No matter how you spin it - whether long or short - Roche's $400 million plus partnership with Inovio Pharmaceuticals (INO) is good for both Inovio and investors. Currently, shares are trading higher by 15%, making its one-week performance 50%-- although this deal might have major implications beyond what is seen with the naked eye.
At the surface, we see $10 million upfront for two preclinical vaccines-- prostate and hepatitis B products-- milestones up to $412.5 million and a double-digit royalty on future sales. As we dig deeper these positive factors limit the threat of dilution, support the possibility for additional partnerships or a takeover, and they present as major news for both immunotherapy and electroporation as industries.
What's The Deal?
A partnership with Roche might be Inovio's biggest news in the company's history, indicating that Inovio is on track to gainful bounties. In many ways, this partnership was not expected. For the last several months investors had been speculating about a potential Merck partnership or buyout -- adding to a 2004 licensing agreement with Merck -- which then led to Inovio's mid-year rally.
Instead, the vaccine powerhouse Roche saw upside in Inovio's "preclinical" vaccines: INO-5150 for prostate cancer and INO-1800 for hepatitis B. I emphasize the word preclinical because these are two programs in the earliest stages of development, with only animal testing. Roche did not license any of Inovio's more advanced programs such as its cervical dysplasia, HIV, or influenza segments, all of which use synthetic vaccines and electroporation for delivery.
Hopefully, Inovio and Roche will have a long and lucrative relationship. Investors should note that the $11 million received will add to the company's $23.5 million in cash, but larger cash payouts are unlikely to be awarded in the earlier stages of development. With that said, $412.5 million in potential payouts is more than enough to properly develop these two candidates and also limit the amount of dilution in shares of this company.
Overall, I think this is quite the boon for Inovio-- and the possibility does quiet a lot of naysayers. But let's look at two other beneficiaries to this deal.
Electroporation Is Validated
Inovio has been developing electroporation-based vaccines for many years-- and many considered it to be a dead technology. With this partnership, Roche will gain access to Inovio's electroporation technology, which is used to administer Inovio's vaccines.
Electroporation is used to bypass the body's natural way of fighting foreign substances. The process uses electrical pulses to create temporary pores in cancer cells. These temporary pores then allow for permeability-a way for a therapy such as a vaccine to access the cancer-while also preventing collateral damage and spillage to other body systems. In theory, this approach allows for less of an agent to be used whilst improving uptake--with fewer side effects. So far, we have seen this at work successfully.
Firstly, both of Inovio's partnered preclinical vaccines successfully induced the immune system's T cells in animal studies. The company's HIV study also saw increased CD4 and CD8 T cell responses. In addition, electroporation technology stimulated blood vessel growth in another Inovio study. Hence, electroporation is proven viable and is clearly one of the reasons that Roche found Inovio attractive.
Another electroporation company is OncoSec Medical (OTC:ONCS), using the same technology, though the company does not use synthetic vaccines. Instead, OncoSec uses IL-12, as an immunotherapy, and bleomycin as a chemotherapy. With bleomycin, just 1/20 of the traditional dose is required to achieve effective results, thus proving the capabilities of electroporation to increase uptake.
Much like Inovio, OncoSec has produced great clinical results with its electroporation approach. In its metastatic melanoma study, 45% of treated lesions showed a durable response at three months, nearly twice as effective as Amgen's TVEC. In treating Merkel cell carcinoma (MCC), all patients saw elevated levels of IL-12 and 33% saw elevated levels of CD8+ T cells in targeted tumors.
In 2013, both electroporation plays have appreciated nicely. With electroporation producing good data, and Roche's acquisition adding a little spark to the optimism, investors must feel confident heading into a data packed year. Most notably, Inovio will present data for several of its early stage studies, and OncoSec will be presenting Phase 2 data on both metastatic melanoma and MCC, an orphan indication, meaning the future could be even better for electroporation stocks.
Immunotherapy Trades Lower, But Shouldn't
Inovio is the first company to have a synthetic vaccine create an immune response, and because its goal is to stimulate the immune system, Inovio is in many ways an immunotherapy company. In fact, Inovio says that it develops multi-antigen DNA immunotherapies. Naturally, Inovio is in fact an immunotherapy company.
While a major partnership with one of the largest pharmaceutical companies in the world should seem like a bonus for immunotherapy, most developmental companies in the space are trading lower following Inovio's news. As of this moment, Dendreon (DNDN) and NewLink Genetics (NLNK) are marginally lower, while Vical (VICL), Oncothyreon (ONTY), and ImmunoCellular Therapeutics (IMUC) have losses greater than 1%, and Galena Biopharma (GALE) is trading lower by more than 5%
Among those mentioned, Dendreon's inability to turn a profit and its recent decline in revenue have created some rumors that a large pharma might try to acquire and integrate the company's drug, Provenge, into their business. The partnership with Inovio doesn't hurt these chances; in fact it might show that companies like Roche are looking at immunotherapy companies.
NewLink Genetics has a platform called "HyperAcute" that is being tested to treat countless cancers. With Inovio's electroporation approach, also a system of sorts, I am a bit surprised that NewLink isn't trading higher following the partnership news.
Galena, the biggest loser in the space, even has a collaboration with Roche where it is testing Herceptin with its vaccine, NeuVax. Galena's NeuVax is believed to treat the remaining 50% of breast cancer patients who do not qualify for Herceptin and, in a Phase 2 trial, saw breast cancer recurrence decline nearly 80% compared to the control. Thus, with the connections, and Galena's notable partnership with Teva, I am surprised to see this stock trading lower.
Nonetheless, despite the initial industry reaction, Inovio's partnership with Roche is a bonus for immunotherapy. It simply shows that big eyes are on this emerging space.
Unfortunately, after Inovio's 15% gains on Tuesday, we probably won't hear too much more about this partnership in the future, with the exception of the occasional analyst outlook or investor blog. This is news that we as investors won't see materialize for many years, as it could be 5 years before significant data is known or 10 years before we know if Roche made a good investment into Inovio's preclinical products.
With that said, I think investors should view Roche's partnership not as a verification of future success, but rather a level of interest, or an investment into Inovio's therapeutic approach. It shows that either Inovio is very good at selling itself to big pharma, or that big pharma believes Inovio's multi-antigen DNA immunotherapy electroporation approach is at least a piece of future medicine. If so, implications are quite bullish for a large industry, making this a rather important partnership.