Oncosil Medical (OSL) BUY: The CT-scans indicate good progress. Key points. Risks and catalysts

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1 Date 24 October 2017 Theme Company Update Company Oncosil Medical (OSL) BUY: The CT-scans indicate good progress We maintain our BUY rating on Oncosil Medical and are sticking with our 12-month price target of $0.38 per share. The company s OncoPac-1 clinical trial in pancreatic cancer has made further progress, reporting its first safety and tumour response results at the EANM 2017 Congress in Vienna. In this report we review those data briefly and reiterate the salient feedback from our consultants and literature sources that support our positive view on the OncoSil TM asset. Although the EANM data is very early and uncontrolled, it re-validates the product concept and the development program being pursued. In 12 months time Oncosil could be making modest sales in Europe and enrolling a global, pivotal study under an FDA-approved IDE an entirely different valuation footing to what investors see today. Hence our continued positivity on OSL shares. Key points OncoPac-1 trial data presented at EANM The pilot phase of Oncosil Medical s clinical trial has reported its first safety and efficacy data, choosing the European Association of Nuclear Medicine s 2017 Congress in Vienna as a forum. The main takeaways are: a) the OncoSil TM device and its ultrasoundguided implantation procedure are presenting no safety flags or complications to patients or practitioners; and b) the tumour response rates are consistent with previous clinical experience. The EANM data is very early but so far there is 100% disease control (at four weeks after implantation) and the median reduction in tumour volumes is ~34.5% (range: 15% to 73%). Importantly, these are uncontrolled observations and they do not comment on OncoSil TM s specific efficacy (the device being used in combination with the standard of care gemcitabine/nab-paclitaxel chemotherapy as background). Solid progress. Clinical performance conducive to European and USA progress. We are confident that this pilot trial can produce 20 evaluable implants by the end of the year, and facilitate a CE Mark case review in early We also understand that US sites are very close to enrolling their first patients. Valuation. Price target of $0.38 per share is set in line with risk-adjusted DCF. Oncosil is a high risk investment but offers up to $2.20 per share in un-risked value (successfully achieving all of the key development milestones that shape asset valuation in our model) over the next 3-5 years. Risks and catalysts Risks: a) access to development capital; b) clinical trial risks; c) regulatory risks; d) product safety/quality/logistics risks; e) volatile sentiment in early stage life science and biotechnology sector. Catalysts: a) obtaining CE Mark; b) OncoPac-1 clinical trial progress; c) EU marketing approval and first sales; d) Board renewal. Recommendation BUY 12-mth target price (AUD) $0.38 Share 19-Oct-17 (AUD) $0.17 Forecast 12-mth capital return 129.3% Forecast 12-mth dividend yield 0.0% 12-mth total shareholder return 129.3% Market cap $80m Enterprise value $74m Shares on issue Sold short ASX 300 weight Median turnover/day Shane Storey, PhD MBA shane.storey@wilsonsadvisory.com.au Tel mth price performance ($) m n/a $0.0m Oct-16 Feb-17 Jun-17 Oct-17 OSL XSI Rebased 1-mth 6-mth 12-mth Abs return (%) Rel return (%) Earnings forecasts Year-end June (AUD) FY16A FY17A FY18F FY19F FY20F NPAT rep ($m) NPAT norm ($m) Consensus NPAT ($m) EPS norm (cps) EPS growth (%) P/E norm (x) EV/EBITDA (x) FCF yield (%) DPS (cps) Dividend yield (%) Franking (%) Source: Company data, Wilsons estimates, S&P Capital IQ Key changes 19-Oct After Var % NPAT: FY18F % norm FY19F % ($m) FY20F % EPS: FY18F % norm FY19F % (cps) FY20F % DPS: FY18F % (cps) FY19F % FY20F % Price target: % Rating: BUY BUY Issued by Wilsons Advisory and Stockbroking Limited ABN Australian Financial Services Licence No , a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

2 Net Debt / Equity (%) Interest Cover (x) 24 October 2017 Growth rates Revenue Growth (%) EPS Growth (%) 383.1% 139.8% 48.1% 20.4% -20.5% -43.5% FY17A FY18F FY19F FY20F Key assumptions Revenue growth (%) EBIT growth (%) NPAT growth (%) EPS growth (%) EBIT/sales (%) -4, Tax rate (%) ROA (%) ROE (%) Returns ROE (%) ROIC (%) 69% -44% -73% -56% -141% -148% -139% -89% Margin trends Solvency Interims ($m) 1H17A 2H17A 1H18E 2H18E Sales revenue EBITDA EBIT Net profit Norm EPS EBIT/sales (%) -844% -5648% FY16A FY17A FY18A FY19A FY20A EBITDA Margin (%) EBIT Margin (%) NPAT Margin(%) 0% -500% FY16A FY17A FY18F FY19F FY20F -1000% -1500% -2000% -2500% -3000% -3500% -4000% -4500% 0% -50% -100% -150% -200% -250% -300% -350% -400% -450% -500% Net Debt / Equity (%) Interest Cover (x) FY16A FY17A FY18F FY19F FY20F - 6, ,352.8 Dividend (c) Franking (%) Financial ratios PE (x) EV/EBITDA (x) Dividend yield (%) FCF yield (%) Profit and loss ($m) Sales revenue EBITDA Depn & amort EBIT Net interest expense Tax Minorities/pref divs Equity accounted NPAT Net profit (pre-sig items) Abns/exts/signif Reported net profit Cash flow ($m) EBITDA Interest & tax Working cap/other Operating cash flow Maintenance capex Free cash flow Dividends paid Growth capex Invest/disposals Other inv flows Cash flow pre-financing Funded by equity Funded by debt Funded by cash Balance sheet summary ($m) Cash Current receivables Current inventories Net PPE Intangibles/capitalised Total assets Current payables Total debt Total liabilities Shareholder equity Total funds employed Page 2

3 Oncosil Medical Positive early OncoPac-1 data presented at EANM 2017 First OncoPac-1 data reported Oncosil Medical has reported first data from its OncoPac-1 clinical trial, in a presentation delivered at the European Association of Nuclear Medicine (EANM) Congress in Vienna. As a reminder, OncoPac-1 is a global clinical trial testing the safety and efficacy of the OncoSil TM medical device for the treatment of unresectable, locally advanced pancreatic cancer (LAPC). The first phase of this trial is a run-in component, which is providing regulators (EMA and FDA) with an assessment of both device-related and procedural safety in the first 20 patients; 28 patients have been recruited thus far, and 14 have been implanted with the medical device, which is a preparation of microparticles containing the radionuclide 32 P. Oncosil s EANM presentation featured safety and local tumour response data from the first 12 patients. The data was cut at a point where 12 patients had had radiological evaluations at week 8 (8w), 4 patients at 16w and one patient at 24w. Key results Procedural safety looks straightforward. OncoSil TM delivery via endoscopic ultrasound (EUS) was described as easy and uncomplicated across several clinical sites and EUS practitioners. Device-related safety OK. There have been no serious adverse events attributed to the OncoSil TM device or the implantation procedure. There was no evidence of radiationrelated toxicities 1. Encouraging tumour responses. Oncosil reported 100% Disease Control Rate (DCR) at 8w. Substantial tumour volume reductions were also described up to 73% volumetric reduction observed four weeks post implant, with a median volumetric reduction of 34.5% at four weeks post implantation. Figure 1: Ultrasound images of OncoSil TM being injected into primary pancreatic tumour mass using ultrasound-guided endoscopy Source: Oncosil 1 Single doses of OncoSil TM are formulated with a radioactive concentration of 6.6 MBq/mL, implanted at an implanted volume to tumour volume (IV/TV) ratio of approximately 8%. This confers Gy mean doses to tumours. Page 3

4 Wilsons view and analysis Procedural simplicity and safety the #1 take-away. We found the anecdotal feedback about the device itself to be encouraging from both the interventional radiologist and endoscopist perspectives. Oncosil has done a lot of work understanding the required dosimetry and ensuring that the ~100 Gray radiation dose is delivered uniformly and with good coverage of the tumour volume. As with all EUS procedures, the skill of the operator can be a factor in clinical outcomes. The interaction with the FDA in the design of OncoPac-1 added much to the clinical protocol and to ensuring that the device can be deployed in a safe, consistent and reproducible manner. Safety data potentially unlocks a CE Mark in Europe and the expansion of OncoPac-1 into pivotal phase. If the reported safety and response characteristics are sustained over the first 20 implants, then we would expect CE Mark to be granted in early Our sales expectations following CE Mark are very modest but the clearance will probably provide an important boost to OncoPac-1 trial recruitment in Europe. Separately, the FDA will conduct its own review of the first 20 patients, 10 of which must be treated at US clinical trial sites. We understand that US sites are very close to enrolling their first subjects. The successful completion of that review would allow Oncosil to commence the larger, randomised, controlled stage of OncoPac-1 which will ultimately enrol ~300 patients. As a reminder, OncoPac-1 is a registration directed, pivotal trial which ultimately could form the basis of an FDA approval for OncoSil TM. The primary endpoint will be local progression free survival (LPFS) which is discussed in more detail, later in this report. Efficacy data positive but uncontrolled in this study phase. The efficacy data presented at EANM does not yet comment on OncoSil TM s efficacy specifically, because all patients in this phase of the trial received chemotherapy both before and after being implanted (gemcitabine combined with nab-paclitaxel or GNP). Oncosil reported 100% Disease Control Rate (DCR) at 8w. Substantial tumour volume reductions were also described up to 73% volumetric reduction observed four weeks post implant, with a median volumetric reduction of 34.5% at four weeks post implantation. These data are consistent with the first OncoSil TM trial in pancreatic cancer, published in 2008/9 (17 patients), which achieved median target tumour response of 23.5% and a DCR of 82.4% 2. Figure 2: Study design for run-in phase of OncoPac-1. Patients receive OncoSil TM after 4 weeks of induction chemotherapy Source: Oncosil 2 Ross, P. J. et al. (2008) Novel delivery via endoscopic ultrasound of a 32-P brachytherapy device in addition to gemcitabine in advanced pancreatic cancer Abstract #205 ASCO Gastrointestinal Cancers Symposium, January 26 th 2008, Orlando, FL. Page 4

5 For reference only, we include some recently published data characterising the tumourshrinking ability of chemotherapy alone. The Phase III trial 3 that supported the approval of nab-paclitaxel for first-line chemotherapy demonstrated linear reductions in primary pancreatic tumour burden over the first 24w of therapy 4. OncoSil s EANM data does compare well against these data, but it is generally not valid to compare different clinical trials in this way. We will not know OncoSil TM s intrinsic, incremental efficacy until the randomised component of the OncoPac-1 trial is completed, comparing the two trial arms: tumour responses in patients treated with chemotherapy + OncoSil TM compared to responses using chemotherapy alone. Figure 3: Data showing the linear reductions in primary tumour burden achieved using two popular chemotherapy regimens in LAPC treatment Source: Kunzmann (2017) 3 Vogel, A. et al. (2015) Efficacy and safety of nab-paclitaxel (nab-p) plus gemcitabine (gem) vs gem alone in patients with metastatic pancreatic cancer (MPC) treated to progressive disease (PD) in the phase III MPACT trial. Eur. J. Cancer 51: S Kunzmann, V. et al. (2017) Tumour reduction in primary and metastatic pancreatic cancer lesions with nab-paclitaxel and gemcitabine Pancreas 46: Page 5

6 Key investment insight on OncoSil TM The opportunity for loco-regional radiotherapy in LAPC is undiminished. We have had a number of incoming calls and conversations with investors this year asking whether Sirtex s disappointing results with its liver-directed cancer therapy (SIR-Spheres) in any way precludes OncoSil TM from being successful. For readers that do not know Sirtex, its 90 Y- based selective internal radiation therapy achieved statistically significant tumour control within the liver but that did not influence overall survival. The advice we have gathered from independent consultants and from the clinical literature offers several lines of reasoning that support and differentiate the OncoPac-1 objective in LAPC: Understand the primary endpoint that the FDA accepted. Local tumour control and quality of life are the important issues in LAPC 5. Approximately 30% of patients die on account of their locally destructive, primary pancreatic tumours. The FDA supported the idea of OncoSil TM addressing progression free survival (LPFS) in the pancreas as primary endpoint, as opposed to overall survival (OS), which is included in OncoPac-1 as a secondary endpoint. This choice of primary endpoint reflects the pressing clinical challenges in early LAPC treatment: a) pre-operative therapies aimed at improving a patient s chance of undergoing margin-negative resection 6 ; and b) local tumour control enhancing the synergistic effect of chemotherapy and radiotherapy combined in the treatment of unresectable locally advanced disease (ULAPC). New modalities are needed in LAPC that offer a rapid de-escalation of the primary tumour with good safety and low toxicity. Goals of treatment are local disease control, symptom palliation and overall survival in that order. LAPC patients have significant and distressing symptom burdens directly related to their primary malignancy including pain, pancreatic insufficiency, biliary obstruction, and early satiety/gastric outlet obstruction. These are all good reasons for targeting the primary tumour as a clinical objective with patient benefit. The recognition that some patients (with certain molecular and/or genetic characteristics) are more likely to have local-dominant progression rather than metastatic spread has also heightened interest in developing products for more effective local tumour control 7. Understand the shortcomings of conventional chemoradiation as applied to pancreatic cancer. Currently, the standard of care for patients who are unsuitable for surgery is the use of chemotherapy and/or radiotherapy (chemoradiation). A clear overall survival benefit for chemoradiation compared to chemotherapy alone has never been demonstrated. Chemotherapy and radiotherapy strategies struggle with LAPC because significant regions of the primary tumour are poorly vascularized and hypoxic. Poor blood supply precludes full access for systemically delivered drugs and the lack of oxygen denies radiation its full force (two-thirds of its impact relies on reactive oxygen species generated by ionisation). External beam radiotherapy is also limited by the need to spare the surrounding organs and structures from toxicity. For this reason, a course of radiation might deliver Gray of therapy to the tumour in daily sessions (or fractions) over a 5-6 week period. In recent years, stereotactic body radiation therapy (SBRT) has emerged, offering a way of delivering similar doses of radiation in 1-6 fractions with minimal dose to the surrounding tissues. SBRT is still delivering lower doses of radiation compared to OncoSil TM : Gray 8 versus 100 Gray in a single procedure. The delivery of full doses of chemotherapy in parallel with SBRT has not been demonstrated to be safe and feasible compared with standard chemoradiation 9. 5 Balaban, E. P. et al. (2017) Locally advanced, unresectable pancreatic cancer: ASCO clinical practice guideline summary. J Oncol Pract. 13: Russo, S. and Wasif Saif, M. (2016) Neoadjuvant therapy for pancreatic cancer: an ongoing debate. Ther Adv Gastroenterol 9: Iacobuzio-Donahue, C. A. et al. (2009) DPC4 gene status of the primary carcinoma correlates with patterns of failure in patients with pancreatic cancer. J Clin Oncol 27: Petrelli, F. et al. (2016) Stereotactic body radiation therapy for locally advanced pancreatic cancer: a systematic review and pooled analysis of 19 trials Int J Radiation Oncol Biol Phys, 2: Phase III trials are testing FOLFIRINOX chemotherapy with or without SBRT for LAPC (ClinicalTrials.gov identifier NCT ) and will determine the safety and efficacy in terms of progression free survival for chemotherapy alone compared with the use SBRT. Page 6

7 Oncosil Medical (OSL) Business description (OSL) is developing a novel form of brachytherapy for the treatment of pancreatic and liver cancers. OncoSil TM provides a means of irradiating tumours from the inside, using microparticles impregnated with the radioactive isotope Phosphorus-32. OncoSil TM is expected to be granted CE Mark in 2018 and be the subject of a large clinical trial in the US commencing in the same year. We estimate a US$350m sales opportunity in the major pancreatic cancer markets. Investment thesis Oncosil Medical is an Australian medical device company developing an implantable, radioactive treatment for addressing inoperable pancreatic and liver cancers. The OncoSil TM product concept is to safely administer a radiation dose large enough to destroy a significant part of the primary tumour in a single procedure, with limited toxicity. We think OncoSil TM can change clinical practice because it offers a potential solution to the number one problem reported by surgical oncologists who make the pancreas their focus: the ability to de-escalate primary tumours with a view to resection or treatment with chemotherapy agents. Revenue drivers Clinical trial success and regulatory approvals to market their products Pricing and reimbursement decisions Market penetration (new clinical centres/hospitals, physician acceptance) New markets (geographical, clinical indications) Balance sheet As at end FY17, Oncosil had ~$8.0m in cash and no debt Margin drivers Gross margins sustainable at 80% or better Although SG&A structure is yet to evolve, long-term rates of ~40-50% achievable (Wilsons estimates) Reimbursement outcomes (pricing). Key issues/catalysts CE Marking and European marketing Clinical trial execution, results and FDA approvals Potential for commercial partnering interest over the next few years as OncoPac-1 trial gains momentum Risk to view The technology is currently only supported by low level evidence from a handful of small Phase I/II clinical trials Outlook depends on higher level clinical evidence flowing from well-designed clinical trials Regulatory risks including manufacturing and quality issues Product safety Competitive risks in a busy oncology technology market. Board Chris Roberts (Chairman) Daniel Kenny (Managing Director) Roger Aston (Non-Executive Director) Martin Cross (Non-Executive Director) Management Daniel Kenny (CEO) Tom Milicevic (CFO) Ash Soman (CMO) Charles Rowland (President US Operations) Contact details Address: Suite 402, Level 4, 50 Berry Street, North Sydney, NSW 2060 Australia Phone: Web: Page 7

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