Scouting for asymmetric opportunities in the small caps universe, I discovered Bioniche Life Sciences (US listing: BNHLF, Toronto: BNC.TO). This company is:

• A full-fledged Phase III biotech. The test results were so good that FDA has allowed Bioniche to file for market approval in Q1 2015.
• Addressing a $1 billion large and critically unmet medical need in bladder cancer with a ground-breaking technology.
• About to receive an Orphan Drug Designation.
• Fully funded. Bioniche has ample cash, and virtually no debt.

You would expect such a company to be valued at $150 million minimum. That's a minimum, most Phase III biotechs are valued much higher. Not so in this case: the market values Bioniche at a mere $25 million. This doesn't make any sense. Bioniche is so ridiculously undervalued - exceptionally low valuation for a Phase III biotech stock - that it could be today's most undervalued biotech stock on the market.

But I bet you never heard of Bioniche. Only 30 people are registered to receive email alerts on Seeking Alpha and there is no research to be found anywhere on the internet. If you're looking for a stock that is completely off-the-radar, Bioniche is. This article is the first research on Bioniche ever available for you to read, and explains why this is a genuine 10-bagger opportunity from current price levels.

About Bioniche

Bioniche focuses on the discovery, development, manufacture, and marketing of proprietary products for the human health markets. Its lead product, Mycobacterial Cell Wall-Nucleic Acid Complex (MCNA) suspension, is a complex biologic immunotherapy designed for the treatment of non-muscle-invasive bladder cancer in humans, which is in Phase III clinical development.

Bioniche's lead drug MCNA has shown excellent results

MCNA is, in technical terms, an acid composition prepared from the culture of Mycobacterium phlei. The composition contains nucleic acids and other cell wall constituents known to elicit an immunomodulatory (affecting the body's immune response) and anti-proliferative response. The components of MCNA have been shown to activate innate immune receptors known as pattern recognition receptors (PRRs). Activation of PRRs is thought to be responsible for the range of immunomodulatory and direct anti-cancer activities of MCNA.

Following successful completion of Phase I and Phase II studies with earlier formulations of MCNA, Bioniche completed the first leg of the Phase III trial with MCNA suspension. The objective of this Phase III trial test was to evaluate the efficacy and safety of MCNA in patients with non-muscle-invasive bladder cancer (NMIBC) at high risk of recurrence and progression who had failed the so-called intravesical Bacillus Calmette-Guérin (BCG) therapy. A total of 129 patients who had failed to respond to one or more courses of BCG were enrolled across 25 centers in the U.S. and Canada.

The results were very encouraging:

- Regarding efficacy, the overall 1-year disease-free survival rate increased significantly. Durable responses were also observed, as well as a noticeably lower rate of progression and cystectomies in patients who responded to MCNA as compared to those who did not respond.

- In terms of safety, the results showed that intravesical administration of MCNA was well tolerated, with most adverse events being mild to moderate in severity and few leading to discontinuation of treatment.

In a high-risk, BCG-failure patient population where limited treatment options beyond a surgical removal of the bladder are available, MCNA, characterized by a clinically meaningful activity and excellent safety profile, appears to be a superior alternative to patients who are unfit for or who decline a surgical removal.

MCNA should be approved

The final goal is, of course, to obtain the FDA's market approval. Biotech stocks are known to soar tremendously upon obtaining such an approval, so what are the chances for Bioniche? Statistics seem to favor Phase III biotechs. Studies show the odds of a drug passing the Phase III trials and getting on the market stands at approximately 50% on average. This bodes well for Bioniche, but it's gets even better. Two very positive milestone developments recently occurred:

Development number 1: FDA allows fast-track route for market approval

The FDA reported Bioniche is allowed to file for market approval just based on Bioniche's existing clinical trial data set, management itself thought they need to conduct another Phase 3 Study (second leg). In other words, the results were so good, that the FDA allowed to speed up the process with fast-track. Read this link to learn more about the FDA's fast-track options, and how beneficial it could be for respectively the company developing the drug and the medical community desperately waiting for new medical innovations. Bioniche expects to file in Q1 2015. If the FDA gives the thumbs up, shares will absolutely skyrocket overnight.

Development number 2: Filing for Orphan Drug Status

Shortly after, Bioniche filed an Orphan Drug submission. An Orphan Drug Designation is a key milestone in the path to full commercialization. An update is to be expected within 60 days from now. This is an important near-term catalyst, which could drive shares substantially higher.

Keep in mind that Bioniche has already successfully completed the first leg of the Phase III trial.

So based upon this information, I estimate the odds of approval to be at least 80%. Such a high likelihood is very hard to find in the biotech space, especially with such an off-the-radar stock as Bioniche.

Also, the high unmet medical need regarding bladder cancer should encourage the FDA to approve MCNA. Experts across the board report that the unmet need in the bladder cancer market has reached critical levels, both in the early-stage, non-muscle invasive bladder cancer and the late-stage muscle-invasive and metastatic settings. Little progress has been made over the past 10 years that has significantly changed the treatment for patients or provided more efficacious treatment options.

MCNA addresses a $1 billion unmet medical need

A couple of interesting statistics to update you on bladder cancer:

• An estimated 75000 new cases of bladder cancer will be diagnosed and about 16000 deaths from bladder cancer will occur in the United States each year.
• Bladder cancer was the ninth most common cancer in the world, with 430,000 new cases diagnosed in 2012.
• Bladder cancer is the fourth most common cancer in men.
• the cost from diagnosis to death is one of the highest of all cancers ranging from $96k to $187k per bladder cancer patient.

The market size for the US and 5 European countries is currently estimated at $240 million, and projected to grow to $300 million by 2017. In the Asia-Pacific region, the market will approach $1 billion in size.

Globally, it's fair to assume the market opportunity is already $1 billion, and is projected to double in 5 years. Again, bladder cancer is for a large part an unmet medical need, and the medical community is more than eager to adopt new therapy methods. Overall, Bioniche appears to be sitting in a pole position to capture sizeable market share.

The bladder cancer market is virtually free of competition

According to this independent study - the same that estimates market sizes - there is hardly any competition in bladder cancer. Here's a quote from the report:

"….Late-stage clinical development in bladder cancer is poorly served. Only one drug is being investigated in a full-fledged Phase III program and only a handful of drugs are being evaluated in Phase II company-sponsored trials. In the metastatic setting, most of the developments are being conducted by independent investigators and are therefore not designed to gain regulatory approval…"

This means the market is literally up for grabs for Bioniche.

Bioniche's financials are good

Bioniche has recently cleaned up its balance sheet and raised cash, and I estimate they currently have about $10 million in cash, virtually no debt and a moderate cash burn. Bioniche should be able to finance their operations for a full year from now without the pressing need for a capital raise. I therefore do not expect dilution this year.

Bioniche is extremely undervalued

Bioniche's $25 million market cap is exceptionally low for a Phase III biotech company. How low? Here's an overview of peer Phase III small cap biotechs targeting specific cancer types with respectively their market valuations:

Oncothyreon (NASDAQ:ONTY): $150 million valuation

Endocyte (NASDAQ:ECYT): $280 million valuation

Galena Biopharma (NASDAQ:GALE): $280 valuation

Mind you that most Phase III biotech stocks have much higher valuations (some in the billions), but I searched in the lowest bracket of valuations, and for companies targeting specific cancer types, so their addressable markets are more or less of similar size. A remarkable thing is that some companies failed their Phase III trials so far (OncoGenex for example), but still are valued at multiples of Bioniche. Other have weak financials, and are also valued much higher. So even in the lowest bracket of Phase III biotechs, valuations turn out to be 3X to 10X higher than Bioniche's, emphasizing clearly what a phenomenal buying opportunity Bioniche is.

Genuine 10-bagger upside

Bioniche is currently valued at $25 million, of which $10 million is net cash.

If Bioniche is allowed to sell on the US market, they could capture a substantial part of the market, because their technology is so unique and advanced, competition is almost non-existent, and the unmet medical need is so critical. A 20% US market share equates to peak sales of $48 million. From there on, Bioniche is able to likely generate revenue in other place, as the US sets the example. A growth stock operating in a growing biotech space generally trade at high price/sales multiples (average is 10). Say with a low multiple of 5, FDA approval could drive Bioniche's valuation to $250 million, equating to a 10X return from current share price. Remember, many biotech stocks are trading at much higher valuations the moment they obtain FDA approval. Once Bioniche gets market approval in the USA, I expect other countries to follow suit. Again applying a low price/sales multiple of 5, the valuation of Bioniche then could approach $1 billion.

If you would apply a peer comparison valuation method, which already showed how cheap Bioniche is today, a 10X return could turn out to be even too conservative.

Why I initiated a position in Bioniche

Number 1: There is an acknowledged and critical unmet need for a new bladder cancer therapy. This is not me saying this, but the medical community, experts, and the FDA itself. I believe Bioniche's technology sets the company way ahead of potential competition.

Number 2: Bioniche is a completely unknown stock. I like buying stocks nobody is paying attention to; these stocks are often present the best investment opportunities.

Number 3: Bioniche is such an obvious example of market mispricing. Phase III peer companies are valued at $150 million and higher, making clear how ridiculously low Bioniche's $25 million valuation really is. Such an irrational undervaluation makes the risk vs. reward profile highly asymmetrical.

Number 4: Bioniche is financially sound. They cleaned up their balance sheet, and raised cash very recently to bolster its cash balance. The company now has all the financial resources to pay for all operations into 2015.

Number 5: Management also has bought shares in the open market a few months back (link). Insider buying confirms the undervaluation.

Number 6: I expect the FDA to grant Bioniche market approval to commercialize its lead drug MCNA, as early as next year. I also expect MCNA to be designated as an Orphan Drug within 2 months.

Risk

A risk is the FDA not granting market approval. This could mean Bioniche needs to complete the second leg of its Phase III trial after all in order to file for market approval again. Not all would be lost if that happened, but it will cause delays, and Bioniche probably will need more cash to finance a new trial.

Further, there might be some selling pressure coming up from financiers exercising their warrants. There is a series of 1.6 million of $0.12 warrants and 3.3 million $0.23 warrants outstanding, ready to be exercised from end of October this year. It's not certain they will, but they could. The amounts aren't that material though compared to the daily average trading volume, so the selling pressure will be very temporary and it will raise cash for the company.

There are also a few long-term series of $0.30 and $0.40 warrants outstanding from a previous capital raise that could also cause some selling pressure, but buyers at today's price levels will have realized substantial gains by that point.

Summary

Bioniche could be the most undervalued stock currently trading on the market, and I think certainly the most undervalued biotech stock. Bioniche is rushing to obtain FDA approval, which could happen as early as next year, thanks to the fast-track route the FDA has given the green light for. There is a critical medical need for Bioniche's technology in a $1 billion market virtually free of real competition, which opens the door for massive revenue growth, while the sound financials limits downside risk. Overall, today's $0.20 share price appears to me as an excellent entry point for a genuine 10-bagger opportunity. One thing's for sure; opportunities of this magnitude are very rare.