On February 26, 2014, Inovio Pharmaceuticals' (NASDAQ:INO) CEO, Dr. J. Joseph Kim, announced that he would access his recent S-3 filing for a multi-million dollar capital raise.
In the following interview from March 4, 2014, Dr. Kim, Inovio CEO, tells why he did it and what investors can expect from Inovio going forward. My interview follows:
BRG: Good afternoon, Dr. Kim, and thank you for taking the time to speak with me today.
BRG: On February 26, 2014, you announced a public offering priced at $2.90. Today, you closed that offering, raising a total of $63.25 million. It appears that you must have over 100 million dollars in cash. You had previously indicated you had a two-year operating runway, based on available cash. Some would consider this new cash balance a small war-chest rather than a comfortable cash balance. What do you intend to accomplish from this capital raise?
Dr. Kim: Yes, we did have two years' cash, and we said that at this time we did not really need additional cash. That doesn't mean that additional cash would not be useful. While two years of cash is a comfortable position, one year of cash is not. A year goes by fast, and when the market delivers an opportunity to secure more capital, most people would consider that to be a prudent step. One of my mentors, Dr. Hubert Schoemaker, who was the founder and inspiration of Centocor, told me when I first started Inovio, "Raise cash when you don't need it."
We can accomplish two things with this increased cash position. Not only do we roughly double our operating runway, we will accelerate certain programs. Even though we do not know how the Phase II cervical dysplasia data will look when it comes out mid-year, we are certainly optimistic. We will use the funds to complete the preparatory work for a potential Phase III study, which would enable it to begin in the shortest possible time frame after the Phase II data. In addition, we will build out several new cancer antigens as products. By the end of this year, Inovio could have the largest arsenal of active cancer immunotherapy products. Furthermore, as I mentioned in our last interview, we have technologies that we've only recently highlighted, including our DNA monoclonal antibody technology and our DNA-based cytokines as immune activators. This cash allows us to be more proactive in advancing these technologies, as well as preclinical and clinical studies of products based on these technologies. All of these advancements have the potential to significantly increase shareholder value.
BRG: Some shareholders question your timing and the need for more capital. What was your purpose for raising this money? Why now?
Dr. Kim: In our last interview, when we discussed the S-3 filing, I mentioned that capital can also be valuable in helping us negotiate with additional large pharma companies regarding prospective partnerships. Last year, we raised money at $0.55, because we felt we needed to enhance our balance sheet as we were advancing our negotiations with Roche. Following this latest financing, Inovio will be able to negotiate our deals from an even stronger position. I think the difference between last year's financing and this new one is dramatic and much more advantageous for our shareholders.
BRG: With key data coming this summer and the potential for a much higher valuation, why wouldn't you wait for that data to come before raising more money?
Dr. Kim: Raising money can be very much a one-in-the hand, two-in-the bush scenario. Do we know what the data will be? No, we don't. The study is still blinded. While I have a high level of optimism and confidence, we can't guarantee what the data will look like and how that will affect investors' perception of Inovio. Secondly, do we know what the market will be doing in the second half of the year? I don't. The overall market was testing its highs. The biotech market chart was moving to higher highs. In the past, we've had the impact of foreign markets like Greece and Spain dramatically impacting global markets. Now we have geopolitical events in the Ukraine causing a market setback. If at any point the market were to take a significant step back, raising capital might then be on terms unfavorable to the company. Our management team and Board wanted to be prudent. It's that simple.
BRG: Just prior to announcing the follow-on offering, the price per share ran to a new recent high of $3.95 a share. Once announced, the stock pulled back approximately 24% to a recent price of $3.00. You recently said that you felt the stock was greatly undervalued at levels below the three-dollar range. Can you explain how you agreed to a price of $2.90 a share in the follow-on offering?
Dr. Kim: One of the questions we have continually received in recent times was, "Why do you not have any real institutional ownership as a percentage of shares, or notable individual institutional holders?" We have also time and again faced the challenge of doing financings with hedge funds that required warrants and do not hold the stock long term - it gets the job done, but it is frustrating.
This round did not include warrant coverage, and we were able to bring in credible fundamental investors. I cannot tell you who invested in this round. That will become visible around May 15, when institutions have to finish reporting their March 31st positions. I will tell you, however, that in this round, we more than accomplished our goal of starting to transition our shareholder makeup. We landed some of the premier "blue chip" biotech institutional investors of the world. We had demand for the financing that far exceeded what we actually raised and cut all the funds back. I can't guarantee what will happen tomorrow, next week, or next month, but so far, I would suggest that this financing was well-executed.
BRG: In actuality, you must have been pleased with the strength of the stock following the announcement of the offering?
DR. Kim: I would note that in many instances a stock price will actually retreat from its recent level during a financing process. Then you add the negotiated discount from the market price to arrive at the financing price. If this had been the case, this financing would have been at much lower prices. The market, i.e. the institutional investors introduced to this offering, established price levels they were comfortable with based on our price performance over the last months, not just the last three or four days. The fact is, we priced near the highs of our last six months' trading range and averages. I think that is a great accomplishment.
BRG: Was it a goal to increase institutional ownership and diversity in the shareholder base, as well as to raise your desired capital?
Dr. Kim: Our long-term strategy has been to have more balance in our shareholder makeup between retail and institutional investors. This financing represents a step forward toward this goal. This does not mean, however, that we will neglect our retail shareholders. In fact, I view myself as the largest "retail" shareholder of Inovio and also want to see the maximum possible value of my shares.
BRG: Is Inovio at an "any day now" time frame for potential release of clinical updates?
Dr. Kim: As I have stated in my corporate presentation, 2014 could be very meaningful for Inovio, with many important milestones throughout the year. The milestones that we consistently reiterate are that we expect to launch three clinical studies leading up to the announcement of our Phase II data for cervical dysplasia mid-year: these are our cervical cancer and head & neck cancer Phase I/IIa studies with our therapeutic HPV vaccine combined with our DNA-based IL-12 immune activator. We will also jointly launch the prostate cancer therapeutic vaccine Phase I/IIa with Roche, for which they will fund all costs. All three studies are planned to launch in the first half of this year.
Obviously, our Phase II data from our therapeutic HPV vaccine expected to be released mid-year is the most important data from the clinic this year.
BRG: Is there a planned clinical launch for PENNVAX-G and INO-1400 in 2014?
Dr. Kim: Yes, we expect to launch our HIV Phase I study for PENNVAX-G, which is being funded by the NIH. We also remain excited about our potential "universal" cancer therapy, INO-1400. It is a cancer therapeutic vaccine targeting human telomerase reverse transcriptase (hTERT). hTERT over-expression is present in over 85% of different cancer types. We plan to initiate clinical testing in breast, lung, and pancreatic cancers in 2014, and then expand to other cancers.
BRG: Partnerships always remain an interest if the proper terms are agreed upon. With 100+ million dollars in the bank, you have the potential to dictate better terms for shareholders. What are your prospects for an additional partnership? If you are able to secure a partnership, how might this affect your future cash requirements? Do you expect to have to raise more cash?
Dr. Kim: I would generally lump partnership prospects into two categories. If we generate compelling data from our Phase II HPV immunotherapy, I expect we will have multiple willing suitors who want to take forward that franchise with its multiple disease targets. Then, we have the ongoing partnering opportunities we've been nurturing for all the other earlier-stage disease targets.
BRG: So, this capital raise was certainly done, in part, to create more power in negotiations?
Dr. Kim: Yes, with this increased cash position, we are in a great negotiating position as far as our balance sheet is concerned. There are no rocks or hard places in our vicinity. If we were to receive desirable terms for our HPV program, then that would remove the responsibility for Inovio to finance the Phase III study for this agent. Plus, it would provide what we would expect to be a material upfront payment that we could use as we wish.
BRG: But if you maintained the programs, what might the cost be?
Dr. Kim: If we made the decision to retain the program in order to retain control and a greater share of the potential economic benefit, then we would have to raise additional capital. A Phase III could potentially cost as much as $100M. That sounds like a lot. The fact is, if the Phase II data justifies moving forward into a Phase III, I expect it to also justify a significantly higher valuation for Inovio. I believe that in this circumstance there will be capital willing to fund this study, with relatively nominal dilution, and that we could preserve potentially greater product profit for the company and its shareholders. We will cross that road when we come to it.
BRG: It sounds like you are willing to grab opportunities that most benefit Inovio and shareholders, especially for the long-term success of the company.
Dr. Kim: If and when the market delivers the right opportunities, we will secure more capital resources as we think is appropriate. Again, as I outlined in our last interview, we are striving to build a great company. This is a long-term endeavor that does require large amounts of capital. If we are successful in achieving our goal, then I have no doubt we will be talking about a dramatically different story and valuation.
BRG: Finally, in our prior interview, you mentioned that investors with short-term horizons could potentially miss historic opportunities, and you cited Gilead as an example. Could the VGX-3100 study propel this stock to double-digits, on proper valuation methods, if the pending data is positive?
Dr. Kim: Can the VGX-3100 data justify a share price in the double-digits? I gave up trying to forecast a specific share price many years ago. But here is the way I see it. The data we are looking forward to from VGX-3100 is not just about efficacy data for cervical dysplasia. Positive dysplasia data could bode well for our clinical studies for inoperable cervical cancer and head/neck cancer. Together, these indications may justify a much higher valuation.
However, equally importantly, industry players and smart investors are anticipating this data in order to hopefully see not only efficacy, but a confirmation of our best-in-class T-cell data in this much larger controlled study. If this immune response data is good, then irrespective of what the efficacy data looks like, many will be convinced that our active immunotherapy combined with an immune activator, a checkpoint inhibitor, and/or some other complementary therapeutic approach will represent a unique treatment modality with tremendous potential.
I believe that perspective is what could cause investors to attach a higher valuation to Inovio.
BRG: Much thanks to Dr. J. Joseph Kim and his team. (End Interview.)
Disclosure: I am long INO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.