Oncolytics Biotech Inc. MORE QUESTIONS THAN ANSWERS

ONC : TSX : C$2.00
ONCY : NASDAQ
BUY 
Target: C$6.50

COMPANY DESCRIPTION:
Oncolytics Biotech is a biotechnology company with a biologic therapy in late-stage development for the
treatment of various cancers. The company’s lead product, Reolysin, is a live virus that has the ability to
replicate in certain cancers, thus destroying the cancer cell. Oncolytics is now conducting several randomized
studies for Reolysin (including head & neck and pancreatic cancers), which should read out over the next
several months.
All amounts in C$ unless otherwise noted.

Investment recommendation
Oncolytics reported top-line data for Reolysin in head and neck cancer (H&N). While the company reported positive median PFS for Reolysin (13.4 weeks vs. 7.1 weeks in the control), limited detail, some omitted data points, and a lack of statistical analysis, painted an incomplete picture for investors. We believe that there were likely a number of confounding factors that impacted the analysis; however, expectations for these results were certainly much higher. As such, we believe that selling from investors with a shorter time horizon pressured the stock.
Investment highlights
 We continue to believe that Reolysin shows signs of efficacy in this indication. However, additional data points (the metastatic disease data) and analysis is required to further understand these results.
 Oncolytics expects to advance Reolysin into a registration study in H&N cancer. This trial is likely to be single-blind to mitigate the
drop-out risk due to the higher incidence of fever in the test group.
 We continue to anticipate a number of data announcements in the near term, including results from the REO 018 metastatic-only patient group (likely in H1 2014) and the Phase II randomized pancreatic cancer data (expected in coming months).
Valuation
We value Oncolytics using a pNPV model of Reolysin in key indications including H&N cancer. Following this data, we have extended Reolysin development timelines and lowered our estimated probability of success in H&N to 45% (from 55%). As a result, we are lowering our target to C$6.50 (from C$8.00), which continues to support our BUY rating.

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