VLA Hotcopper Rebuttal

There is a recent post on HotCopper in relation to the newish Merck announcement that has garnered a lot of attention from my readers. Over the weekend I received several communications about it and I think it warrants a rebuttal because it is blatantly misleading and contains speculation that I think is not only unjustified, but dangerous. It is this kind of bold, quasi-informed posturing on HotCopper by shareholders that creates a whole raft of misinformation that then further sucks people into buying a stock.

Now to be clear, despite some perception to the contrary, I am ok with Viralytics (ASX : VLA). I don’t have any particular beef with the company and I think the CAVATAK data is scientifically very interesting. It may even be that the company/technology has a commercial future that I cannot predict. But the purpose of this forum is to provide a bit of balancing information to the utter rubbish that is posted out there as “information” or “fact” and, unfortunately, VLA gets a disproportionate share.

Here goes:

For those that might not fully appreciate the significance of today’s announcement, Keytruda costs US$12,500 per month or $150,000 per patient per year. The combination trial announced today will enroll 80 patients. If Viralytics were to try and conduct a trial of this size without Merck sponsoring it, and if VLA were unable to negotiate discounted pricing, it would cost VLA around A$17mill. Add the cost of biomarker analysis and this partnership with Merck is effectively saving VLA shareholders around $20mill. (The cost to Merck is much less than this, of course, because they can supply Keytruda at cost).

It is true that Keytruda costs a lot of money – including roughly the numbers quoted (it depends, there are also certain access programs but in general it is correct). However there are three incorrect statements in this paragraph:

1) Merck is not sponsoring the trial. Merck is collaborating. In pharma parlance, a “collaboration” generally means information sharing and each party covering their own costs. The ASX announcement clearly states that VLA is sponsoring the study, not Merck.

2) Keytruda has growing reimbursement coverage for NSCLC and many other cancers, both under its own codes and some “catch all” codes that are relevant for certain less common cancers. This means that in many countries, even if a drug is used in a clinical trial, it can still be reimbursed/paid for by the healthcare system. For example, The Patient Protection & Affordable Care Act (“Obama-care”) contains provisions related to “ensuring coverage for individuals participating in clinical trials”, which became effective early last year for patients participating in clinical trials in the US. As such a properly designed study with the right recruiting institutions (in the US) would have very likely enabled VLA to get reimbursement for the use of Keytruda. The current clinicaltrials.gov entry for the STORM trial indicates that the study is being recruited in the UK, and not in the US. Whether this “STORM 2” study will continue to be recruited in the UK remains to be seen (Merck will clearly have some influence). My general point is, however, is that using an approved drug like Keytruda doesn’t have to cost $17m if it is already reimbursed, even when used in a clinical trial. If someone is an expert on UK clinical trials reimbursement, any comment is welcome.

3) There is nothing “special” about Merck running the biomarker analysis in any way suggested by this paragraph. In order to do a meaningful analysis of PD-1 expression, T-cell recruitment, etc. qualified assays would need to be used. Merck would have those qualified assays running in-house and under a reasonable “collaboration” (read data sharing arrangement) it would be normal for those assays to be used. The cost is negligible to Merck, although obviously if VLA had to go and establish and validate those assays from scratch, this would be a major cost (though it would be a stupid cost because those assays are commercially available by others). I also note, again, that if “STORM 2” takes place in the US, then some of those assays are also reimbursed because they are part of the standard of care.

Shareholders might also not be aware that because Keytruda is already registered, and because CAVATAK has already passed phase 2, if this 1b combination trial is sufficiently successful (in either indication), Merck and Viralytics will have the option to move straight into phase 3 without conducting additional phase 2 trials.

Simply not true.

Not only is this statement factually incorrect, but the scope of the study with Merck is a safety and efficacy study for a combination therapy. From a decision-making vantage, it would be fairly unlikely to go straight into a Phase III study based on this kind of a “signal” study – i.e. open label, no control arms. Readers should familiarise themselves with the scope of Phase II evaluation for similar products, like T-Vec. I’m not saying it’s impossible, but I am saying it is far from the suggested “slam dunk” given the trial design as currently articulated.

Merck have now effectively declared their hand as a potential suitor for Viralytics. My guess is that Viralytics will become a takeover target for Merck as soon as sufficient efficacy data for this trial becomes available (It is no accident that Merck want to do the biomarker analysis internally). Alternatively, if Merck exclusively licence cavatak re phase 3 combination therapy, Virylatics is likely to see hefty up front payments and milestone payments.

I will not repeat myself on the biomarker analysis. It’s very common and very reasonable.

These kinds of collaborations happen all the time. Does it indicate Merck’s interest? Absolutely. Does it make Viralytics a take-over target? Nothing in the disclosed scope of the partnership indicates this, and this is nothing more than pure speculation. I would also add that this collaboration is NOT being run with the front-line clinical Keytruda stakeholders at Merck (though they would have likely had to “bless it”), it is being run through MRL, which is not the same.

Furthermore, in my view, if the previously announced Yervoy-CAVATAK combination trial (MITCI, currently being conducted in the US) is also sufficiently positive, then Bristol-Myers Squibb (the owner of yervoy) will also likely want to own/exclusively licence CAVATAK. With a bit of competitive tension between BMS and Merck, should all or most of these combination trials prove sufficiently successful, it not too much of a stretch to see Viralytics being valued in excess of $1bill.

Agree that competitive pressure is good, and this study with Merck will undoubtedly increase the visibility of VLA. There is no real valuation basis to the “$1Bn” number – that’s just hype.

And given that these trials only take around a year to complete, with interim data also available, we may not have too long to wait for this kind of competitive scenario to play out. There is plenty of risk here, of course, but this is one of the few listed ASX biotechs with genuine 10 bagger potential over a fairly short time frame.

This study is unlikely to be completed in a year, as it is currently only recruiting at 3-4 sites, unless there are plans underway to expand the number of recruiting sites. These patient populations are in high demand and not all will be suitable for the study – plus we should remember that VLA’s patient recruitment hasn’t been speedy. I would encourage shareholders to be cautious about expectations around timelines for data output from this collaboration. Moreover, if Merck really is serious about the information, there will be a lot of restrictions about how the outcome data is communicated to the outside world … and when.

But do I think someone is going to pay $1Bn for a prep of wild-type coxsackievirus? Nope. Why? Because there are plenty of far better (including mediating target) immunostimulatory / T-cell recruiting drugs out there being evaluated in combination with Yervoy and Keytruda. Although it is a bit of a misnomer to refer to CAVATAK as a “common cold virus“, it still aint much more than that.


Awesome Photo Credit: Ryan McGuire. http://www.gratisography.com/.

One thought on “VLA Hotcopper Rebuttal

  1. A quick glance at that posters record, shows you may want to be considering doing the opposite of his recommendations.
    ACL, VXL and ELM was the poster’s 3 strong buys in 2014.
    Of course, being wrong 100% of the time thus far, has never stopped Hotcopperites accruing thumbs up followers, using the formula of telling them what they want to hear.


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