Inovio Pharmaceuticals, Inc. (INO) is a microcap biotech company based in Pennsylvania that is developing DNA vaccines for the treatment a number of unmet medical needs, including cancers, universal flu, HIV, hepatitis B/C virus, amongst others. The company presently has five Phase I and three Phase II clinical trials underway for the treatment of cancers and infectious diseases, with six of the clinical programs having financial partners. Inovio also recently announced that it expects to launch two additional clinical trials later this year for malaria and Hepatitis C.
With all this good news pouring out of Inovio of late, shares of INO have been on a torrid pace, up 44% since the first trading day of the New Year. Investor sentiment has turned decidedly bullish based on the StockTwits stream, as well as the various INO message boards. Indeed, investors are of the belief that INO has yet another 20-30% run to the upside remaining, despite the rapid recent appreciation in PPS already. In this article, I will show why INO is actually a great short candidate at current levels, and will all too quickly make a huge correction to the downside. Overall, I believe INO will finish the year below 40 cents a share, in spite of the numerous positive press releases emanating from the company.
Even though Inovio's marketing materials certainly make it sound like the company invented DNA vaccines, this technology is actually over 15 years old. Moreover, DNA vaccines have a rather unpleasant clinical history, which is mentioned nowhere on Inovio's website, or their materials to investors. Namely, there have been nearly 100 Phase I and II DNA vaccine clinical trials performed on humans to date, none of which have shown superior efficacy compared to traditional, protein-based vaccines. Basically, DNA vaccines tend to work wonders in animals, but show sub-optimal immunogenicity in humans. According to a recent review article (hyperlinked above), the problem for human use is that researchers still lack a clear understanding of the biochemical mechanism of DNA vaccines, making it difficult to optimize the vaccines for use in humans. The one bright spot, however, is that the plethora of clinical trials has shown DNA vaccines to be well-tolerated in humans. As such, I would expect the company to have little problem filing new Investigational New Drug Applications with the FDA for its platform.
Inovio's Marketing Activities to Investors are Problematic
In the month of December alone, Inovio put out 5 press releases, which is about average for this tiny company. For a penny bio stock, I find this deluge of press releases to be a major red flag, especially since many of them were unnecessary. While it's always important to keep investors abreast of company comings and goings, I found many of the clinical updates to be disconcerting, and even misleading, from a scientific perspective. On December 6th, 2012, for example, Inovio announced "positive interim results in a Phase II Leukemia trial." If you read the press release closer, however, you realize that they had only treated 14 patients, less than a third expected to enroll in the trial. For the statistically uninitiated, I would like to point out that you cannot have "results" from 14 patients; scientifically-speaking, this is little more than an interesting observation.
Suffice to say, all of the company's scientific press releases suffer from the same slight-of-hand, and I invite investors to take a closer look at them. It's important to keep in mind that the general trend is for interim results to be released by companies in Phase III trials, due to their length and complexity. Phase I and II, unfortunately, tend to be released by companies looking to bolster their share price. Overall, I find the large number of press releases, and the wording of the clinical updates to be a canary in the coal mine so to speak.
Inovio Fundamental and Technical Analysis
Inovio hints within its investor materials that most of its costs are being covered by third parties via grants or partnerships. Specifically, the company states that six of its clinical programs are partnered and the company has received approximately $42 million in grant funding. The company's 3rd Quarter results tell a vastly different story, however. According to Inovio's 3rd Quarter Financial results, the company is burning approximately $1.63 million a month, and has already accessed $1.2 million of its $25 million ATM common stock sales agreement. For comparative purposes, another microcap biotech Sangamo BioSciences (SGMO) is burning less a million a month, despite numerous ongoing clinical trials. At this burn rate, the company would be bankrupt in only 10 months without accessing the remaining $23.8 million in ATM funding. Simply put, Inovio is likely going to heavily dilute shareholders in the near term due to their rapid cash burn rate, and I would expect the company to take advantage of the recent run-up in PPS to do so. From a technical perspective, INO is heavily overbought with a relative strength index of 81.7, and trading 32% higher than its 200-day moving average. The short float on INO also only sits at 0.25%; so investors cannot expect a short squeeze to continue the stock's tremendous January momentum. Overall, INO is ripe for a short attack, as the fundamentals and technicals no longer support an increase in PPS.
Shares of INO have made a tremendous run this January, due to the numerous positive press releases from the company. That said, the fundamentals and technicals indicate a strong downturn in INO PPS in the short-term. With dilution sure to rear its ugly head, the fact that Inovio is at least 2 years away from licensing out a phase III drug candidate, and the fact that DNA vaccines have repeatedly failed in phase II trials to show superior efficacy compared to protein-based vaccines, I see no reason why INO will not finish the year under 40 cents a share. In fact, history would suggest that INO will never produce a viable drug candidate, making the company a poor long-term investment. In my opinion, investors will also eventually catch on to the fact that 8, 14, or even 20 patients does not constitute scientifically valid "results," and the stock will plummet as a result. In conclusion, I believe the INO bubble will burst at or above 80 cents a share, and will correct heavily to the downside. I thus recommend shorting INO once it crosses 80 cents a share. With this tiny biotech, I think it's safe to say that the risks greatly outweigh the possible rewards.