According to the US CDC, in 2015 there were an estimated 36.5 million current adult smokers in the USA and more than 16 million are living with a smoking-related disease. As previously mentioned over 220,000 cases of lung cases are diagnosed each year and around 2 million patients have low-dose CT scans which detect nodules in the lung. We know that on average approximately 95% of these nodules will not be diagnosed as lung cancer. The current USPSTF lung cancer screening guidelines, with eligibility criteria modified from those used for the NLST trial (aged to 55 to 80 years of age, 30-pack year smoking history and currently smoke or have quit smoking within the past 15 years), recommend annual screening with low-dose CT (to be discontinued when the patient has not smoked for 15 years). From published data which ONC has reviewed elsewhere, we believe that only approximately 40% of the 220,000 patients diagnosed with lung cancer annually in the USA would have been eligible for lowdose CT scanning under the USPSTF lung cancer screening guidelines. Fig. 15: Estimated annual lung cancer cases (USA) Non-smokers Smokers Total Age (years) Non-USPSTF USPSTF <55 2,554 19,015-21, ,285 48,566 89, ,605 >80 4,821 37,005-41,826 Total 25, ,586 89, ,000 Source: Company Data and Bryan, Garnier & Co. EarlyCDT -Lung is currently sold to primary care doctors and lung specialists (pulmonologists). Pricing in the USA varies according to end-users and distributors but we estimate that ONC could generate >80% gross margin once volumes become substantial. Our forecasts are based on volumes for the EarlyCDT -Lung test growing to over 700,000 tests per annum in FY2024. In the context of the 2m nodules which currently require further investigation by pulmonologists annually, we believe this growth is reasonable. Additionally, there are many cases, as described above, where low-dose CT scans would not be recommended under USPSTF screening guidelines. A positive EarlyCDT -Lung test would give these patients an alternative route into lowdose CT screening. Our forecasts for sales of the existing lung cancer detection test are considerably more conservative than those prepared by Health Advances Boston, a company of consultants engaged by ONC to profile the global market and opportunity for the EarlyCDT -Lung product. USA Primary care physicians while some 80,000 primary care physicians are currently able to prescribe the product for patients, only a small number are thought to be familiar with the product and its advantages. USA Pulmonologists some 4,000 specialists are currently able to prescribe the product for their generally more complicated patients. Being more advanced with their training and knowledge of the latest developments these prescribers offer a potentially more rapid route to sales growth and 21