Oncosil has a chance of becoming best spec stock of 2016

by Gary Glover

Typically I only look at larger cap stocks but every now and again, something catches my eye and although this is a small cap stock and therefore very risky, the potential upside has definite appeal.  I don’t mind taking a risk every now and again, as long as the reward is worth the risk.
When looking at the Liver and Pancreatic Cancer treatment market, there are some very prominent companies.
Sirtex Medical  (ASX: SRX )      $37.79
Market Cap:  $2.16 billion
Biotech and Medical device group who manufacture and distribute a liver cancer treatment.
In August, Sirtex announced full year sales of 10,252 dosages (up 20%) in the last financial year at approx $18,000 a dosage.  It had revenues of $176.1 million for the year. (up 36%)
It has generally traded on approximately 10 times revenue. Ie.  It had a market cap of just over $1.8 billion after that result.
SRX announced last week that it did its first 1000 dosage month.  (Liver Cancer treatment)
Celgene Corp   (Nasdaq: CELG)  $122.71
Market Cap:  $98.76 Billion
Biotech company that manufactures a number of drug therapies for cancer and inflammatory disorders.
Owns Abraxane - $850 million in revenue in 2014 after FDA approval in late 2013
Forecast to do $1.5-2.0 Billion in revenue in 2017 (over 60% for Pancreatic)
One of many treatments that it owns.
 Gemcitabine – is the current standard treatment for Pancreatic Cancer (peaked at $1.7 billion in sales in 2008)
 It’s worth noting how substantial the revenues are for companies with a validated Liver or Pancreatic Cancer treatment. 
Oncosil Medical            (ASX:OSL)         $0.175
Market Cap :  $62 million
 Oncosil Medical (ASX: OSL) is an Australian based company with an implantable device that emits radiation into a targeted tumor.  Its limited trials (4) have had good results so far, with over 50% of the trialists experiencing a reduction in the size of their tumors greater than 30%.  Due to the lack of good treatments and poor survival rates of patients with Liver or Pancreatic Cancer, there is a large demand for new therapies to treat these cancer types.
It recently achieved its certification process and has just completed its fast tracked CE mark review process, which was conducted over 4 days in early October.  It is awaiting the results of this review and is confident that they will receive their CE mark. Due in November or anytime soon. (Pancreatic and Liver Cancer)
A CE mark will mean commercialisation of its product.  It can then start selling its treatment in some large markets in the European Union as well as Australia, Canada and Singapore.
 Recent research reports from Wilsons and from Van Leeuwenhoeck Research have indicated that this treatment has the potential to be a block buster (sales in excess of 1 billion) in the next few years.  They also expect to file for an IDE with FDA in 2016 which is likely to take approximately 18 months to two years to complete.  This will facilitate selling their treatment in the US within a couple of years.
There are a few risks here as it still has to be granted its CE mark (license to sell into EU and Australia, Canada and Singapore) but if this company is granted its license it can start selling its treatment into this very large market.
 If we make some assumptions about some future events:  I believe CE mark has an 80% likelihood of being achieved by end of 2015 and FDA is 50-60% likelihood of being achieved by end of 2017. 
 If we assume that OSL receives its CE mark in Nov 2015 and then receives its FDA approval within two years, then this company could be doing sales of greater than 10000 dosages within 3 years.
10000 dosages at $18,000 Australian = $180 million in revenue and results in a Market Cap of over $1.8 billion. This is what Sirtex Medical achieved in August 2015. With a similar pricing and margin model we can potentially value OSL if it achieves certain sales markers. 
We have presumed that OSL can start with 500 dosages in the first quarter of 2016 after achieving CE mark in mid November and then growing its market by 500 dosages every quarter following. 
Following FDA approval in Dec 2017, we would expect sales to ramp up with 1500 dosages per quarter from the US market.  FDA approval should lead to instant success and strong penetration.
Achieving 20% of pancreatic market might seem like a big ask but when you look at the current treatments – Gemcitabine (sales peaked at 1.7 billion) and Abraxane (did $850 million in revenue in 1st year after getting FDA approval) it does put these figures into some context. 
Oncosil Medical have applied for CE mark for both Pancreatic and Liver Cancer treatments but I have just looked at Pancreatic market here alone just to give you an indication of the size of the opportunity. 
Yes there are risks with any small cap stock as things can obviously go wrong but the risk reward here is extremely appealing.
If they get their CE mark granted in next few weeks, I think they can easily go on and achieve sales of 1000 – 2000 dosages in the next 12-18 months which should give them a market cap between 180-360 million (ie $0.50 to $1.00 valuation).
In two years time if they get their FDA approval and they can grow dosages by 500 each quarter they could be doing revenues of 72 million and have a market cap of 720 million which is $2.00 a share provided no share raisings take place.
Ultimately with FDA approval and 20% of pancreatic market – it’s not unreasonable to see a $10.00-11.00 share price within 3-4 years.
From the research I have done on Pancreatic Cancer, once a treatment becomes accepted, it appears to get wide spread acceptance, with most of the market moving to use it.  Gemcitabine has shown to benefit sufferers with another 5.5 months added to survival rates and Abraxane has only benefited sufferers with another 1.5 months to their survival.  So Onconsil doesn’t have to cure cancer, it just has to show a mild improvement in survival rates.  The interesting thing with the trials so far is that there has been strong signs that radiation in the tumor, has caused a reduction in tumor size in over 80% of patients.  50% of patients have seen a reduction of over 30% in the tumor after treatment.  If only 5% of patients were able to shrink their tumors and shift their prognosis from an inoperable tumor to now being operable, then I think alot of patients would seek this treatment out as odds of survival would be greatly enhanced.
Oncologists are generally looking for a treatment that is kind to the patient and provides some relief from the pain caused by these cancers.  I believe this is a major advantage of this treatment as patients have the localised treatment, walk in and out in the same day, rather than many regular dosages of chemo.
 Most of the broker research on OSL, assumes a long term target of only 10-20% of market share.  This could be potentially underestimating the product when you look at how fast Abraxane was accepted.  It is forecast to do $1 to $1.2 billion in revenues from the pancreatic market within 3 years of being granted its FDA approval.
We bought shares at 11.5 cents on 5/5/15 for our model portfolio. We may look at adding another small parcel as this has great long term potential to bring us a large windfall.
Remember this is a high risk investment play – it is not for the conservative investor.

Don’t risk anymore than you would be comfortable enough to lose here – even though the rewards appear high.  
The company will need to achieve its CE mark soon and also get FDA approval in late 2017, so there are some big hurdles to achieve before we see more upside in the share price.  Getting its CE mark in the next month will be a big step forward in the right direction.


Gary Glover is an Authorised Representative (Rep No. 259215) of Novus Capital Limited ("Novus"). Novus is a holder of Australian Financial Services Licence No 238 168. Novus, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.

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