Seeking Alpha
Growth at reasonable price, healthcare, newsletter provider
Profile| Send Message| ()  

A recent article, posted here on Seeking Alpha, shed some light on Merck's (MRK) dwindling oncology franchise. The contributor offered solutions by listing several targets that could potentially steer Merck's oncology division in the right direction. Given my position in Inovio (INO) and their earlier relations to the large pharma, I decided to speculate on the possibility of these two companies working together again. Who knows, perhaps Inovio's consistent immune responses in its cancer trials may be the future growth catalyst Merck is seeking to remain relevant in the oncology field.

Merck feeling the effects of generic competition

In 2012, only 3% of Merck's $47 billion revenue came from cancer related drugs. Its two commercialized oncology products, Temodar and Emend, are victims of the patent expiries looming over the pharmaceutical sector. For the first quarter of 2013, Temodar, a treatment for brain tumors, saw a decline of 9% in comparison to the 2012 sales. This slump was a reflection of generic competition in Europe, as Temodar lost patent exclusivity in the EU during 2009. In August 2013, generic manufacturers may launch their own version of the brain cancer treatment in the US which will significantly erode Merck sales. Similarly, Emend, a preventive treatment of chemo-induced nausea and vomiting, will be facing a patent expiry in 2015. Combined, Merck could stand to lose over $1 billion in sales if it does not act accordingly. The need for a future catalyst capable of restoring the giant pharma's position in the oncology sector is evident.

Merck's area of interest will presumably include a firm that's developed an immunotherapy platform, as this is the current treatment being used on oncology patients. The company may have several options: acquire a late stage pharma that has presented clinical benefits nearing commercialization, or propose a partnership deal with an early stage biotech oozing with potential. As Amgen's failed $10 billion bid for Onyx illustrated, the former can get quite costly. Its alternative is to partner with a development stage company that is able to provide a promising pipeline.

A flourishing and widely-held example to the riskier approach of partnering with an early stage biotech is the agreement between Johnson & Johnson and Pharmacyclics (PCYC). Back in December of 2011 when the collaboration was announced, the blood cancer drug, ibrutinib, was in Phase II of clinical trials. The agreement rewarded PCYC with as much as $1 billion. Now, almost 600% has been added to the $7.5 billion market cap of the once early stage Pharmacyclics. JNJ is fighting for the drug to receive breakthrough designation which would knock two years off the FDA process and get it one step closer to the market.

Merck is no stranger to premium acquisitions that have yet to prove themselves commercially. Back in 2006, to the surprise of many, Merck took a necessary gamble with early stage biotech Sirna Therapeutics by dishing $1.1 billion for the company (a 100% premium). Sirna's potential breakthrough RNA interference (RNAi) technology had just won the 2006 Nobel Prize in medicine as advocates believed it would be the basis of treatments for a wide swath of illnesses. Nonetheless, it was a very rich deal for a company that was years away from a commercial therapy. In hindsight, the purchase was a failed attempt for Merck, but it shows that the large pharma will place deep wagers if it believes the target has the prospective to become a blockbuster drug.

Inovio: Tailored for partnership with Merck

The 2013 summer has been quite sizzling for Inovio investors who have seen shares rally more than 105%. In the last month, the company has continued validating its therapeutic vaccines by consistently announcing strong T-cell responses during trials. Eager investors were banking on these catalysts to support the development of Inovio's proprietary technology platform that would guide the stock to levels it hadn't seen in years. The company did not disappoint as it is nearing three-year highs on the premise of a rejuvenated pipeline.

To summarize how Inovio got to current level:

On July 10th, Inovio announced the peer-reviewed publication of results from its phase I trials of PENNVAX-B preventive HIV vaccine, confirming what Inovio had found earlier with its 2012 studies. The journal reaffirmed PENNVAX-B with best in class distinction as Inovio's vaccine, together with the CELLECTRA device, significantly increased the number of responders producing robust and durable T-cell responses in humans. As expected, the street took the news very well with shares jumping 25%.

About a week after the HIV results, on July 18th, Inovio revealed a new application of its CELLECTRA electroporation technology. Animal studies showed an enhanced ability of DNA therapy to stimulate blood vessel growth and recover from debilitation caused by blocked arteries in the legs. While this is early in studies, this new application may be beneficial for treatment of peripheral arterial disease (PAD), offering Inovio another promising therapeutic avenue for commercial opportunity. Shares continued their upswing momentum by increasing 4% on the release.

Inovio added to its oncology franchise on July 24th when it announced preclinical studies for its hTERT DNA cancer vaccine, administered with CELLECTRA, generated robust immune response and in turn increased the rate of survival in mice and monkeys. Inovio's vaccine generated immune responses more than 18-fold higher than the next best hTERT therapeutic vaccine. High levels of hTERT are found in 85% of human cancers which allow Inovio to develop a widespread cancer therapeutic based on these early results. Inovio plans to advance its synthetic hTERT vaccine into clinical trials in 2014 by focusing on breast and lung cancers before expanding to other cancer types. Shares rallied 17% for two days following the exciting report.

Inovio's diverse pipeline passes over any downtime in company buzz which gives investors frequent future catalysts to look forward to. Come September, Inovio is presenting at three investor conferences across nation to continue increasing exposure and getting more investors to share their vision of revolutionizing vaccines. The 2013 agenda will include the phase I initiation of INO-5150 that targets prostate cancer while the first quarter of 2014 will bring the results of Inovio's phase II candidate, VGX-3100 for treating HPV-related cancers. Although the Phase II data for VGX-3100 is still several months away, the cervical dysplasia vaccine is the most advanced independent therapeutic treatment in Inovio's pipeline. If all goes as planned, VGX-3100 may be INO's first commercialized product, providing the company with a consistent revenue stream. These approaching events will provide channels of information for Inovio to continue driving momentum on its side.

Given Merck's dire need for a stimulant to its oncology division, collaboration with Inovio would be ideal. Inovio's growing oncology franchise would provide Merck with access to treatments of cancer that may potentially be blockbusters. Sharing global profits in such a deal would be an obvious advantage, similar to how JNJ is hoping to gain with their Pharmacyclics alliance. Partnering for an early stage cancer treatment, such as Inovio's robust hTERT therapeutic vaccine, may prove to be a strategic investment that rewards Merck shareholders handsomely while saving the company billions that would otherwise be expended on an acquisition.

For Inovio, partnering with a large pharma offers financial and experienced assistance in developing their early stage drug candidates. Delivered funding would cover costs and in turn reduce any pressures to dilute shareholders in order to subsidize development. Not to mention the validation and confidence Inovio would receive from the partnership with a global industry leader. To support this speculation, however, while presenting at the onemedplace conference, Inovio CEO Joseph Kim brought up that the company is currently in late stage discussions with a large pharma to bring a value changing partnership. Dr. Kim's connections to Merck, having been a senior vaccine developer, and Inovio's licensing agreement with the large pharma for its electroporation technology in 2004 give good indication that the two may be nearing an agreement to work together again.

Conclusion

A looming partnership provides Inovio shareholders with a worthwhile catalyst that will carry on the recent momentum seen with its share price. Merck's need to restore its oncology division and the connections with Inovio make the potential partnership more than a speculative desire. Even if Inovio's partnership discussions are not with Merck, the company's sizzling summer is expected to continue.

Source: Inovio May Prove To Be Merck's Solution