Since the flurry of Seeking Alpha articles several weeks ago, (with 47 comments each as of this publication), Inovio (INO) has drifted lower, at $1.75 on 11/4, down from $2.20, leaving the company with a market cap of $350mm. I believe the decline offers a compelling entry point here for a long-term play, and has been discussed in prior articles, the company's unique platform of immune therapies & vaccines (using synthetic DNA vaccines) coupled with innovative delivery systems is potentially a big winner, long term. Somewhat unusually for a smaller cap stock, the liquidity profile is compelling as well (1.5mm shares traded, or $3mm notional) for those seeking to amass a more sizeable position.
I will briefly outline my thesis, as many of these points have been made somewhat before, but it is necessary to clarify the pathway going forward here and focus on risk/reward opportunity.
I will be laying out the science in layman's terms here, for those seeking a more comprehensive scientific background please see prior articles which are much more comprehensive. The company's platform of vaccines can be used as therapies (as oncology targets) as well as for preventative measures. Their lead product (VGX-3100) is focusing on HPV infection, a wide open market, and focusing on the killer T cell "squad" team aspects of the immune system, whereby it seeks out pre-cancerous lesions and wipes them out. The market for this therapy is quite attractive: 300,000 women in the US have high grade CIN2/3 pre-cancerous lesions, many of which can become cancerous if untreated.
The company's relaunch in 2009 has galvanized interest in re-energizing a new core business strategy to bring in validating corporate partners to help develop the prolific pipeline across numerous oncology indications - including breast/lung cancer, prostate cancer, and extensive infectious disease candidates in HPV, flu, Hepatitis B. There has been some prior speculation that the company would do a deal with Merck (MRK), likely because many of the senior management has close ties with MRK - specifically, half the board came out of there (including the CEO), and they had a previous delivery-focused licensing deal in 2004.
· VGX-3100 is currently in a double blinded placebo controlled 148 patient phase II study, which has completed full enrollment, and should show unblended efficacy results in mid year 2014.
· Phase III clinical study trial is planned for other indications starting in 4Q/13, such as head and neck cancer and cervical cancer studies, with anal/genital cancer studies planned for later in 2014.
Valuation & Risk-Reward Considerations
Good Ownership: Healthy ownership at the management level - The CEO owns 12mm shares, the largest individual holder, David Weiner as co-founder owning 4mm in shares, collectively management owns 15%. 50mm in warrants and options, and 180mm shares outstanding, liquidity is fairly solid (2mm daily traded). Institutional ownership is about 10%, and another 20% of the shares are private investors who have held the shares for 5+ years. So I peg the true float at around 50% of the shares, or 90mm.
Roche Deal Validates Upside: Since announcing its partnership with Roche (OTCQX:RHHBY) the stock has declined 23%, which is counter-intuitive other than "buy the rumor sell the news" since the company had been foreshadowing this event for some time (without revealing the partner, just the idea of a Big Partner). The Roche deal had given INO $10mm up front with $415mm on the back end for INO-5150 and 1800 (prostate cancer and Hep B respectively). As laid out in prior articles somewhat, the value of this deal to INO today is likely worth $150mm+, based on the present value of execution against the milestones and the likelihood of success of achieving the tiers.
While the bulk of the payments are back end loaded, i.e. that $10mm up front, about $40mm in 2015, and then $120mm in '17 and beyond for each of the 2 programs, still, using an NPV framework and adjusting for a higher probability easily yields $200mm. This validating mechanism implies that the sum total of the rest of the pipeline and technology is only $150mm which seems weak based on comps and other platforms with late stage assets.
Using a screen relative to these prospects, I arrive at bull case scenario of about $4.50-$5 per share based on hitting the Roche milestones and further validation of lead compounds.
Bear case scenario would be trial failure on the lead compound and missing milestones on Roche which places downside at cash plus pipeline value of about $1 per share, or -40% from today's levels. So a downside of 40% vs. upside of 250% at stated deal values appears like an intriguing entry point.