RBC - Next 12 Months Likely Transformational
We believe 2010 and early 2011 will likely be transformational for ONC as the company has multiple potential catalysts occurring over the next 12 months that may impact investor sentiment.
These include:
1. The initiation of ONC's first phase III pivotal trial in H&N cancer in the coming weeks that should produce interim phIII data in ~12-14 months.
2. Data released from ONC's NSCLC phII trial around mid-year that we believe will be positive based on the design of the trial, and potentially data later in the year from the company's phII metastatic melanoma trial.
3. The initiation of additional phII trials in colorectal cancer, pancreatic cancer, and squamous cell lung cancer.
4. A potential partnership deal.
Model Revisions: We have made minor changes to our model following the release of the Q4 results. Our updated 2010 and 2011 EPS are ($0.32) and ($0.20), respectively, vs. ($0.27) and ($0.18) previously.
Outlook Unchanged: Focus Is on 2010 News Flow. Based on the data released to date, we believe ONC's lead product, REOLYSIN, has the potential to treat multiple cancer indications. In the coming quarters, a number of events discussed above could provide catalysts for the stock and we believe a potential partnership
deal could be finalized at any time following the initiation of the phIII trial.
While the exact timing of a partnership is uncertain, management has previously indicated that they are in discussions with multiple parties and that each has different interests regarding timing and the data they require. We believe management is in a relatively strong negotiating position given ONC has the capital required to generate the initial phIII data in H&N and should have data (expected to be positive) from the NSCLC phII around mid-year. As a result, we maintain our Outperform, Speculative Risk rating and believe our conservative approach provides for additional upside beyond our forecasts.
Valuation: Maintaining $5.00 target.
Priced as of prior trading day's market close, EST (unless otherwise noted).
Valuation
Our price target is based on a 15x multiple to our 2016 EPS estimate of $1.67 (previously $1.68), discounted at 30% for six years to arrive at $5.18 ($5.23 previously). Our target is supported by a SOTP DCF value of $5.03/sh (risk weighted, 70% probability of success for REOLYSIN in H&N) (previously $5.10/sh). Our multiple and discount rate are typical for what we would use to value other development stage cancer companies in the current market environment. In addition, we believe a number of catalysts exist that could lead to considerable upside including further positive clinical data that confirm the response rates observed to date, the possibility of faster timelines to approval than we forecast, and the eventual approval in additional indications including NSCLC, sarcoma, melanoma, and others.
