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Inovio (NASDAQ:INO) just closed a $422 million deal with Roche Pharmaceuticals (OTCPK:RHHBF) changing the whole perception of the company and its technology. The deal covers only two of Inovio's current pipeline of nine drugs. The drugs included in the partnership agreement are INO-5150 for prostate cancer, and INO-1800 for Hepatitis B.

This deal fundamentally revalues Inovio. One of the largest pharmaceutical companies in the world feels that Inovio's DNA vaccine technology, and electroporation technology is worth investing over 400 million dollars in.

Roche feels that INO-5150 and INO-1800 are worth 422 million, leaving us with the question of what is the rest of the pipeline worth? There are 10 other products in Inovio's pipeline. Certainly any honest person would have to say the value of Inovio is much higher than 422 million now, and with today's closing market cap of $458.85 million the company is very undervalued. I believe that the universal Flu vaccine is worth much more then $422 million by itself. I will give a case study later in this article to support this.

Inovio has tuned in to a controversial stock in recent months. Many do not believe its technology will be successfully developed, others speak about its long history and some bad management decisions and plenty of dilution. I would say that all of these are valid concerns.

The deal with Roche announced today gives us the most qualified answer to these questions. One of the largest pharmaceutical companies on the world is saying that it believes Inovio's DNA vaccines will be successful and make it to market, and indeed after careful study, DNA vaccines are worthy of investment and ready to make it to market. Roche is also saying it believes in Inovio's electroporation technology since it is necessary to deliver the two vaccines it partnered on. Further more, this deal gives an already well financed Inovio another $10 million dollars up front and the milestone payments should be enough to keep Inovio financed into the foreseeable future greatly reducing the chances of any more substantial dilution.

Let me give a very quick and accurate history of VGX/Inovio. I mention VGX because that is the root of the current company. Many have mistakenly thought that Inovio is the root of the current company. I have seen many postings about Inovio's 30 year history here and on many message boards as well. It is true that you can trace the history of Inovio back 30 years, butt that is quite misleading.

The current company, which is the VGX/Inovio combination, starts off in 2001 with Joseph Kim and his former teacher/advisor from the University of Pennsylvania Dr. David Weiner. Dr. Weiner is widely credited as the Father of DNA Vaccines. He is the inventor of naked DNA technology. Dr. Joseph Kim did his doctoral dissertation on DNA Vaccines as well and has written many papers in the field.

Back in 2002 VGX's lead drug candidate was VGX 410 for treating HIV which did fail. Few biotech companies do trials while being private. Most that have a failed product weather public or private go out of business. VGX had a total of 3 trials it did in about 3 years and they all failed. The ability of J. Kim to manage these failures and still keep in business and raising private money is a testament to his excellent management and his ability to do much with very little money. He was constantly in touch with his major investors. Good or bad he told it all.

In 2005 VGX decided to take over a publicly listed company in Korea called Dong Il Fabric, and turn it in to VGXI and make it an international division of the company. So VGXI was founded in 2005. Dong Il still operates as a profitable division of VGXI today. Their lead drug for swine flu was licensed from Inovio back in 2009-2010. It is the same flu vaccine that Inovio is having such great results with in the US.

Advisys take over that VGX did in 2006, which brought the company the manufacturing plant in The Woodlands, Texas, and GHRH technology and an animal health division. All of this for less than 6 million dollars, that was purchased mostly with VGX stock. The reason Inovio is still the name of the company is it was the public entity during the takeover. Given it was a known public entity and VGX was not the name was kept. This may have been a mistake. You can view much of this story in my interview with Joseph Kim back in February.

Now why you should view Inovio as a different entity than the old entities you are taking about is as follows:

1. VGX management took over all but one of the top postings.

  1. Most of the current technology that is used by Inovio is VGX technology. Syncon was developed by VGX (David Weiner) as well as the current pipe line which came from VGX. Indeed the Hep C Cervical cancer vaccine carries the test name of VGX 3100. If you go to the Inovio web site you will see many VGX designations on the pipe line.
  2. The Inovio drugs have been developed since the takeover have been developed using the Syncon system.
  3. The core of the Cellectra Electroporation system came from the VGX electroporation system. The current model is a fusion of the best of Inovio's and VGX"s systems.
  4. The majority of the board of directors was replaced by VGX directors. Finally, the head of the Scientific Advisory Board for VGX, Dr. David Weiner is now head of the Inovio Scientific Advisory Board. Dr. Weiner is the inventor of much of the technology Inovio is developing today. Just as important is Dr. Joseph Kim who has worked on much of this technology as well and is the current CEO of Inovio.

All the VGX trials and takeovers, not to mention research and development was accomplished with 40 million in private funding raised by Joseph Kim. This is a testament to Joseph Kim's amazing management and his ability to reinvent the company and turn in different directions as needed.

When you buy Inovio today, much of what you are buying is Dr. Joseph Kim and Dr. David Weiner. These two men head up the technology that Inovio is developing. All investors interested in Inovio should do a good bit of research of both men. Both have long histories and are at the top of their fields.

Next you are looking at their drug pipeline which is extensive. I do not want to cut and paste data from the Inovio web site, so you can find the Investor summary, and pipeline data at this link http://ir.inovio.com.

Let me narrow this down to two easy points. When you buy Inovio you are buying the SynCon system and Inovios's electroporation system Cellectra.

The SynCon system is a "plug n play" construct that allows the construction of DNA vaccines rapidly. Inovio scientists simply plug in the synthetic DNA fragment into this construct to develop the vaccine. This technology can also be licensed to other companies or Inovio is capable of working with companies directly to implement their DNA fragment into a new DNA vaccine. This system is what has allowed Inovio to have such a diverse pipeline with such low development costs. This system also allows vaccines to be developed very quickly.

The ability of the SynCon system to be licensed or Inovio being able to work with other companies for vaccine development is not something I have seen mentioned in the press. This represents an area that Inovio can expand in to any time in the future with no RND and little start up costs.

Synthetic DNA vaccines are substantially cheaper to produce then their current counterparts, and are more stable which allows them to be transported and stored in environments that have limited or less refrigeration. This will allow wider deployment of vaccines in the third world.

It is a given that most of the pipeline is in the Preclinical stage of development. Which is the stage of lab and animal testing. There are four products that are in human trials, three in Phase 1 and one in Phase 2. Details can be found here http://www.inovio.com/clinical-trials/.

With good trial data on HIV recently reported and published in a peer reviewed medical journal and excellent preclinical Flu and Ebola/Marburgh the company has captured more attention then ever.

The real question is what is this worth? While any answer is speculation, we can make educated guesses to help show some valuation. Many people have posted opinions that the vaccine business is a very low value, and therefore any product approved. I could not disagree with this more.

First as stated above Synthetic DNA are substantially cheaper to produce. So with all the market forces being the same the Synthetic DNA vaccines will be much more profitable. I have discussed the cost differential with many industry sources, and the consensus I have gotten is the Synthetic DNA vaccines will be 35 to 45 percent cheaper to produce. This would be a very nice margin improvement for any company and would take the low margin vaccine industry to medium margin all by itself. That is not the only driver of value and profit. The fact that these vaccines will be more effective and carry no chance of infection from the disease you are vaccinating against will build substantial value.

I want to use one of the most common vaccinations that Americans face and talk about the profit potential. My choice is Flu and the vaccine is the Inovio's universal influenza vaccine for seasonal flu INO-3510.

According to ABC News 128 million people in the US received Flu vaccinations in 2011. I think we can see this is huge profit potential. According to the CDC Vaccine Price List retail cost for adult flu vaccine runs between $9.50 and $8.15. Add a fee of about $10 to $15 for getting the shot and that is how much your vaccination costs.

Given that Inovio's vaccine cannot cause you to get the flu, and that the vaccine is a universal flu vaccine, a vaccination will not be needed yearly. A reasonable time frame for vaccination will be about once every 3 years to start. Inovio will be able to charge a substantial premium for their vaccination. The cost for an Inovio vaccine could be as high as $80 per dose. For our purpose here, let us assume that Inovio decides to charge $50 per dose. With $15 added on for getting the shot itself this drives the cost to $65 for an Inovio vaccine every 3 years. This compares very favorably with the same cost of the current vaccine of about $22 per year.

Given these numbers and the additional benefits of the Inovio vaccine, we can easily see Inovio charging as much as $100 for its vaccine alone. The simple reason the vaccine is a universal vaccine and therefore will not be subject to failure by the CDC picking the wrong strains of flu to vaccinate against would make it a fairly easy sale to both insurance companies, businesses and patients. Also consider that fact that the vaccine will be only needed every 3 years (possibly longer), and we can reasonably say that the Inovio vaccine will dominate the market if or when it is released.

Some simple math will help us make a reasonable value for one year. In the first year we will assume that 70% choose the Inovio vaccine over the older vaccines. Also given the lower costs of production and the ability of Inovio to charge a premium price we will say the profit margin to be a reasonable 50%. So we have a cost per dose of $50 at a 50% margin which leaves us with a margin of $25 per shot. 70% of 128 million is 89,600,000 shots leaves Inovio with a hefty two billion two hundred and forty-million (2,240,000,000) profit. That is big money even for Merck and Pfizer.

These numbers are based on Inovio being first to market with a DNA based universal Flu vaccine. It is possible that others could make it to market first, or during the first year and take part of the market.

The disadvantage is with the 3 year vaccination window, you vaccinate the entire US population in 3 years. It is also possible the vaccination window will be pushed to 5 years or more. Of course in this period Inovio is also getting approval in many other countries.

It is also true that other companies are working on Synthetic DNA vaccines for flu as well. Most are not universal vaccines, but a few are. None have demonstrated as good clinical data as the Inovio vaccine yet. Even if another company has just as good a vaccine as Inovio, both will most likely command a substantial premium.

Yes, few vaccines will be given yearly like the Flu vaccine. With Inovio's efficiency in production of its SynCon vaccines which brings costs down substantially over the current vaccines, even once a lifetime vaccines become much more profitable. Finally I would have to ask how much would the homosexual community pay per dose for a successful HIV vaccine. Followed by the heterosexual population. Gardisil costs about $360 for the total of 3 shots needed. I believe an HIV vaccine could command as much.

We have not even covered Inovio's vaccines that treat the disease, and some even prevent and treat. I believe that this portfolio of vaccines will all command substantial price premiums and their low cost of manufacture will also boost profits.

Now on to electroporation. Inovio has a vast patent estate related to this area. They also have the most clinical experience in this area, and they have the best clinical and human results in electroporation so far. Even if all of Inovio's drug pipeline fails, electroporation could easily make the company profitable.

Electroporation is the delivery system Inovio and other companies use for the delivery of DNA based products. So far it has proven superior to other delivery methods for DNA product delivery systems, which include virus delivery methods (often called Vector based) or chemical (often called adjunct) based systems. Given the growth of DNA vaccines as an industry, and other DNA based treatments, few people doubt that DNA vaccines or DNA treatments will make it through FDA approval eventually.

When this happens, a delivery system will be needed. The best delivery system is Inovio's Cellectra and Inovio is working on many more revolutionary methods to make electroporation more effective, easier on the patients and easier and faster to deliver.

The best comparison I can make for this delivery technology would be like owning the patent on the hypodermic needle and syringe today. What would that be worth?

Much has been made about Inovio needing further dilution to execute its business plan. I will point to the last Inovio quarterly report "Based on management's projections and analysis, the Company believes that cash and cash equivalents are sufficient to meet its planned working capital requirements through the first quarter of 2015." The company can also exercise a few million more shares in its current ATM agreement and raise more capital as the stock price increases.

I will also point out that Inovio is only funding 2 out of 12 products on its current pipeline, demonstrating that Inovio has the ability and desire to use outside funding and partnerships.

With all things the Devil is in the details. It is possible that none of Inovio's drug candidates make it to market It is also possible that another company comes up with a better delivery system for DNA base products.

Period Ending

Jun 30, 2013

Mar 31, 2013

Dec 31, 2012

Sep 30, 2012

Total Revenue

786

1,455

1,135

855

Cost of Revenue

-

-

-

-

Gross Profit

786

1,455

1,135

855

Operating Expenses

Research Development

4,411

5,115

4,443

4,972

Selling General and Administrative

3,047

2,974

2,919

2,674

Non Recurring

-

-

-

-

Others

-

-

-

-

Total Operating Expenses

-

-

-

-

Operating Income or Loss

-5,672

-6,634

-6,227

-6,292

Income from Continuing Operations

Total Other Income/Expenses Net

-2,162

-1,388

4,738

-577

Earnings Before Interest And Taxes

-7,835

-8,022

-1,489

-6,869

Interest Expense

-

-

-

-

Income Before Tax

-7,835

-8,022

-1,489

-6,869

Income Tax Expense

-

-

-

-

Minority Interest

14

14

13

10

Net Income From Continuing Ops

-9,853

-8,844

-659

-6,122

Non-recurring Events

Discontinued Operations

-

-6,634

-

-

Extraordinary Items

-

-

-

-

Effect Of Accounting Changes

-

-

-

-

Other Items

-

-

-

-

Net Income

-10,853

-8,844

-659

-6,622

Preferred Stock And Other Adjustments

-

-

-

-

Net Income Applicable To Common Shares

-10,853

-8,844

-659

-6,622

As you can see from the table above, Inovio burned through almost 11 million dollars last year. The Roche deal takes two drugs that the company was developing on its own and moves the cost of development off Inovio's balance sheet. However, both these drugs were preclinical, which means the development costs were low. Inovio needs to keep an eye on the cash burn or they could run into problems.

Roche give Inovio 10 million dollars up front, which could cover Inovio for another year at the current cash burn. The rest of the deal is in milestone payments. The risk here is that one or both of the vaccines fails to meet a major milestone. This could cause the company to not receive any milestone payments. However, given the nature of DNA vaccines, they will most likely pass the Phase 1 human trials. Specific milestone details are not known yet, and even if they pass Phase 1, they could still miss the milestones set by Roche. I see the most danger past Phase 1. Inovio was financed until the end of 2015 before this deal, the 10 million dollar up front payment should keep them financed for another year on its own, plus any milestone payments. It appears that Inovio's risk is now more drug performance related then financial.

So how much is all of this potential worth? I know it is impossible to accurately rate potential. I do not want to state my personal belief in this area. I will only say that I believe that Inovio is worth much more then $4 and invite you to make your own decision.

Disclosure: I am long INO.

Business relationship disclosure: I have had past business relationships with VGX (when it was private). I was an early investor in VGX back in 2002. I was involved in the takeover of Dong Il Fabric, which led to the formation of VGXI. My partner and I did 10% of the bridge financing. I was also involved by investing additional money in the Advisys takeover and the formation of VGX Animal Health. I own 10% of VGX Animal Health, which is a private company (Inovio owns the other 90%). I own a substantial long position in Inovio, as do some of my family. I am not receiving any compensation for writing this article (except from Seeking Alpha).

Source: What Is Inovio Worth After The Roche Deal?