(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
On Thursday Inovio (INO) announced in a press release that it pre-clinical results indicated that its newly developed interleukin 33 DNA-based cytokine immune activator increased the potency & efficacy of the therapeutic response to the DNA vaccines. While early, the results imply that IL-33 could potentially be an effective immune booster vs. cancer & chronic viral infections (which are the company's primary lead indications). The press release claims that the DNA based IL-33, when paired with Inovio's CELLECTRA electroporation device, demonstrated rapid & complete tumor regression on HPV-16 based cancer bearing mice, and induced potent CD4 and CD8 T cells (or killer T cells).
Why this Matters for INO's Immune Activator Portfolio
As covered previously on SA, INO's portfolio of DNA vaccines/immune boosters act to either enhance (activate) therapeutic T cells or preventive antibodies, modulate the type of immune responses produced by the vaccine, impact durability of immune responses, and drive immune responses to sites of infection, e.g. mucosal surfaces. Different immune activators can therefore play unique roles in achieving desired immune responses generated by DNA immunotherapies and vaccines.
INO has several shots on goal with its immune activators and the latest results indicate that it perhaps has an additional growth leg. Its lead product, SynCon vaccines, when combined with proprietary electroporation tech, can generate best in class immune responses (specifically T-cell responses). Other products currently include the PENNVAX DNA vaccine (which it has previously studied in combined with its DNA-based IL-12 immune activator).
IL-33 is an addition to Inovio's current portfolio of cytokine gene immune activators, which are IL-12 (being developed for HIV and will be evaluated for cancer in 2014) and IL-28 (being developed for HCV), and Inovio owns the patents on these three molecules.
Robust Pipeline: What's Next?
As covered previously, the latest results stack up well in INO's overall cancer opportunity & pipeline prospects. Most notably, INO is currently competing against Advaxis (ADXS) to develop the first vaccine for cervical cancer. INO's VGX-3100 uses 4 antigens through electroporation (vs. ADXS single antigen and plasmid L. monocytogenes delivery). INO's phase I results completed in2010 stack up well vs. ADXS's 2012 phase II results, although the patient counts are much lower (18 vs. 110), respectively.
My thesis remains intact as I have covered previously: 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.
Compelling Point: 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.
INO currently trades at a market cap of ~$500mm with $40m in net cash (no debt) after raising $15m in cash in March of last year. At current levels, INO appears interesting merely considering the Roche partnership economics.
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 $5 per share based on hitting the Roche milestones and further validation of lead compounds.
Bear case scenario would be as follows: (1) I ascribe a 40% probability of trial failure on the lead compound due to the validated PC results, methodology of action, and previous data pathway; (2) I ascribe a 25% probability of missing milestones on Roche and then (3) the overall cash position plus pipeline value as baseline. Putting these together at a discounted cash rate leaves us with a downside position of $1.50 per share, or -40% from today's levels.
Another key risk that should be contemplated that could temper the bull case is the competitiveness of the Hep B market. Specifically, while the market is expected to grow to $5b by 2020 (up from $3b in 2012) as per SS Analytics (Private site), the launches and successes of Pegasys, Tyzeka, Viread have compelled others to swarm the field, potentially limiting the market capture from INO's '1800 compound.
Nevertheless, an overall up down of $5/ $1.50 is still a wide spread, but potentially intriguing to take a closer look into the data.