(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
The recent Roche/Inovio (OTCQX:RHHBY) (NYSEMKT:INO) deal has been widely covered by fellow SA contributors, so I won't dwell on its details. If you are looking for a primer some of the best coverage can be found here and here. Instead, the focus of this article is the technology the deal involves, and an interesting correlation between two similar companies.
Inovio uses electroporation to deliver its DNA vaccines (INO-5150 and INO-1800), via a patented delivery system called Cellectra. As far as DNA vaccines are concerned, electroporation is making use of electric pulses to temporarily destabilize cell membranes. This temporary destabilization allows a DNA vaccine to be inserted into the cell, which elicits an immune response. The concept itself is relatively simple and the electroporation process has long been on the radar of the biotech community.
Because of the fact the electroporation has been around for so long, and has (up until the Inovio deal) failed to gain any real traction in terms of commercial success, many investors have grown impatient and written the technology off. Over the last three to four months, this has led to extreme volatility in Inovio stock. Whether the technology and its application to cancer therapy will eventually become commercially viable remains to be seen-the two vaccines involved are not yet approved-but the $422M valuation the Roche deal puts on the two treatments suggests that at least one Big Pharma company believes it might.
Since the deal was announced on Sep 10, despite a close to record volume of shares being traded on that day and analysts from all over the web suggesting an upside correction in the company's market valuation was due, the response in the price of Inovio stock has been relatively mute. From a high of $2.55 on Sep 10, it now sits at $2.09. Having said this, and despite the considerable volatility in its price, 2013 has been stellar for Inovio holders; the stock opened the year at $0.50.
There is another company that has also received some coverage on SA, and that history suggests might stand to benefit from the Roche deal. This company is OncoSec (NASDAQ:ONCS). OncoSec's business also revolves around electroporation delivered DNA vaccine therapy. Its delivery technology, OncoSec Medical System (OMS) works in exactly the same way as that of Inovio, and in fact OncoSec licensed electroporation technology from it. The only real difference in the science of the two companies is that OncoSec delivers its DNA vaccines directly into tumor cells, whereas Inovio does not.
Take a look at the chart below showing Inovio versus OncoSec since early 2011.
The correlation between early 2011 and the beginning of this year is undeniable. For two years the companies rose and fell together. The early 2012 price hike started with OncoSec's release of its clinical development plan, and the announcement that it would initiate three Phase II open label, multi-center clinical trials. The November hike of the same year followed OncoSec's positive preliminary results from one of these Phase II trials, and positive interim results from a concurrent Phase IV trial. As is so often the case with emerging biotechs, these news results caused a flurry of investor activity, which was largely cancelled out in the weeks or months to follow-until this year.
As already mentioned, Inovio opened the year at $0.50, and OncoSec at $0.22. Since then, Inovio has rocketed to highs of $3 on August 5, and now sits at a fraction short of $2.10. OncoSec, on the other hand, topped out at $0.34, and has now settled at a little over $0.30. Why such divergence? One possible conclusion is this: Those investors who followed electroporation stocks were, up until July this year, undecided as to which company warranted investment.
A flurry of catalysts
On July 8, Inovio reported that its H7N9 DNA influenza vaccine component protected 100% of the vaccinated animals in preclinical trials. Then, after just two days, Inovio reported that its next-generation Pennvax-B HIV vaccine combined with Cellectra improved the effectiveness in a Phase I study. Then, on July 18, the company announced positive results from a mouse model in a new application of Cellectra, and six days later that in two animal studies the same technology presented strong indications that it has the potential to be a "universal cancer therapeutic". This developments seemed to offer these undecided investors a reason to favor Inovio, and the stock rallied more than 100% throughout July. Throughout August, the company released its second quarter financials, reporting cash holdings sufficient to finance the company through the first quarter of 2015, and announced positive results from animal testing of its malaria DNA vaccine.
The above flurry of positive catalysts has fueled the gain in Inovio stock, and the Roche partnership announced last month will likely add a floor to the gains, preventing the aforementioned downside correction that the stock has been subject to in the past.
The question now is, will history repeat itself and OncoSec stock price mimic that of Inovio, or has the correlation come to an end? Obviously, nobody knows for sure, but a look at OncoSec's calendar for the remainder of the year suggests there could be a similar flurry of catalysts that, if positive, might drive such correlation to continue.
These 2013 potential catalysts include:
- Presenting interim response data from OncoSec's Phase II melanoma trial along with long-term progression-free survival data from its previous Phase I melanoma program
- Presenting final data from OncoSec's Phase II melanoma trial and Merkel cell carcinoma trial
- Conducting an end-of-Phase II meeting with the FDA for OncoSec's melanoma and Merkel cell carcinoma program
- Presenting interim data from OncoSec's Phase II cutaneous T-cell lymphoma program
- Launching a pivotal Merkel cell carcinoma program
- Launching a Phase IIB metastatic melanoma program
While there is no guarantee that all, or indeed any, of the data involved with these catalysts will be positive, the remainder of the year will be a busy time for OncoSec, and if the company reports positive results it could attract the attention of investors in the same way that Inovio has over the past three months.
The goal of this article is merely to point out an interesting recent historic correlation (and a recent divergence) in the share prices of two companies with very similar operations. Just because the two stocks have drawn collateral gains and losses from one another over the past three years, does not mean this will continue. The advances of Inovio could represent its "winning" the electroporation battle, in which case the divergence will be considered logic in retrospect.
Furthermore, development stage biotech stocks are inherently risky. Roche may have indicated some faith in Inovio's technology and application, but both DNA vaccines are not yet FDA approved. The path to approval can be long and costly, and short-term catalysts like those mentioned above often prove not to be indicative of longer term outcomes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.