Back in the late 1970s and the early 80s, common sense indicated that we would not witness the creation of any new pharmaceutical companies. Building up a new infrastructure and paying for all the R&D was too great a cost to compete with the existing powerhouses like Syntex and Marion Labs. But as we know today, biotech companies like Genentech (now a member of the Roche Group) and Amgen (AMGN) proved common sense wrong. Much to the surprise of those at the time, a group of innovative entrepreneurs not only built new pharma companies, they created an entire industry based on new science. As a result the scientific community viewed the groundbreaking medical developments of the time, while Wall Street witnessed stocks double in price the day of their IPOs. It is events like these that draw my attention as an investor, and companies that such as Inovio (INO), that are worth another look.
Today there are hundreds of public companies claiming to be biotech firms; as a result it only makes it harder for investors to pick the winning stock. However, the key to biotech investing is to focus on a few stocks that share characteristics with high flyers of the past. The features of superior biotech firms are listed below, and as you will see they appear mostly to be common sense.
- Great management with relevant experience
- A strong technology platform that will support multiple product opportunities, not a single product play
- Ties to top academic centers
- Product development strategy that will yield high-value products in our lifetime
- Access to financing other than the stock market, like significant corporate partnerships
- Avoidance of fads
- The ability to mesh science with business
Talk to any long time industry investor and they will say the same thing. No matter how much the world changes, the key features of winning companies remain the same. Now let's apply this logic to Inovio and see how the company stacks up.
Management/ meshing business with science: Great management is especially important in biotech companies, were the largest asset is a technical team working to create the first product. In a stock market that is mostly concerned with product revenues instead of science, it is important that management be those with hands-on experience in drug discovery and merging academic scientist with business people.
Let's start with Joseph Kim, the president, CEO and director of Inovio Pharmaceuticals, who joined Inovio on June 1st 2009. Just by taking a glance at a short biography that can be found here, it is clear that Kim is by no means someone who has to learn on the job. Despite the fact that while working at VGX, all three of the companies drugs failed to pass FDA trials, Kim was able to roll with the punches in the form of raising private money and keeping in touch with his investors. Though his persistence and fiscal responsibility, Kim has proven himself a flexible and reliable Piece of VGX's, and Inovio Pharmaceuticals management team.
Next we have the less talked about CMO, Mark L. Bagarazzi. Mark, who also has a short bio that can be found on Reuters, boasts an impressive resume. Before joining Inovio in 2010, Bagarazzi was Director of Worldwide Regulatory Affairs for vaccines and biologics at Merck & Co. (MRK) While at Merck he led ongoing vaccine product and regulatory development of Merck's ZOSTAVAX®, the vaccine for shingles. He was responsible for global regulatory activities related to Merck vaccine candidates for the prevention of HIV/AIDS. He also led the regulatory process through to FDA approval of RotaTeq®, Merck's vaccine against rotavirus.
As shown above, all it takes is a fragment of Marks biography to show that he has direct hands on experience with the drug development process and is an important player on the Inovio management team. It is the act of getting people like Mark to join your company that shows you have real potential.
Strong technology platform that will support multiple product opportunities: The most electrifying science in the world isn't worth investing in unless it can be used to create products with clinical relevance. Furthermore, you don't want a company where the technology buzz happens too far in advance. In stocks that make premature run ups, savvy investors will take profits off the table and wait for evolving product opportunity. Lastly, make sure any company actually owns the technology it will use for its product development. You don't want to end up like Millennium Pharmaceuticals, who were taken by surprise in 1995 when Amgen snagged the obesity gene project out of Rockefeller University, right out of the lab of a Millennium co-founder!
Inovio has also done a good job meeting this characteristic. With over ten products in its pipeline, Inovio is in the process of developing vaccines ranging from the treatment of cancers to infectious diseases. When investing in Inovio, you by no means put all your eggs in one basket. On the subject of premature run ups, it's safe to say there have been at least 2 in the company's history. One obviously in 2000 when the stock went over 40 a share, and another in 2004 when we saw prices over 6 a share. Since then Inovio has come a long ways, both in drug development and management. One thing is clear, the current elevation in stock price is by no means premature due to the fact that there have been several events that most certainly revalue the stock in a lasting way. On the subject of intellectual property the company has also done well. As mentioned in the conference call on September 10th Inovio holds and expansive global patent portfolio. As can be seen on Inovio's web page under "intellectual property" This portfolio encompasses all of the following:
- SynCon® DNA vaccines for specific disease areas, including the proprietary consensus gene sequences of the targeted antigens
- DNA-based adjuvants
- DNA vaccine formulations
- Electroporation delivery products in clinical and near clinical development as well as next-generation electroporation devices
- Broad patent coverage of core electroporation parameters and methods of application.
Ties to top academic centers: Early in a biotech company's evolution, essentially all of its technology comes from its academic co-founders and collaborators. Never the less, even well established companies benefit from academic ties to researchers who can contribute new ideas, tools and compounds that might lead to new products.
Again we see a winning trait in Inovio. With all the current hype about the Roche deal, it seems as though everyone has forgotten about Inovio's ties to the University of Pennsylvania and the University of Southampton. Inovio's partnership with the University of Pennsylvania is the major source of Inovio's synthetic vaccine research and development. The underlying technology was developed in the laboratory of Professor David B. Weiner, Ph.D., at UPenn. Dr. Weiner is a pioneer in the field of DNA vaccines and serves as chairman of Inovio's Scientific Advisory Board. At the same time The University of Southampton is advancing an investigator-sponsored clinical study of its leukemia DNA vaccine using Inovio's electroporation delivery technology. The company has strong ties to both universities showing that it is rooted in academia as well as in the business world.
Product development strategy that will yield high-value products in our lifetime: This may seem obvious but many investors can get their money tied up in a company whose product will take decades to be fully realized or never put to use at all. The Key is to invest in companies trying to make drugs that are either so effective and treating a life treating illness that a small patient group is willing to pay any price or create a more reasonably priced drug that is used to treat a much larger patient group who will use the drug on a regular basis for years. Inovio seems to be doing a little of both. Some of their cancer drugs are targeted at specific groups, such as INO-5150 for prostate cancer. While VGX-3400X is intended for the treatment of Influenza, which has a much larger patient group in other countries. As for the in our lifetime requirement, several of Inovio's drugs are in or about to start Phase I studies.
Access to financing other than the stock market, like significant corporate partnerships: As many know it can take upwards of 150 million dollars to develop a new drug. This is why smart investors look for companies that have access to funding other than Wall Street. Usually this means corporate partnerships. As we all know, Inovio has done fantastically in this area. Not only does the company have the much talked about Roche (RHHBY) deal that took place on Tuesday, but let's not forget that a 2004 deal with Merck & Co. gave worldwide non-exclusive rights to use Inovio's electroporation technology for intramuscular delivery of certain proprietary DNA vaccines. The Merck deal, while not as major, also provides the company with milestone payments. These deals, especially the former, not only provide the company with a source of cash but also add to the credibility of Inovio. The deal making strategy currently being put to use by Inovio also allows for partners like Roche to build up the research infrastructure of the company, something that will bring lasting value to Inovio.
Avoidance of fads: Many companies in any sector may put buzz words and fads to use. Every so often a new company will come along with a truly novel idea or technology and make a scene on the exchange. Afterwards existing companies that are struggling to keep their cash balances from slipping down become jealous of the attention being grabbed by a hot new thing. Management then tries to find some way to attach these buzz words to the struggling company, no matter how outrageous it is. One way an investor can tell if they are getting the real thing or just a buzzword chaser is to look at a company's press releases for the past 6 months. If the newly announced strategy makes you wonder or is full of buzzwords than you have found a company who is chasing a fad. Inovio checks out pretty easily here. If you read though their PRs it's clear that they have been doing the same thing for a long time. There have been no major changes in direction, and it's apparent the company isn't hurting for cash. Inovio is definitely not a fad chaser.
With the recent Roche deal and active management at Inovio Pharmaceuticals there is new interest in the company. At the very least, the company does not show any huge red flags as of today. Perhaps, for now, the safest investing strategy would be to wait for the stock to fall a little farther from its recent highs or for more news on drug development. Although it will be years before any products actually hit the market, I think the company is defiantly worth a closer look. At the very least, Inovio is a quality biotech that has come a long way in the past few months and should, for now, be on everyone's radar.