Description

First off, given the nature of micro-cap, clinical stage biotech companies, I believe VIRX is best suited as a small, option-like position or for your PA.

Setup:

Viracta Therapeutics (VIRX) is a micro-cap, clinical stage biotech company. The Company is taking a novel approach towards solving a critical unmet need for specific cancer patients with annual sales potential of $3BN+. The indications that VIRX is pursuing have no curable options and are associated with high mortality rates.

The stock is totally orphaned and underfollowed as it came public in February 2021 via a reverse merger. Although VIRX’s market opportunity and competitive dynamic have not changed, the stock has been very weak since the transaction due to poor sector sentiment and slower than expected trial enrollment. The stock is down over -90% since the transaction and down -64% over the last 12 months and sports just a $56MM equity valuation and $1MM enterprise value. Adding to the negative sentiment, analyst optimism has waned, and the Company is perceived to be operating in areas with significant incumbent competition.

While I acknowledge there is little to no downside protection, I believe the current extremely negative sentiment coupled with 15x+ return profile provides an attractive setup. And while I also acknowledge that I am not a dedicated biotech investor, VIRX has many characteristics that I look for in a small, opportunistic, high return potential option-like position: (1) addressing critical unmet need; (2) unique, novel approach; (3) no existing approved curative therapies (4) low bar for success; (5) $1BN+ annual revenue opportunity; (6) near term catalysts; and (7) impressive management and board.

Profile:

VIRX is a precision oncology company mainly focused on Epstein Bar Virus (EBV) associated cancers. The lead drug candidate, nana-val, is a combination oral therapy currently being evaluated for EBV+ lymphoma and solid tumors. There is a distinct and unfortunate difference in the way these cancer patients respond to SoC therapies depending on whether they have EBV. EBV+ patients face lower probability of survival (PoS) and shorter progression free survival (PFS) than EBV- patients. In focusing on EBV+ patients, VIRX is targeting patient populations that face high mortality rates (50%+) with no current approved therapies making them clear medical unmet needs.

Nana-val uses a novel and unique method of action (MoA) to terminate cancer cells that they call a “kick and kill” strategy. Essentially “nana” serves to unmask or “kick” the EBV infection into an active state which then enables “val” to kill the virus. This approach is the first of its kind and could potentially transform the field of viral oncology. EBV+ lymphoma and solid tumor markets are very attractive markets given little to no competition and low bars for success due to the high mortality rates. These 2 markets represent a potential annual revenue opportunity of at least $3BN in the US and EU.

VIRX is currently conducting 2 separate trials for EBV+ lymphoma and solid tumors. Their current Phase 2b/3 EBV+ lymphoma trial, NAVAL-1, comes on the heels of positive Phase 1 and 2 data. It is a global, pivotal trial that if confirmative of earlier stage data could support an NDA filing and potential US market launch in early 2025 and EU launch in late 2025. The Company’s Phase 1b/2 trial in solid tumors is an initial proof of concept trial with potential market launch in the US as early as 2026. Although the EBV+ solid tumor program is still in early stages I view it as somewhat de-risked due to earlier positive data from the EBV+ lymphoma program and the Company held belief that VIRX’s “kick and kill” MoA is applicable to all EBV+ cancers.

The Company recently released positive data for NAVAL-1 in that 1 of the cohorts being evaluated achieved the minimum efficacy threshold and has been advanced to the next stage. I expect news on additional cohorts advancing over the remainder of the year. The Company also expects dosing data on the Phase 1b/2 trial in solid tumors later this year which sets the stage for trial advancement and expansion. The Company has sufficient cash to fund operations through 2024.

The Company was previously led by Ivor Royston who co-founded IDEC which was sold to Biogen for $7BN. He is extremely well known in the biotech universe and has invested in many other biotech companies through his venture capital firm which has had many very positive outcomes. He is 77 years old, remains on the Board, owns over 13% (personal and Forward Ventures) of the stock, and is transactional by nature. The Company’s new CEO joined late last year and brings a wealth of experience in commercializing orphan drugs.

At a $56MM market cap, I believe the stock has at least 15x upside in just the EBV+ lymphoma program. I think the recent weakness in the stock presents an attractive entry point into a situation with a compelling risk reward profile for a small, opportunistic position.

Business Summary:

VIRX’s primary focus is on the association of EBV and cancer. The Company does have some earlier stage assets that could be interesting and monetized, but this report will mostly focus on nana-val in EBV+ lymphoma and solid tumor cancers.

One of the causes of cancer, many which still allude us, are viruses. We know that even after viruses initially infect humans and animals they can remain latent in the body for many years. And over the years, the latent virus can lead to cancerous change in the body’s cells. One of the viruses that is known to cause cancer is EBV. EBV was discovered in 1964 and is most commonly known as the virus that causes infectious mononucleosis or mono in so many of us - estimated that 95%+ of adults are infected with EBV.

The EBV is not successfully eliminated from the body in the majority of people who contract it. It often sticks around in our bodies in a latent form. It has been clinically found that there is an association between EBV+ patients and lymphoma cancers and certain solid tumor cancers including nasopharyngeal carcinoma (NPC) and gastric carcinoma (GC). While there are many approved drugs and therapies for lymphoma and solid tumor cancers, there is a distinct difference in how patients respond to therapy depending on whether they are EBV+ or EBV-. Below you can see that EBV+ patients across 3 different lymphoma subtypes have a much lower survival rate or PoS and PFS.

EBV can be tested for quite easily via the EBER-ISH test. The EBER-ISH test essentially measures the amount of viral DNA in the blood. The test is commercially available, although somewhat underused, in the US as the current treatment paradigm does not address EBV+ cancer patients.

VIRX’s lead asset nana-val (nanatinosat + valganciclovir) utilizes a novel “kick and kill” strategy to selectively target and kill EBV+ cancer cells with limited systemic toxicity. The drug combination is taken orally. While each drug taken independently is inert, taken together they are highly lethal to cancer cells. A highly simplified explanation of nana-val’s novel MoA: Essentially nanatinosat “kicks” or induces EBV viral protein kinase expression which then activates the antiviral drug valganciclovir into its cytotoxic form which then “kills” EBV+ cancer cells by inhibiting DNA replication and therefore leading to cell apoptosis.

The EBV+ cancer patient population represents a great unmet need. Currently there are no approved therapies specific to EBV+ associated cancers. It is roughly estimated that EBV+ malignancies account for ~2% of all new cancers globally which equates to about 310k new EBV+ associated cancers cases every year. For those EBV+ cancer patients, the prognosis is very poor. It is estimated that EBV+ associated cancers are responsible for over 180k deaths per year. With nana-val, VIRX has set out to give this desperate cancer population a ray of hope for recovery and remission from EBV+ associated cancer.

Nana-val in lymphoma

Lymphoma is cancer of the lymph nodes. These cancers can grow very large and throughout the body. It is estimated that 10-15% of lymphoma cancer cases are EBV+ which translates to roughly 10K EBV+ lymphoma cases per year in the US. It is important to note that this is likely vastly understated due to the lack of awareness and testing rate for EBV in the US.

Nana-val has already been clinically shown to have positive efficacy effects for lymphoma patients that are EBV+. Data from nana-val’s Phase 1b/2 trial in R/R (relapsed/refractory) EBV+ lymphoma patients has been presented at the American Society of Hematology meeting for the last several years. The data shows that 50-60%, and in some cases 80%, of EBV+ lymphoma patients, depending on the subtype, responded to the drug combination with tumor shrinkage exceeding the percentage that is counted as a response. There were even responses where the tumor entirely disappeared from the patient. And many of these responses have been ongoing for months, if not years.

The Phase 1b/2 trial was an open label, dose escalation / expansion study in R/R EBV+ lymphoma patients that had at least 1 prior therapy with no current curative options. Primary endpoints were response rate, response duration, safety and clinical benefit rate (CBR). While I am only briefly discussing the trial setup and outcomes, I think the next several diagrams give you a good sense and overview of the trial.

The trial consisted of a heavily pre-treated group of patients across all major lymphoma subtypes. Median time to response was 1.8 months (range 33-162 days) and median duration of response (DoR) was an encouraging 10.4 months with an overall response rate (ORR) for all subtypes of 40% and CBR of 56%. Some subtypes had ORRs and CBRs north or 80%…

…with a well-tolerated safety profile with most AEs in line with valganciclovir’s label. This should encourage broad uptake with physicians if ultimately confirmed with additional data and approved by the FDA.

Given the positive results from the Phase 1b/2 trial, VIRX is moving forward with a pivotal Phase 2/3 trial, called NAVAL-1, in R/R EBV+ lymphoma patients. The global NAVAL-1 trial will utilize a highly adaptive Simon 2-stage design, for which VIRX secured with the FDA during its end of Phase 2 meeting in November 2020. The Phase 2 portion is currently recruiting R/R EBV+ lymphoma patients with 2 prior lines of therapy across 6 different cohorts. It will test for response rate (ORR every 2 months with each cycle for 28 days), DoR, safety, CBR, PFS and OS. The trial will also test for the time to next anti-lymphoma treatment to capture nana-val’s potential in bridging patients to transplant.

The NAVAL-1 study continues to enroll patients into the 6 cohorts at more than global 70 sites. Recently, the Company announced that the PTCL cohort achieved the pre-specified efficacy threshold for expansion into Stage 2. VIRX plans to give an update on additional cohorts advancing to Stage 2 2H 2023. These important milestone / catalysts should help provide clarity regarding next steps for the program and the regulatory pathway. If successful and confirmative of earlier data, NAVAL-1 could lead to an NDA and FDA approval in any number of different lymphoma subtypes. Current US market launch is expected in early 2025 and late 2025 in the EU.

The market potential is very attractive for nana-val in lymphoma. I estimate the annual sales potential in the US to be $1.1BN+. I believe the market size in the EU is roughly the same. I should point out that this includes all lines of EBV+ subtype lymphoma patients and that it is likely, at least at first, that nana-val will carry a label for 2/3 line treatment and potentially for specific subtypes. However, over time (and potentially sooner rather than later given unmet need and safety profile) I do think it is likely that nana-val could move up to earlier lines of treatment and carry a broad label for all EBV+ lymphoma subtypes. Also recall, the significant majority of EBV+ lymphoma patients are R/R so many of them do unfortunately progress to 2/3 lines of treatment. The market for nana-val in lymphoma could expand with increased awareness around EBV testing. Further, nana-val has received Orphan Drug Designations across several lymphoma subtypes and Fast Track Designation in November 2019 for the treatment of R/R EBV+ lymphoid malignancies.

Nana-val in Solid Tumors

EBV also causes solid tumors in the nose and back of the throat, NPC, and in the stomach, GC. VIRX believes the MoA of nana-val is also applicable to those cancers. Although the etiology and pathology of EBV+ lymphoma and EBV+ carcinoma are not identical, VIRX believes nana-val’s “kick and kill” approach should work regardless of the difference in terms of viral genome expressions / latency types. Additionally, nana-val’s broad efficacy demonstrated across multiple types of lymphoma further validates its MoA.

VIRX has released some promising pre-clinical data that showed nana-val’s ability to induce EBV+ protein kinase in vitro and have good uptakes with solid tumors.

The data was promising enough to advance the program to a Phase 1b/2 trial. The trial is currently enrolling EBV+ recurrent or metastatic NPC patients. 1b is the dose escalation phase of the study. Upon identifying a recommended Phase 2 dose, up to 60 patients will be enrolled to receive the combination of nana-val + Keytruda to evaluate ORR and safety profile. Initial readout of safety / efficacy data is expected in 2H 2023. This will be important given that this program is still early stages.

The market potential in EBV+ solid tumors is at least 2-3x the size of EBV+ lymphoma cancers. EBV+ NPC and GC have an annual incidence rate in the US of about 5.5K per year. The global market is much larger at around 218K cases per year. EBV+ advanced solid tumor cancers have no curative therapies and both the competition and bar for success (somewhere around 20-30%) are low. I estimate the US annual market potential for nana-val in EBV+ solid tumors to be $1BN+ and potentially much larger outside the US. Current US market launch is expected in 2026 and shortly thereafter in the EU.

Valuation:

There are about 10k new cases of EBV+ lymphoma in the US every year. There are a similar number of new cases in the EU every year. Assuming 65% of those patients advance to 2/3 line treatments, 35% penetration, $100K average treatment cost yields total annual peak revenue of $520MM. Applying a 3x peak sales multiple you reach ~$1.4BN equity value potential. This compares to the current market cap of $56MM. There are currently 38.4MM shares outstanding. I assume they will need to issue an additional 20MM shares to fund the commercialization efforts.

It is important to note that I am not ascribing any value to the solid tumor opportunity as it is still very early stage.

History:

VIRX was initially seeded by Latterall Venture Partners and Forward Ventures in 2015. The Company acquired its lead asset nanatinosat from Chroma Therapeutics in November 2016 and started evaluating an optimized combination approach with the approved antiviral drug valganciclovir for EBV+ lymphoma. Following good progress on the clinical front and several additional financings, the Company came public via a reverse merger in February 2021 with Sunesis Pharmaceuticals (SNSS). The idea behind the reverse merger came from SNSS and VIRX mutual large, dedicated biotech investors. SNSS had failed to bring a drug to market and was basically just left with a large cash position. So, the 2 companies completed the reverse merger and the VIRX management team took over the public cash shell.

The Company has impressive management and board. The Company’s prior CEO is Ivor Royston. Royston is well known in the biotech world. He co-founded IDEC Pharmaceuticals which developed the block buster cancer drug rituximab and was eventually acquired by Biogen for nearly $7BN. Royston also launched life sciences venture fund Forward Ventures in the early 1990’s. Forward Ventures has had some impressive biotech stories including at least 8 exits that I was able to find for north of $3BN total. Royston is 77 years old. The new CEO, Mark Rothera, is a respected, veteran biotech executive. He has significant experience with commercialization of new drugs. The Company’s Chairman held senior roles at Johnson & Johnson and Merck.

Catalyst

NAVAL-1 clincal progress

EBV+ Solid tumor phase 1b/2 clinical progress

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