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Vical's (VICL) Allovectin-7 is a pure immune therapy.(1) Which means it does not directly kill cancer cells, but activates the immune system to do so. Vical will soon announce A-7 phase 3 results in Melanoma, but the mechanism of action is not specific to Melanoma, and can be used in any solid tumor cancer.(2) For this reason, I expect that Allovectin-7 will become one of the best selling cancer drugs of all time.

Allovectin-7 uses Vical's proprietary plasmid technology, and has Orphan Drug status.(11) Orphan drug status means that Vical will receive exclusivity in the US for 7 years from the date of FDA approval, and 10 years in the EU. Vical owns all rights in the US and European Union, and will receive royalties in parts of Asia that have been licensed to Anges.

Unlike, systemically administered immune therapies, such as Yervoy, that cause severe adverse effects(3), Allovectin-7 has zero grade 3 or 4 adverse effects. (4)

Allovectin-7 is relatively inexpensive to manufacture(5), and is not specific to individual patients. Which means it fits the big pharma model for maximum profitability. Because of the benign adverse effect profile, off label usage in other solid tumor cancers should be extremely high.

Here is an analysis of what I expect from the phase 3 results:

The 127 patients in the phase 2 (6) is almost the exact size of the 130 patient control arm of the phase 3.(7) The phase 3 control arm uses Chemo.
Over the last 20 years there have been hundreds of studies using chemo in late stage Melanoma patients, and the median overall survival has never improved by more than a month or 2.

The phase 2 had the exact same enrollment criteria, except there are 38% patients with prior chemo treatment in the phase 2, and none in the phase 3. The phase 2 had 53% stage 3 unresectable, 47% stage 4, with an average age of 60. The phase 3 has only 38% stage 3 unresectable and 62% stage 4, with an average age of 64. Therefore, on average the phase 3 patients are older and sicker.

If you remove the 49 patients who received more than one cycle( 1 injection per week for 6 weeks) of Allovectin-7, the median overall Survival drops from 18.8 months to 12 months for the 78 patients who received one cycle or less. Vical used this cohort as a proxy for estimating the control group median overall survival for the phase 3.(8) There was also a failed phase low dose 3 from 2000(1/200 of the high dose phase 2 and phase 3) and the control arm lived approximately 10 months. Vical combined these 2 studies median overall survival to arrive at the 11 months, used in the assumption for powering the phase 3. (8)

The 49 patients who received more than one cycle of A lived a median approximately. 30 months. The published phase 2 results {Melanoma Research 2010, Vol 20 No3 A phase 2 study of high-dose Allovectin-7 in patients with advanced metastatic melanoma by Agop Y Bedakian, Jon Richards, Dmitri Kharkevitch, Michael B. Atkins, Eric Whitman and Rene Gonzalez } shows that the 15 R.E.C.I.S.T (acronym for Response Evaluation Criteria In Solid Tumors) (9) "responders" were from the 49 patient cohort that received more than one cycle of Allovectin-7. (6) That means the durable response rate in this cohort = 30.6%. All R.E.C.I.S.T responses were durable, which means greater than 6 months.

Vical has not disclosed the median overall survival for this cohort, but the only way for the entire study median overall survival to equal 18.8 months, is for the 49 patient cohort median survival to equal approximately 30 months. The 49 patient cohort was not by design. The innate immune reaction to the Allovectin-7 injection caused immune cells to swell the injected tumor. R.E.C.I.S.T. criteria forced the investigators to remove 78 patients (61.4%) from treatment after 1 cycle (six weeks) or less.(6)

FDA agreed to protocol changes contained in the Special Protocol Assessment, (12) that Vical received for the phase 3:

a) Vical received modified R.E.C.IS.T. criteria from the FDA for the phase 3, so that all A-7 patients would receive at least 2 cycles (16 weeks) of therapy. (12)

b) Vical also excluded patients who were pre- treated with chemo from the phase 3, as chemo damages the immune system.
As would be expected from chemo treatment damage to the immune system, 11 out of the 15 phase 2 "responders" were not pre- treated with chemo. (12)

The phase 3 protocol changes were made to enhance the observed results seen in the 49 patient cohort. (13)

The 2 year delay - CEO remarks in Feb. 2010 conference call: " Based on this information today, we would expect to lock the clinical trial data base around mid- 2011"} (13) in reaching enough deaths to lock the database of the phase 3 should not be a surprise, based upon the expected results from the changes made to the phase 3 protocol.

In order to understand what the 2 year delay in reaching the target number of deaths in the phase 3 means, it is very instructive to closely examine the percentage of patients still alive as plotted against the time in months of the phase 2. ( 4 minutes 40 second mark in attached video)

The Allovectin-7 phase 3 began enrolling in January 2007. Reached a midpoint or median in April 2009. Finished enrolling Feb. 2010. Therefore the median patient has been enrolled for 50 months as of June 2013. The last patient has been enrolled for 40 months.

Looking at the phase 2 survival curve, there are approximately 23% of patients alive at 50 months. 23% of 127= 29 patients. But this number includes 10 of the 15 responders.

To estimate the survival of the phase 3 control arm, it makes sense to remove most of the known A-7 effect. Therefore, Removing/subtracting the 10 responders =19 patients still alive at 50 months. 19 patients = 14.9% of patients alive at 50 months.

This is more than one would expect. Increased survival is most likely because there were approximately 20% of patients that showed a systemic response, but only 11.8% had enough tumor shrinkage to be classified as a R.E.C.IS.T. "responder".(6) The generally expected range of survival after 4 years is about 10%.(14) So, using the phase 2 survival curve excluding the 10 responders, will produce a slightly better proxy for the phase 3 control arm, than would be expected from the meta data.

The 127 patient Allovectin-7 phase 2 survival curve (adjusted for the responders) most likely presents a higher estimation of the the survival curve of the Allovectin-7 phase 3 control arm. Therefore, using it will most likely lead to a conservative estimate of the Allovectin-7 phase 3 arm results.

The target number of deaths in the Allovectin-7 phase 3 is going to be very close to 66.5% used in Amgen's T-Vec study in Melanoma that had a similar patient population. 66.5% of 390 total patients = 259

This corresponds with my 260 maximum number, based upon assuming everyone was dead in the control arm, then a median is reached when 130 are dead Allovectin-7 arm. It is important that Vical be able to calculate a median in the Allovectin-7 arm for commercial purposes, which explains why Vical has been waiting to reach the target # of deaths before locking the DB. Some have suggested that the target # of deaths is greater than 260 deaths, but this is impossible based upon Vical's assumptions. If you closely examine the phase 2 survival chart, you will realize that there is no possible way for more than 66.5% of the phase 3 to be dead at 26 months, based upon the 11 month and 18 month assumptions for the 2 arms.

Using a target number of 260 deaths means that the more patients alive in the control arm when the database is locked, the greater the over count in months. In other words, if we assume everyone is dead in the control arm, then by not reaching the target number of deaths until June 2013, means the median OS for the Allovectin-7 arm would be 50 months.

If the % alive in the phase 3 control arm at 50 months is the same as the phase 2, adjusted by removing the responders, then that would be 14.9% or 19 patients.

To estimate the over count, we must estimate how many people have been dying per month on average over the last 6 months in the phase 3.

From the Phase 2 chart, it appears that approximately 6 % of the patients, or about 7 patients died in the 6 month span from 44 months to 50 months. Therefore, it appears the average is approximately 1 death per month. It seem reasonable and logical to expect a similar average in the phase 3 control arm, since the phase 2 survival curve is serving as a proxy for the phase 3 control arm.

How many have been dying in the Allovectin-7 arm in the phase 3 over the last 6 months? I would estimate at least 1 per month. For half the Allovectin-7 arm to die= 130 patients. Since the death rate starts to flatten out after 38 months, as observed from most Melanoma survival curves including the phase 2, it seems conservative to use 1 death per month in the A-7 arm.

Therefore, the total number of dying per month in the phase 3 over the last 6 months = 2/month

To reach an estimate of the Allovectin-7 median overall survival , we need to subtract enough months to equal the potential over count of 19 deaths. At 2 deaths per month the over count is eliminated by subtracting 9.5 months from 50= 40.5 months.

Using the phase 2 survival curve, adjusted for the responders, and the current duration of the phase 3 without reaching the target # of deaths, produces a 40.5 month median overall survival in the Allovectin-7 arm. The best estimate of the phase 3 control arm median overall survival should be based upon the 78 patients in the phase 2 that received one round or less of therapy = 12 months median overall survival.

A conservative prediction for the Allovectin-7 phase 3 median overall survival is 40 months in the Allovectin-7 arm, and 12 months in the chemo control arm.

CONCLUSION

Vical has approximately $70 million in cash and no debt. The cash burn is approximately $30 million a year.

At the current market price, the market cap including cash is only $300 million.

I expect that Vical will announce the Allovectin-7 results at, or slightly before, an immune therapy conference on August 13.

I estimate the solid tumor addressable market for Allovectin-7 at over $25 billion a year.

While the Melanoma market alone will produce sales of approximately $1 billion a year for Vical.

With extremely high gross margins, because Allovectin-7 is relatively easy to manufacture compared to most biologics, it will become one of the most profitable cancer drugs of all time.

The implied valuation based upon recently proposed and concluded transactions in the cancer drug area indicate that Vical should be worth more than $10 billion, or $100/share.

Based upon my analysis for Vical's lead product, Allovectin-7, I highly recommend investors aggressively purchase shares and call options on Vical.

I do not see any major risks in my analysis, as I constructed it conservatively. I have been studying this situation for the last 9 years, including visiting Vical's manufacturing facility. The Vical 10Q (10) has 10 full pages risk factors, which I encourage investors to read. I am sure the shorts can dream up a myriad additional risks, including getting out of bed in the morning.

This article was meant to highlight the upside in Vical. Anyone can rationalize numerous reasons for not investing in any biotech stock.

Footnotes:

(1) www.vical.com/products/cancer-immunotherapies/default.aspx

(2) www.vical.com/products/cancer-immunotherapies/allovectin/default.aspx

(3) www.yervoy.com/patient/side-effects.aspx

(4) www.ncbi.nlm.nih.gov/pubmed/11883699

(5) www.genengnews.com/gen-articles/high-yield-plasmid-dna-production/4077/

(6) Melanoma Research 2010 Vol. 20 No 3

(7) clinicaltrials.gov/show/NCT00395070

(8) seekingalpha.com/article/771681-vicals-ceo-discusses-q2-2012-results-earnings-call-transcript

(9) www.recist.com/

(10) www.sec.gov/Archives/edgar/data/819050/000119312513213331/d501460d10q.htm Vical 10Q Item 1A RISK FACTORS page 20

(11) www.docguide.com/fda-grants-orphan-drug-designation-allovectin-7-melanoma-treatment

(12) www.evaluategroup.com/Universal/View.aspx

(13) seekingalpha.com/article/188251-vical-inc-q4-2009-earnings-call-transcript Prepared remarks by CEO

(14) news.bms.com/press-release/rd-news/new-four-and-five-year-survival-data-yervoy-ipilimumab-treatment-naive-and-pre 9.6% Chemo treated patients alive at 4 years.

Source: Analysis Of Vical's Allovectin-7: Best Results Ever In A Melanoma Phase 3 Trial