The Speculator

New clinical trials in the US could cure the lagging share price of cancer group Viralytics.

PORTFOLIO POINT: Shareholders in cancer-cure hopeful Viralytics can look forward to an up-beat report when the company holds its annual meeting.

In a newsletter sent last week to investors in Viralytics (VLA), the company’s Los Angeles-based executive chairman Paul Hopper confidently predicted “we are in the process of transforming Viralytics” as the company undertakes Phase 11 clinical trials in the United States.

A company’s graduation to Phase 11 clinical trials and beyond, under the guidance of the US Food and Drug Administration, offers a near-certainty that the company’s shares will attract a radical re-rating if the process succeeds.

The report, to be discussed at the forthcoming annual meeting adds: “The Viralytics board believes that gaining approval for and starting a US Stage 11 cancer study is a significant achievement for any Australian biotechnology company aspiring to create real value for its drug portfolio.”

The company’s principal asset is its patented therapy, CAVATAK, in the use of the Coxsackievirus (related to the common cold) to destroy cancer cells.

Viralytics’ chief science officer, Professor of Virology Darren Shafren, at Newcastle University’s Hunter Medical Research Institute, is the principal developer of the technology. (Two pages of patents granted or pending are listed in the annual report.)

During the past year Viralytics completed its Phase 1 clinical development program. That was based on a single dose-escalation of CAVATAK intravenously into a range of cancers: Melanoma, breast, prostate and colon cancers. It conducted a multi-dose intratumoral trial in late-stage head and neck cancer.

The Phase 1 trials were essential to establish safety and dosage schedules for drugs ahead of any Stage11 studies, which are designed principally to establish whether or not a drug is effective.

Final clinical study reports for the Phase 1 trials are being prepared. In a report due this month, however, Prof. Shafren added that “we can say generally the intravenous and intratumoral delivery of a single dose of CAVATAK in late stage cancer patients was well-tolerated”.

Armed with data from those trials together with all the pre-clinical research conducted by Viralytics, the company won FDA approval late last year for Phase 11 of multiple injections into late stage melanomas on a total of 54 patients.

The first began successful treatment in January with multiple injections into tumours over an 18-week period to monitor immune related progression-free survival at six months. (I understand that if the first 15 or 20 recruits show positive results, it may be possible to accelerate development without being required to run Stage 11 trials on all 54 targeted patients.)

A progression to more advanced Phase 111 trials, including targeting a wider range of cancers, such as colorectal prostate and head and neck cancers, would raise Viralytics’ investment profile significantly.

After the company’s newsletter went out to existing shareholders last week, Viralytics’ shares rose from a week’s low of 21c to a week’s high of 26.5c on turnover of 515,000 shares. That’s still well short of its 12-month high of 61c.

With 47.48 million shares on issue, the stock at 26c carries a market capitalisation of $19.35 million, with cash on hand at June 30 of $5.9 million. Directors claim in the annual report that the company is in a “strong cash position to support its research and development programs through 2013.”

I will stay with my under-valued portfolio holding. Readers might note that of the company’s 4.35 million unlisted options, all are well out-of the money with more than half exercisable at 70c and most of the rest at prices between $3 and $4.

Food for thought

Directors own most of the options exercisable during the next three years. Why would they bother with the task of running a company if they didn’t share some hope of a recovery?

Executive chairman Paul Hopper has more than 20 years’ experience in the management and funding of biotechnology and health care public companies. He is a partner in the Los Angeles merchant Bank Cappello Capital.

Among his colleagues on the board is non-executive director Dr Leonard Post, a past director and consultant to Biovex Ltd, acquired last year by US giant Amgen Inc in a US$1 billion deal.

The Speculator portfolio (as of October 16, 2012)

CompanyCodeNo of sharesBoughtPurchase priceCurrent priceCurrent value
Image ResourcesIMA*20,00031/12/2010* $0.338 av$0.270$5,400
ViralyticsVLA19,99520/12/2011$0.308$0.270$5,399
Robust ResourcesROL6,00031/12/2010*$1.49 av$0.650$3,900
Scotgold ResourcesSGZ27,50031/12/2010*5.5 av$0.064$1,760
GoConnect LtdGCN250,00031/12/2010*0.034 av$0.016$4,000
PlatsearchPTS20,0008/02/2011*$0.130$0.068$1,360
Broken Hill ProspectingBPL30,00022/02/2011*0.132 av$0.096$2,880
Austpac ResourcesAPG40,0002/03/2011*$0.060$0.040$1,600
Potash West PWN11,05030/03/2011*$0.220$0.265$2,928
Cortona Resources CRC25,00013/04/2011*0.146 av$0.094$2,350
Golden Gate Petroleum GGP408,50020/04/2011*0.0145 av$0.008$3,268
TNT MinesTNT4,44022/07/2011*$0.000$0.250$1,110
Quickstep HoldingsQHL20,00023/11/2011*$0.185$0.195$3,900
Orpheus EnergyOEG19,25017/08/2011*0.164 av$0.069$1,328
Black Mountain ResourcesBMZ10,00017/04/2012$0.300$0.230$2,300
GullewaGUL40,00022/05/2012$0.063$0.065$2,600
Chesser ResourcesCHZ12,00027/08/2012$0.360$0.420$5,040
$51,123
Total value of portfolio$51,123
Owe the bank-$8,835
Total$42,288
Portfolio change since January 3, 2012 (started with $50,000)-15.42%
All Ordinaries change since January 3 2012 (then 4155.22)8.63%
All Ordinaries close 16 October 20124513.9