Just last month, Australia's Viralytics Ltd. was marching to completion on its phase Ib immunotherapy programs of lead candidate Cavatak after landing a A$29.6 million (US$23.9 million) private placement with China's Lepu Medical Group. The funding boosted the company's coffers to A$57 million in cash, "which gets us well into 2020 with the full program we've got," Viralytics CEO Malcolm McColl told BioWorld at the time. (See BioWorld, Jan. 26, 2018.)

Viralytics need worry no more about cash runways after signing a definitive agreement with Merck & Co. Inc. to acquire the Sydney-based firm, through a subsidiary, for A$1.75 cash per share. The deal is valued at approximately A$502 million (US$394 million), with the per-share price representing a premium of 160 percent to the one-month volume weighted average price of Viralytics shares (ASX:VLA).

Viralytics is set to become a wholly owned subsidiary of Merck, of Kenilworth, N.J., which gains full rights to Cavatak (CVA-21), an immunotherapy candidate based on an oncolytic virus (coxsackievirus A21) formulation shown to preferentially infect and kill cancer cells.

The companies were hardly strangers. Cavatak is being evaluated in multiple phase I and II trials, both as an intratumoral and systemic agent, including a combination effort with the anti-PD-1 agent Keytruda (pembrolizumab) that dates back to a 2015 agreement. The ongoing phase I/II KEYNOTE-200 (STORM) study is investigating the Cavatak/Keytruda combo compared to Cavatak alone in individuals with late-stage melanoma, prostate, lung and bladder cancers, with data expected to read out next year, according to Cortellis Clinical Trials Intelligence.

Roy Baynes, senior vice president and head of global clinical development and the chief medical officer at Merck Research Laboratories, declined to say precisely when Merck took an interest in acquiring Viralytics.

"All I would say is that we are very interested in the whole concept of oncolytic viruses," Baynes told BioWorld. "We've been working on this for a while."

Merck's interest in oncolytic viruses led to a previous collaboration with Amgen Inc. in a multicenter, open-label phase Ib/II trial that assessed the efficacy, safety and tolerability of pembrolizumab plus talimogene laherparepvec (Imlygic) vs. pembrolizumab alone in individuals with mid- to late-stage melanoma. Imlygic, approved in the U.S. and EU in 2015 as the first oncolytic virus agent, is derived from a herpes simplex virus engineered to infect cancer cells and to generate granulocyte macrophage colony-stimulating factor, or GM-CSF. (See BioWorld Today, Feb. 6, 2014, Oct. 26, 2015, and Oct. 29, 2015.)

The pembro/T-vec trial showed "quite significant rates of activity," Baynes said – sufficient to advance the combo into a global phase III study expected to recruit some 660 patients across more than 170 sites, according to Cortellis. Known as KEYNOTE-034, the trial's primary endpoints include overall survival, progression-free survival (PFS) and safety, along with more than a dozen secondary endpoints such as objective response rate, disease control rate, complete response rate and biomarker response.

Merck and Amgen, of Thousand Oaks, Calif., subsequently moved the combination into other indications.

Merck's interest in Cavatak dated back to monotherapy studies of the agent. In April 2015, Viralytics presented data from the phase II CALM study at the annual meeting of the American Association for Cancer Research (AACR) in Philadelphia, showing that 22 of 57 (38.6 percent) patients achieved the immune-related PFS (irPFS) endpoint, more than doubling the initial target of 10 of 54 (18.5 percent) evaluable patients reporting irPFS at six months after initial dose.

Investigators also reported an overall response rate in 16 of 57 (28 percent) patients and an interim one-year survival rate of 75 percent (36 of 48 patients).

As the study progressed, so did the encouraging response rates. Meanwhile, at the 2017 AACR annual meeting in Washington, interim results from the combo STORM study showed that, among patients with melanoma, non-small-cell lung (NSCLC) and bladder cancer in cohort 3, Cavatak tumor targeting was confirmed by detection of Cavatak viral RNA in tumor biopsies and viral replication by immunohistochemistry in melanoma tumor biopsies. Of 13 patients from cohorts 1 to 3 eligible for investigator best overall response assessment, partial response (n = 1), stable disease (n = 8) and progressive disease (n = 4) were observed. All patients in part B showed active host-antiviral immune responses by developing detectable anti-CVA21 neutralizing antibodies by study day 22.

Those responses had matured by November 2017, when Viralytics presented additional data at the 2017 annual meeting of the Society for Immunotherapy of Cancer in National Harbor, Md. For 19 evaluable patients, response was observed, though not all confirmed, in three of six NSCLC and five of 13 metastatic bladder cancer patients. Promising changes were observed in the levels of PD-L1, including an increase to positive PD-L1 levels from a group of five patients who previously had negative or weak levels, following biopsy of tumor tissues before and after administration of the Cavatak/Keytruda regimen.

Needless to say, "we've had the opportunity to look at [these data] in great detail," Baynes said. "Clearly, there is a cytolytic effect of the virus and there's also, we believe, good evidence of abscopal effect, where we see tumor shrinkage at sites remote from where the actual injection occurred."

For that reason, in addition to studies involving intratumoral administration, Merck and Viralytics are evaluating the safety of intravenous Cavatak in combination with Keytruda in a phase I/II study in Australia that is enrolling patients with advanced NSCLC, according to Cortellis.

Even with Viralytics, which will operate as a wholly owned subsidiary, under its wing, Merck has "a lot of work to do" before moving the combo into a pivotal setting, Baynes said.

"We have good evidence of activity with direct intratumoral injection," he said. "Certainly, our proof-of-concept study with a different oncolytic virus has shown that we do seem to have additional activity when we combine pembro with the oncolytic virus. We still need to show definitively whether systemic administration is as good as intratumoral injection. And then there's obviously some refinement to be looked at in terms of how many injections are needed, how apart they should be spaced and the totality of the combination."

Ultimately, "there is the potential for this to be broadly active," Baynes added.

Merck has other designs on Cavatak in immuno-oncology (I-O), and terms of the deal are designed to ensure that Viralytics doesn't slip through its fingers. Although the boilerplate contains the usual language that close of the transaction is subject to "no superior proposal," Viralytics board members unanimously endorsed the acquisition, recommended that shareholders vote in favor and expressed their intention to vote their shares the same way. The company's largest shareholder, China's Lepu Medical Group – which holds voting power in 13 percent of Viralytics shares, thanks to last month's financing – also indicated that it will vote in favor of the scheme, according to Viralytics.

Merck and Viralytics expect to implement the transaction by the second quarter, subject to the vote of Viralytics shareholders and customary regulatory approvals. The deal is expected to close by midyear.

As for that longer-term vision, Merck is already looking to Cavatak combinations beyond Keytruda, Baynes said – a strategy the company has pursued in other tie-ups, including a 2016 cancer vaccine alliance with Moderna Therapeutics Inc. and last year's acquisition of Rigontec GmbH for €115 million (US$137 million) up front and up to €349 million in milestones. (See BioWorld, June 30, 2017, and Sept. 7, 2017.)

"We have a number of molecules that we have declared publicly," Baynes said. "Many of these are aimed at enhancing the immunogenicity of the cancer" – for example, by pursuing combinations with mechanisms such as the stimulator of interferon genes, or STING, agonist; cytokines, such IL-12; agonist programs such as Toll-like receptors; and agents that target innate immune signaling pathways. Merck also has ongoing efforts targeting indoleamine 23-dioxygenase 1, or IDO-1; cytotoxic T-lymphocyte associated protein 4, or CTLA-4; and lymphocyte-activation gene 3, or LAG-3, among others.

"All of these have the potential to be important, and certainly there is the possibility that certain of these might be explored with new oncolytic viruses," Baynes said. "We have a very rich early pipeline, and we think this is really going to help us bring the benefits of immuno-oncology to a broader array of patients. Obviously, Keytruda is doing amazing things for patients, but there still are a large number of patients who don't respond to Keytruda as monotherapy, so combinations are important to explore."

In an email, Evercore ISI analyst Umer Raffat called the deal "a very nice tuck-in" for Merck and said the timing was "particularly interesting," given that Viralytics had guided to a second quarter clinical update on the KEYNOTE-200 combo trial.

"Outside of early ORR being seen in this trial of lung and bladder cancer [patients], the most intriguing signal previously emerging out of this trial was the up-regulation of PD-L1 expression seen within a couple of [weeks] among [patients] with low PD-L1 expression at baseline," Raffat wrote.

Viralytics' management characterized the combo effort as the company's "prime focus," noting that perhaps the most important aspect of KEYNOTE-200 that was flagged by the company was the up-regulation of PD-L1 expression in lung and bladder patients, he added.

In a Viralytics note issued in December, Edison analyst Dennis Hulme wrote that preliminary data for Cavatak in combination with checkpoint inhibitors, whether administered intravenously or by intratumoral injection, continued to look "impressive."

The company was already recruiting additional patients in expansion cohorts in melanoma, lung and bladder cancers to obtain more robust estimates of tumor response rates, he pointed out, and had initiated plans for a potential pivotal study of a combination with Bristol-Myers Squibb Co.'s checkpoint inhibitor, Yervoy (ipilimumab), in melanoma patients who failed prior single-agent, anti-PD1 therapy. Predicting the prospect of partner funding for such an effort, Hulme increased the company's valuation to A$469 million or A$1.95 per share from A$408 million and A$1.70 per share.

On Wednesday, shares of Viralytics (VRACY) jumped 144.5 percent on the OTCQX market, gaining $2.37 to close at $4.01. The deal was disclosed after Wednesday's close of the Australian Securities Exchange, where the company's shares lost A$0.015 to close at A$0.615.

Shares of Merck (NYSE:MRK) lost 44 cents Wednesday to close at $54.55.