Zacks Small-Cap Research Sponsored Impartial - Comprehensive January 29, 2018 John D. Vandermosten, CFA 312-265-9588 / jvandermosten@zacks.com scr.zacks.com 10 S. Riverside Plaza, Suite 1600, Chicago, IL 60606 Oncolytics Biotech Inc. NASDAQ Uplisting: Expect Greater Liquidity Based on our DCF model and a 15% discount rate, Oncolytics is valued at approximately $2.00 per share. Our model applies a 40% probability of approval for second line metastatic breast cancer based on interpolation of historical success ratios. Our valuation includes contributions from the US, EU and Japan. Current Price (1/26/2018) $0.69 Valuation $2.00 (ONCYF - OTCQX) OUTLOOK Oncolytics is developing an oncolytic virus as a cancer therapy employing the reovirus in its clinical work. The company is currently focused on breast and pancreatic indications where its sole product, REOLYSIN, functions as an immuno-oncology agent. The company s two key indications in breast and pancreatic cancer use REOLYSIN in conjunction with chemotherapy. Oncolytics will present data from its Phase II trial to regulatory agencies targeting a conditional marketing authorization and breakthrough designation. A Phase III trial has been designed and is expected to begin in mid-year 2018. The duration of the trial is expected to be 2.5 to 3 years and it is targeted to enroll from 400 patients. Assuming a 2022 launch of REOLYSIN, we believe the company s shares represent attractive value. Our target price of $2.00 per share is based solely on success in high mutation breast cancer. SUMMARY DATA 52-Week High 0.90 52-Week Low 0.19 One-Year Return (%) 229 Beta 2.4 Average Daily Volume (sh) 366,016 Shares Outstanding (mil) 140.7 Market Capitalization ($mil) 97.1 Short Interest Ratio (days) 3.65 Institutional Ownership (%) 1.0 Insider Ownership (%) 0.4 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2017 Estimate P/E using 2018 Estimate Risk Level Type of Stock Industry ZACKS ESTIMATES Above Average Small-Growth Med-Biomed/Gene Revenue (In millions of CAD) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2016 $0.0 A $0.0 A $0.0 A $0.0 E $0.0 E 2017 $0.0 A $0.0 A $0.0 A $0.0 E $0.0 E 2018 $0.0 E 2019 $0.0 E Earnings per Share Q1 Q2 Q3 Q4 Year 2016 -$0.03 A -$0.02 A -$0.03 A -$0.04 A -$0.13 A 2017 -$0.03 A -$0.03 A -$0.02 A -$0.03 E -$0.11 E 2018 -$0.12 E 2019 -$0.12 E Zacks Rank
WHAT S NEW Oncolytics Seeking NASDAQ Listing Oncolytics Biotech (OTCQX: ONCYF / TSE: ONC) announced in a release today that it will seek a listing on the NASDAQ exchange. A shareholder vote will be required during a special meeting of shareholders on February 23 to consolidate the company s shares to achieve the required listing price. The company was previously listed on the NASDAQ, however, share price declines in 2014 led to the October 2015 shift to the OTCQX. While the OTCQX does have a high standard for reporting, the NASDAQ confers additional prestige and is associated with increased volume compared to the OTC Markets. Many institutional investors in the United States are precluded from taking positions in OTC companies and will gain added ease of trading in Oncolytics with a NASDAQ listing. The NASDAQ Capital Market 1 requires a minimum share price of $2.00 to commence listing on the exchange if market value of the listed security is greater than $50 million. This adjustment will require a reverse split by the company. At Friday s closing price of $0.69, a minimum of a 1:3 reverse split would be required to achieve the necessary share price. However, share prices above $5.00 attract additional investors as some have restrictions trading in low dollar stocks suggesting a different ratio. Additionally, companies prefer to have some margin for price volatility, which would suggest a reverse split that would result in a price above $5.00. While we are not aware of the relative ranking of all the factors Oncolytics is considering, we see a 1:10 reverse split as a reasonable choice as it makes the math a little easier and satisfies some of the other constraints that support additional institutional ownership and liquidity. While reverse stock splits are many times seen as a negative resulting from a company attempting to maintain an exchange listing, when they are undertaken to qualify for an uplisting, they fall into a different category. In a review of the research available on uplistings, we found that returns on the announcement of this change resulted in a price increase of 25% or greater in 60% of the cases over the short term. Price increases were only higher in about 10% of the cases several months after the announcement and uplisting. In most cases the increase was not long lasting and prices returned to their pre-announcement levels. The main benefit from an uplisting is an increase in the volume of shares traded. In a study conducted by the NASDAQ, a 132% increase in 3-month daily volume was observed. A NASDAQ listing brings an additional level of prestige to a company as well as a higher perceived level of quality due to the reporting and corporate governance requirements for the exchange. While Oncolytics is already meeting these standards, which are also required by the Toronto Stock Exchange (TSX), the reputational benefits are expected to increase volume of shares traded in the United States. Many institutional investors require their portfolio constituents to trade on the NASDAQ or NYSE due to the higher reporting standards and they also prefer shares to trade at a $5.00 or greater minimum price. While a reverse split and exchange uplisting will not change any of the fundamentals for the company, it will increase the pool of potential investors. This should result in better access to capital, greater liquidity and a tighter bid-ask spread. As of the end of the third quarter 2017, Oncolytics held $14 million in cash, which based on our estimate of $1.3 to $1.4 million per month gets them to about mid-year 2018. In November, Oncolytics announced a deal with Adlai Nortye that will provide upfront cash which we expect will extend this runway by several months. NASDAQ requirements call for a minimum of one year of cash needs on the balance sheet for companies with negative earnings, so we expect a capital raise in the short term which should be easily accomplished given the company s progress over the last quarters and the improved exposure of the anticipated listing change. Summary After an impressive 2017 with strong data announced from the metastatic breast cancer study and a partnership deal with Adlai Nortye which should support Phase III development, Oncolytics is seeking an uplisting on the NASDAQ to increase its access to US investors and gain additional exposure to peers, large pharmaceutical companies and research analysts. While this does not change the very strong fundamentals of the company, it is a positive milestone that has positive reputational benefits for the company. We maintain our price target of $2.00 per share and will adjust it accordingly following any share adjustment. 1 https://listingcenter.nasdaq.com/assets/initialguide.pdf Zacks Investment Research Page 2 scr.zacks.com
PROJECTED FINANCIALS Oncolytics Biotech, Inc. - Income Statement Oncolytics Biotech Inc. 2016 A Q1 A Q2 A Q3 A Q4 E 2017 E 2018 E 2019 E Total Revenues $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 R&D $9.8 $2.3 $2.9 $1.7 $2.3 $9.2 $10.0 $11.0 Operating $5.5 $1.3 $1.4 $1.3 $1.6 $5.7 $7.0 $7.2 Other expenses $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Operating Income ( $15.3) ($3.6) ( $4.4) ($3.0) ( $3.9) ($14.9) ( $17.0) ( $18.2) Op erating M argin - - - - - - - - Interest Expense $0.2 $0.1 $0.0 $0.0 $0.0 $0.1 $0.1 Total Other Income $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Pre-Tax Income ($15.1) ($3.5) ($4.3) ($3.0) ($3.9) ($14.8) ($16.9) ($18.2) Taxes & Other ($0.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Tax R ate $0.0 0 % 0% 0 % 0% 0 % 0 % 0 % Net Income ($15.1) ($3.5) ($4.3) ($3.0) ($3.9) ($14.8) ($16.9) ($18.2) Reported EPS ($0.13) ( $0.03) ($0.03) ( $0.02) ( $0.03) ($0.11) ( $0.12) ( $0.12) Y OY Growth - - - - - - - - Shares Outstanding 119.9 121.3 127.3 139.5 139.6 131.9 144.3 149.0 S ource: Co mpany Filing // Zacks Investment R esearch, Inc. Estimates
HISTORICAL STOCK PRICE Oncolytics Biotech, Inc. Five Year Price Chart 2,3 2 Price chart is for ONC as traded on TSE due to limited data availability for ONCYF. Share value is measured in Canadian Dollars. 3 Chart generated by Google Finance. Zacks Investment Research Page 4 scr.zacks.com
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