Oncothyreon Stock Surges on Partner’s Renewed Bet in Lung Cancer

9/25/13Follow @xconomy

Seattle-based Oncothyreon (NASDAQ: ONTY) was written off by a lot of investors last year when a cancer immunotherapy it developed failed in a pivotal clinical trial run by one of its partners. Today, the company bounced back as its partner, Merck KGaA, said it essentially saw enough of a silver lining in the data to keep spending money on the drug candidate.

Oncothyreon shares climbed 24 percent, to $2.24, at 1:09 pm Eastern time, as more than 10 times the usual amount of shares changed hands.

The frenzy happened after Germany-based Merck KGaA, Oncothyreon’s partner, said it has opted to invest in another Phase III clinical trial of the immune-booster tecemotide, formerly known as Stimuvax. That product failed last year to extend lives of Stage III non-small cell lung cancer patients who enrolled in a 1,500-patient study called START. But Merck KGaA didn’t throw in the towel, because it saw a 10-month median survival advantage in a subpopulation who got the new drug after concurrent chemotherapy and radiation (as opposed to those who got the other standard treatments in sequence). While an after-the-fact subgroup analysis isn’t convincing on its own, the finding was encouraging enough to generate a new idea. So Merck KGaA said it is moving ahead with a new trial designed to enroll only lung cancer patients who appeared to benefit in the earlier trial, the ones who got the new drug after concurrent chemo and radiation.

Even though Oncothyreon’s stock surged on this news, the future financial impact is probably miniscule. That’s because Oncothyreon only stands to collect an undisclosed royalty on sales from Merck KGaA if tecemotide turns into a marketable product.

The vote of confidence from Merck KGaA does, however, provide some further support for Oncothyreon’s thesis that a peptide segment of a protein called MUC1 is important for cancer immunotherapy. That matters to Oncothyreon in the long term, because it retains 100 percent ownership of a second-generation immunotherapy based on MUC1 called ONT-10. The next generation product is designed to be more potent, eliciting a broader immune response that includes both T cells and antibodies. The original is only designed to help stimulate T cells.

“We view Merck KGaA’s decision as very positive news for ONTY because: 1) it allows for the further funding & development of this asset, 2) it provides one source of external, albeit biased, validation of the START data, which may help sway some investors, and 3) most importantly, it, in our view, makes ONTY an M&A target.,” said Simos Simeonidis, an analyst with Cowen & Co, in a note to clients today. He rates the stock an “outperform.”

“We believe that it makes a lot of sense for Merck KGaA to acquire Oncothyreon, especially given its currently depressed valuation, and the high probability, in our view, that tecemotide succeeds in the START2 Phase III trial, when it reads out in a number of years,” Simeonidis wrote. “The fact that Oncothyreon, in addition to the tecemotide royalty that it would be owed, owns 100% rights to this follow-on vaccine, that it could license to another big pharma that could go head-to-head with Merck KGaA, makes an acquisition a likely scenario, in our view.”

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