By Brian Marckx, CFA
OTC:VNRX

2013 10-K Filed

VolitionRx (VNRX) filed their 10-K for the year ending December 31, 2013. Aside for some slight delays in the timelines for initial commercialization via the RUO channel as well as expectations for CE Mark submission and a non-cash asset impairment in the current period, operating and financial results continue to track our expectations. We have adjusted our model for the delays.

Excluding the $350k impairment charge Q4 operating expenses were $1.3M, compared to our $1.2M estimate. The asset impairment charge relates to a patent licensed by VNRX for their HyperGenomics assay (i.e. – unrelated to the core NuQ tests) – VNRX took the $350k write-down as it was discovered that an unrelated entity had already filed a similar patent. The company hopes to file a new methodology patent related to the HyperGenomics test in the coming months.

Net loss and EPS were $842k and ($0.07), compared to our $1.2M and ($0.09) estimates.

Cash used in operating activities was $709k, down slightly from $828k in Q3 and from $991k in Q2. VNRX exited the quarter with $889k in cash and equivalents, up from $474k at the end of Q3 with Q4 cash bolstered by a $750k cash raise from the issuance of 366k shares ($2.05/share) with 100% warrant coverage (5yrs, $2.40 strike). Subsequent to 2013 year-end, VNRX raised $3M (gross) via the issuance of 1.5M common shares (@ $2.00/share) with 100% warrant coverage (5yrs, $2.20 strike).

We are maintaining our Outperform rating. We recommend accumulating the stock up to our $7/share price target. See below for access to our full 30-page report on VNRX.

Operational Progress

On the operational front, 2013 (and into the current) was productive for VNRX – mostly relating to additional positive clinical data and commencing additional clinical studies. Recent positive data from the Bonn University and CHU Dinant Godinne studies, indicating high specificity and sensitivity of the NuQ tests in detection of colorectal cancers complement earlier data which had similar results. In 2013 VNRX also announced the collaboration for two large studies with Hvidovre Hospital at the University of Copenhagen in Denmark. These two studies (one restrospective and one prospective) include ~16k samples and should provide significant insight into how the NuQ tests perform relative the colonoscopy, the latter which is considered the gold-standard for colon cancer screening (but which suffers from serious drawbacks such as being highly invasive and costly. We expect to hear preliminary results from at least one of these studies in the current year – positive results of which would likely be used for support of CE Mark submission.

As we have noted in our ongoing coverage of VNRX the significant drawbacks of colonoscopies could offer the company an enormous opportunity if they can demonstrate their NuQ tests are competitive in terms of accuracy. Drawbacks of colonoscopy include that at about $1,000 per procedure, it’s a relatively high cost screening tool (particularly compared to VNRX's relatively inexpensive testing option) and it's very invasive, uncomfortable and time consuming, requiring the patient to be sedated as a fiber optic camera is threaded through the interior walls of the rectum and colon. Approximately 3.1 million colonoscopies are performed in the U.S. every year (and about 4.1 million done in Europe) which indicates that despite the drawbacks, there's a very substantial market for colon cancer screening - which would presumably expand even further with the availability of an accurate, easy to use, inexpensive and non-invasive screening test such as NuQ.

Data to-date from the various studies where NuQ tests have been used for colon cancer indicate reasonably high specificity and sensitivity – although the sample bases have been too small to draw any concrete conclusions. Results from the much larger University of Copenhagen study, if positive, should provide much more definitive evidence into the performance of the tests. We look forward to data from the first 1,000 patients – if positive, we think this could provide a catalyst to the stock price.

One-Third of Adults Not Meeting Colon Cancer Screening Guidelines…

And despite several options to screen for colon cancer, a significant portion of the at-risk population is not meeting colon cancer screening guidelines. According to the CDC, as reported in the November 5, 2013 issue of Morbidity and Mortality Weekly Report, one-third of U.S. adults aged 50-75 who should be screened for colon cancer are not being screened. The USPSTF recommends regular screening for colon cancer using fecal occult blood testing, sigmoidoscopy or colonoscopy beginning at age 50 and continuing to age 75.

While the drawbacks of the current screening methods were not cited as a reason for the low compliance rate, we think an easy-to-use and relatively accurate method would likely have significant appeal. Colonoscopy (and sigmoidoscopy) is not the only method that suffers from serious drawbacks. Fecal occult blood tests, while convenient as they can be used at home, suffer from a high rate of false positive. In discussing the recent CDC report, Tom Frieden, CDC Director noted that people are more likely to be screened if they were given more choices. We see this as another indication of demand for another option in colon cancer screening. VNRX’s NuQ tests may offer an option that is competitive to colonoscopy in terms of accuracy but with all the convenience and low cost of fecal occult blood tests.

Hvidore Denmark Prospective Study Expanded From 6,000 To 11,000 Samples

VolitionRx continues to expand the number of studies as well as the number of patient samples which are using their NuQ technology as a diagnostic for various cancers. Larger trials are expected to build on encouraging results that have come from smaller initial studies which have indicated NuQ can differentiate between healthy and cancerous blood samples with. Larger studies will be key in reducing any potential "noise" in the data sets, to increase the statistical power, and will likely be required as support for applications seeking regulatory approval - we anticipate CE Mark by next year.

At the forefront of the larger studies are two being done in collaboration with Hvidovre Hospital at the University of Copenhagen in Denmark under the direction of Professor Hans Jorgen Nielsen (Professor of Surgical Oncology at the Department of Surgical Gastroenterology). Given that these studies are jointly funded, they are being done at a very low cost to VNRX ($1.85 million).

In May 2013 VNRX announced that they would obtain ~10,800 (subsequently increased to ~15,800) very high quality patient blood samples for analysis with their NuQ tests in two studies, a retrospective study and a prospective study. 4,800 samples come to VNRX at essentially no cost and will be used in a retrospective study, initially for colorectal cancer. Analysis on the first 1,000 of these samples is expected to be completed this year. Data from this study is expected to be used as support for CE Mark submission, also expected in 2014.

When VNRX first announced these two studies in May 2013, the prospective study was expected to collect ~6,000 patient blood samples. However, in mid-November the company announced that the prospective study sample base would be increased to about 11,000. Importantly, the additional samples come at no additional cost to VNRX. The samples will be collected at the University of Copenhagen under the direction of Professor Nielsen.

The additional samples afford the ability to collect additional data points and as well as increase the statistical power - both of which are important for regulatory approval and commercialization purposes. Patients will be screened with a fecal immunological test (FIT) as part of the Danish national screening program. ~8,000 patients with a positive FIT result and ~3,000 patients with a negative FIT result will then be tests using VNRX's NuQ assay panel. These results will then be confirmed by colonoscopy. The samples will be provided to VNRX blinded and randomized.

The prospective study is expected to commence in April 2014 and finish towards the end of 2015.

Trial Data Remains Highly Encouraging With Results Coming Out On Regular Basis:

- Bonn Study Results: VNRX recently announced results from the Bonn University Study. Dr. Stefan Holdenrieder from Bonn University Hospital in Germany presented the results at the 8th Circulating Nucleic Acids in Plasma and Serum (CNAPS) congress in Baltimore in early November 2013.

As a reminder, in mid-2012 VNRX entered a collaboration with Bonn University Hospital in Germany (Rheinische Friedrich-Wilhelms-Universitat Bonn) to perform clinical trials in the evaluation of Volition's NuQ assays for cancer diagnosis and in other diseases. Lead investigator of the trials is Dr. Stefan Holdenrieder of the Institute of Clinical Chemistry and Clinical Pharmacology at University Hospital Bonn who is considered a world-renowned expert in the field of circulating nucelosomes and has authored over 70 journal papers. There are currently three studies ongoing at Bonn including an 800-patient retrospective study for various cancer types, a larger (~2,000-patient) prospective study for various cancers as well as non-cancer diseases and a study to validate the tests as a predictor of the performance and therapy monitoring of chemotherapy.

Data was presented from 90 patients (24 colorectal cancer (CRC), 10 benign colorectal diseased (BCD), and 56 healthy controls (HC)) tested with VolitionRx's NuQ-5m assay for colorectal cancer. Results were encouraging and showed the assay was able to detect 75% of patients with colorectal cancer with a 70% specificity. These findings were confirmed on a second set of 113 patients (49 CRC, 26 BCD, 38 HC). The assay detected significantly (at 95% CI) lower levels of NuQ-5mc in CRC and BCD compared to HC although no differences were found between CRC and BCD. Relative to differentiation of CRC from HC, sensitivities improved from 33% at a 95% specificity to 75% at a 70% specificity.

These results compare somewhat similarly to results of a small internal study led VolitionRx's own scientists at its Belgium-based lab which were announced in late 2012. The study included 105 patients including 31 healthy patients and those with cancer of the colon(n=25), breast(n=25), and lung(n=24) were included in the initial results which showed. In the colorectal cancer cohort the NuQ assay had a 76% sensitivity (19 of 25 patients detected), 90% specificity (3 of 31 healthy samples false positive).

- CHU Dinant Godinne / UCL Namur Hospital Study Results: In early December VNRX announced preliminary results from the study being done at Yvoir, Belgium. As a reminder, in August 2012 VNRX announced an agreement with Biobank of CHU UCL Mont-Godinne, an academic hospital in Yvoir, Belgium for a prospective longitudinal study with ~ 250 patients as they progress through diagnosis and treatment of colorectal cancer. This will be the first trial using VNRX tests focused on a single cancer (colorectal). Enrollment includes patients with a potential digestive pathology such as suspected colorectal cancer, polyps, Crohn's disease and colitis. The goal of the study is for VNRX's NuQ to be able to distinguish between patients with cancer and those with digestive conditions that indicate similar symptoms. Patient sampling will occur at CHU UCL Mont-Godinne and Volition will analyze the samples at their lab in Belgium.

The preliminary results from 39 patients, announced in December at the Clinical Genomics and Informatics Europe Conference in Portugal, showed that when two of the NuQ tests are combined and used together, they were able to detect 85% of cancers with an 85% specificity. The combination test was also able to detect more than 50% of precancerous polyps.

- Prostate Cancer Pilot Study Results: In March 2014 VNRX announced that their NuQ tests were able to detect approximately 80% of prostate cancer cases in a small pilot study. The results from the study, which included 39 patients, were presented at the International Society of Oncology and Biomarkers Congress in Barcelona and also showed the tests were able to distinguish between colon and prostate cancers.

Beefed Up Distribution

In September 2013 VNRX announced a distribution agreement with Active Motif for their NuQ product line for the RUO markets. Acitve Motif will have co-exclusive rights, along with VNRX, to market the products in the U.S., Europe and Japan. Active Motif, at the forefront of epigenetics research and a major supplier of reagent products to the research community, should provide significant and targeted distribution reach for VNRX's product line. VNRX more recently signed a similar distribution agreement with Sciencewerke, which will distribute the RUO tests in Singapore, Indonesia and Thailand.

And while, as we have previously noted in our coverage of VNRX, we think the RUO market likely offers only a fraction of the revenue potential compared to the commercial clinical market, it does offer the opportunity to generate some early revenue as well as provides the ability to build awareness about the products and expands the validation experience of their technology. Revenue generated from the RUO channel will help facilitate ongoing and future clinical trials in support of eventual regulatory filings, including for CE Mark and FDA approval. While we had expected initial revenue from the RUO channel to commence in 2014, we have now pushed back this timeline to mid-2014.

EUREKA Eurostars Grant

VNRX announced they, along with Alcyomics, were awarded a European grant which is aimed at promoting development of new products from small and medium sized companies. The EUREKA Eurostars grant, worth about $1 million total and about $560k of which is expected to be received by VNRX, will help fund Volition's research for its technology in inflammatory disease. While most of the research to-date of the NuQ technology has focused on cancer applications, the company had talked in the past about expanding research for other conditions that are related to elevated nucleosomes, including inflammatory-related diseases (as well as autoimmune diseases and sepsis). We view this as a small, yet meaningful step towards expanding potential applications outside of cancer, which will remain the company's main focus and where we see the bulk of the near term opportunity for the technology.

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