Examining Inovio: Impact Of Roche Deal

| About: Inovio Pharmaceuticals, (INO)

Since my last Inovio (NYSEMKT:INO) article, where I speculated that the company was a fitting partner for Merck (NYSE:MRK), the stock price has had its ups and downs (and that's an understatement). However, shareholder itch for a large pharma collaboration was satisfied on September 10th, when Roche (OTCQX:RHHBY) and Inovio cut a deal. Following the release, Inovio price closed at $2.55 (or up nearly 15% for the day). Though this is a fine daily return, given Inovio's volatility, more of an upshot was expected. Just as the stock overreacted when a speculative deal with Merck was pondered, I believe the market underplayed the deal with Roche.

Roche Partnership Terms

Roche and Inovio agreed to an exclusive worldwide license agreement to research, develop and commercialize Inovio's preclinical DNA immunotherapies targeting prostate cancer (INO-5150) and hepatitis B (INO-1800). Additionally, Roche acquired the exclusive license to use Inovio's electroporation technology, CELLECTRA, for delivery of the vaccines.

Roche will make an upfront payment of $10 million to Inovio while also providing R&D and financial support for development of both treatments. Including all development and commercial milestones, Inovio may see up to $412.5 million. To add, Inovio is entitled to receive up to double-digit royalties on any product sales. Roche also has an option to license additional cancer vaccines, leaving the possibility for the two to work yet again in the future.

What does this all mean for Inovio?

Validation

The disclosed terms of the deal were extremely favourable for Inovio, especially considering it was for two preclinical drug treatments. Partnering with one of the largest health care companies globally provides definite validation for Inovio. Such a deal will quiet any remaining skeptics that were questioning INO technology, some even pointing to the company's "history". This deal clears the air on the suspected legitimacy of the company and its science.

Recurring Funding & Resources from a Global Leader

With the upfront payment of $10 million, Inovio is now fully funded through 2015, as per CEO Joseph Kim. There is no forthcoming dilution in the near future. Keeping in mind that this cash run rate does not include any milestone payments ($400+ million), the first payment may come as soon as the end of 2013, when INO-5150 goes into Phase I. Not only that, but Roche has picked up all the development costs included which will cut Inovio spending, further improving their financial structure.

Obtaining the support and resources of a leading pharmaceutical like Roche will prove to be valuable in the development of both the prostate and hep B treatments. With no hep B therapies in its pipeline development, you can safely assume that Roche will pay particularly close attention to its newest asset. This obviously bodes well for Inovio, which will continue seeing milestone payments as each drug progresses through development and eventually reach commercialization. Assuming both drugs get commercial approval and that the royalty to INO is a conservative 5% (terms call for up to double digits), even a combined $200 million in sales would result to $10 million/year. For comparison sake, Roche had hepatitis vaccine sales of over $1.5 billion in 2012.

Further Partnership Opportunities

Due to the company's diverse pipeline, Inovio is still well positioned to be included in another partnership. Inovio and Roche have a separate agreement that would give Roche the option to license other drugs in a collaborative cancer research program. Speculation would suggest this could be Inovio's preclinical hTERT DNA cancer vaccine. In preclinical studies, 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's leading phase II candidate, the internally funded VGX-3100, aimed to treating HPV-related cancers, may draw partnership interest as it approaches its mid 2014 top line data. Such indicative early data (from preclinical- Phase II) would interest a large pharma looking to expand their pipeline. Take Merck for example. Given Merck's dire need for a stimulant to its oncology division (discussed here) and their past relations with Inovio, collaboration between the two would be ideal.

Conclusion

The announced deal was contracted at a great value for Inovio as this announcement still leaves the company in a position to move forward on several fronts. By partnering with a global industry leader, Inovio validated its technology while significantly removing any dilutive pressures due to being funded for at least the next two years. It was able to maintain enough flexibility to consider other partnering options while ensuring their ongoing arrangement with Roche advances. Overall, due to these points and the upcoming catalyst, Inovio is in a position to continue an "epic year" after seeing an underwhelming reaction, by Inovio standards, to a collaboration.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.