I don't know of any investor that can successfully time the market for long-term success, and, for that matter, trying to time the market for short-term trading has become even more difficult.
Investing is certainly not a science, and no mathematical formula has ever been created that will ensure success. The best we can do as investors is to take the time to study, analyze and prepare a calculable position based on available data within the markets. As a long-term holder of Inovio (NASDAQ:INO), I have again studied published information about the company to determine whether my strategy to hold this company will provide a long-term reward.
I have written about Inovio several times, and have had the opportunity to interview the CEO of the company at length, which was published on Seeking Alpha on two occasions. Lately, Inovio has declined sharply, not unlike many of its peers in the biotech sector, evidenced here by the recent performance of the iShares Biotechnology Index (NASDAQ:IBB). Shareholders have seen declines in excess of 50% since February of 2014, however, as of late, the shares have grabbed some footing and are now tracking higher from the lows of May 2014.
With a reverse split recently approved and implemented on June 5th, additional turbulence might need to be endured before the stock can begin to form a bottoming process and get to the point where investors will primarily focus on company fundamentals, milestones and interim data expected to be released mid-year of 2014. Post-reverse split on June 6, 2014, Inovio traded over 6% higher on volume, slightly higher than average on a split-adjusted basis.
Many investors, especially retail traders, often trade on emotion, most likely because we are not playing with other people's money. The institutional teams invest with what you and I give them, hoping the investments gain in value to maintain our business. And citing recent institutional disclosures, many institutional investment firms have been using client money to purchase shares in Inovio, which is a welcome sign for shareholders.
Institutional investors take each and every investment seriously, and, being that the institutional ownership, by firm, has increased by over 50% for the period ending March 31, 2014, investors should feel a sense of optimism that Inovio is a stock of interest and one of long-term promise to many professional traders, evident by the increase in institutional ownership, by both firm and share ownership.
As of the most recent institutional reporting period, well-established biotech funds like Orbimed and Emerald Growth have taken a position ahead of the pending interim data. Orbimed is a highly-respected, first-call fundamental biotech investor. Emerald Growth seeks to invest in companies that have a perceived competitive and leadership position within market segments, and utilizes a rigorous ten-step investment evaluation process prior to making investment decisions.
Inovio now has 87 institutional holders with a total position in excess of 8%. Compared to peer immunotherapy companies, Inovio is at the lower end of institutional ownership against peers at Perrigrine Pharmaceuticals, NewLink Genetics and Dendreon, ranging from 17% ownership for Perrigrine to slightly over 50% for NewLink. Dendreon currently reports institutional holders at slightly over 36%. The trend for institutional ownership of Inovio shares have increased in each of the prior three reporting and disclosure periods for institutional firms.
In a market downtrend, it is not unlikely to see selling from retail holders, many taking the opportunity to profit from prices as low as sixty cents from less than one year ago. However, the below-average trading volume of late might serve as an indicator that retail sellers have not necessarily been running for the doors to get out of Inovio. As retail investors, we typically get pushed in one of two directions… taking gains too early or taking losses too late. As of late May, though, the average daily share volume has weakened, which is a trader's signal that selling pressure has been absorbed, perhaps leading to the recent rebound in share price.
Many shareholders have held a long position in Inovio for at least one year. So, realizing the importance to evaluate portfolio positions on a consistent basis, let's take a look at Inovio and decide whether or not my decision to hold and potentially add to my position is a good decision at this point in time.
A Reverse Split Was Implemented On June 5, 2014
We know that on May 23, 2014, the company announced plans to implement a reverse split. Although the valuations for a current position do not change, the retail investment psychology often fails to buy into that argument. For instance, being reduced from ten thousand shares to twenty five hundred shares in a 1:4 reverse split is never appealing, even though the portfolio valuation remains the same in dollar terms.
But, even with the reverse split, the investor must come to terms with the fact that positive developments from a company will ultimately provide the same valuation based upon a given multiple.
In the case of Inovio, being valued at $700 million in February of this year brought a price per share of approximately $3.50. With a consummated reverse split at 1:4, if the market was to re-value Inovio at $700 million, the price per share would be valued at approximately $14.00, representing no difference in the value of your current position, even though you hold only twenty five percent of your original shares.
An argument can be made that perhaps up to this point in time, a valuation of $550 million is quite fair. In mid-year, though, essentially less than sixty days away, positive results might quickly justify a higher multiple based on proof of platform. Until then, though, investors should remain patient and focus on the many positive initiatives that Inovio has in play. The reverse split, in my opinion, should not be classified as a fundamental material event. Thus, it is not a reason for me to sell the stock.
Many times, post-reverse split is the time that larger and smarter investors step in to mop up any weakness. From there, fundamentals take over and Inovio can prove its worth to an interested investment community. Incidentally, and to that point, Inovio traded over 6% higher on its initial post-split trading day, with above-average volume compared to the prior three weeks' average daily volume, on a split-adjusted basis.
Inovio Is Progressing On Multiple Fronts
VGX-3100 Clinical Trial
Obviously, the current VGX-3100 clinical trial has the focus of the shareholder base. The company is approaching the primary endpoint in June of 2014, whereby the study will be unblinded and analyzed. The results will include clinical data from a minimum of 148 women, and will present data to evaluate tissue changes in pre- and late-stage cervical cancer patients. Information about this study has been published repeatedly, so for those that need a refresher, please click here for a detailed explanation of the study. Investors should realize that the VGX-3100 study is not a simple one-off headline that would materially affect the progress of the company's planned clinical trials.
The study, in simplest terms, is evaluating the level of efficacy and measuring the regression from late-stage cervical pre-cancer to early-stage pre-cancer and potential elimination of the disease. This is a huge headline, if the results are successful.
Of significant importance within the study, though, Inovio has stated that it will be comprehensively characterizing and focusing upon the immune responses within the group of treated patients. Within the VGX-3100 study, the company is hoping to also identify strong T cell immune response characteristics. If the VGX study can demonstrate that the presence of T cell immune response indicators are present and robust, the study will help define the potential of Inovio's active immunotherapy products as standalone therapies. The study can also play an important role to demonstrate the potential of VGX-3100 used in combination with complementary components to drive reaction in immune activators and checkpoint inhibitors. The reasoning behind potential combination therapy techniques would be for the company to safely administer additional DNA-based, proprietary vaccines that can enhance potency and treat cancers and infectious disease.
The initial headline that shareholders want to see is the one that demonstrates regression and/or elimination of cancer cells. But, Inovio has made clear that several promising developments can also be analyzed… the level of T cell response, the validation that VGX-3100 can be used as a potential component for combination therapy and the success shown in activating checkpoint inhibitors.
Two Additional Phase l/lla Studies Planned For 2014
Inovio stated in its Q1 report that we can expect the company to initiate two separate Phase I/IIa studies of VGX-3100 against HPV-caused cervical cancer and head and neck cancer. Both of these studies will test VGX-3100 as a complimentary component with DNA-based immune activator IL-12. This combination is designated INO-3112. Current studies utilizing IL-12 has demonstrated positive early-stage clinical data. Companies such as OncoSec and Merck have been closely monitoring the success of IL-12, and hope to harness its promising results within its own trials.
As Inovio management stated, these studies will analyze combination therapies utilizing VGX-3100, IL-12 and other DNA-based vaccines. Success in these studies can validate the potential of combination therapy and lead to next-generation development of vaccine and immunotherapy-based care.
Although the company has not released the anticipated enrollment population for these two new studies, it has addressed the approachable market of over 532,000 new cases of the disease caused per year, as well as over 275,000 deaths occurring on an annual basis from the disease. Thus, the market is sizeable and immediate, whereby Inovio is hoping, with positive trial results, to grab a leadership position in the field, attracting potential partnership agreements and the possibility of third-party funding.
In Q3 of 2014, the company intends to launch its Phase l study in partnership with Roche, to target prostate cancer immunotherapy, namely INO-5150. Inovio has demonstrated in pre-clinical data that this proprietary therapeutic vaccine has induced impressive antibody and T cell responses in studies using animal models. The company is focusing on the promising evidence that its concept for DNA-based vaccines can lead to a broader and more comprehensive set of antigens, and may improve the efficacy for prostate cancer immunotherapy.
A proprietary vaccine delivery method that Inovio has validated in clinical study is the Cellectra electroporation system, which is a patented technology. Cellectra has shown, unequivocally, that the device significantly enhances cellular uptake of the company's proprietary SynCon DNA plasmids, and that the cells, themselves, then produce a significant amount of plasmids necessary to target cancer and disease cells.
And although the company has been quiet as to the terms of the Roche partnership, the launch of this study will trigger the first milestone payment from Roche, a deal which has promised over $400 million in milestone payments. It's anyone's guess at this point as to the amount of money that Inovio will receive from this launch and milestone payment, however, it is a reasonable assumption to predict a multi-million dollar payment, a milestone worth waiting for.
Phase l Study For A Preventative And Therapeutic Treatment For HIV
Inovio, in a May 12, 2014 release, stated that it expects to launch a study within the fourth quarter of 2014 to test its Pennvax-GP vaccine candidate. Pennvax-GP, utilizing the Cellectra delivery system, has already generated significantly positive results, with a paper being published in the Journal of Infectious Diseases. The study will be designed to validate the therapeutic and preventive advantages of Pennvax-GP as an HIV DNA vaccine candidate.
The results that were published in the journal had demonstrated "best-in-class" T cell responses and highlighted the significant difference in test results when the Cellectra delivery system was used in testing. The results generated a seven-fold increase in positive response rate, in comparison to patients not treated with the Cellectra device. (Source: Inovio Pharmaceuticals)
Exploratory Human Study For Breast, Lung and Pancreatic Cancers
Also highlighted in the May 12, 2014 company release, Inovio has stated that it plans to initiate an exploratory human study for breast, lung and pancreatic cancers in the second half of 2014. This study will utilize its "INO-1400" platform, which is its hTERT DNA immunotherapy. hTERT is shown to be present in over 85% of cancers, and Inovio is hoping to prove that the INO-1400 antigen can become a potential universal vaccine candidate concentrating on the attack of the hTERT expressions.
Results from its pre-clinical animal studies show that INO-1400 generated robust immunotherapeutic responses that were significantly higher than the previous best results of hTERT therapeutic vaccine candidates. (Source: Inovio Pharmaceuticals)
Additionally, and important to this study, is that no serious adverse side effects have been reported, a key distinction from the currently published data, which has demonstrated severe inflammation and cytokine storms. A cytokine storm is a potentially fatal immune reaction stemming from a feedback loop with highly elevated levels of cytokines.
Alzheimer's and Multiple Sclerosis
Most recently, on May 13,2014, Inovio announced that it has acquired the worldwide rights for early preclinical therapies addressing Alzheimer's disease and multiple sclerosis. These newly licensed technologies have found a unique and proprietary method to generate regulatory T cells, referred to as iTreg cells. These iTreg cells are important, and appear to be significant in delivering the ability to shut down immune responses after they have successfully eliminated invading organisms. The study will be designed to demonstrate the ability to shut down the aggressive activity of T cell response at the appropriate time, which would be a significant step forward to the field of cancer immunotherapy treatment.
My Opinion… Too Many Pending Milestones To Become A Seller
There is no doubt that these past few months have been a test of patience for investors in small cap biotech. Even mid and large cap biotech stocks have not been immune from the carnage. However, it is important to keep in mind that Inovio has positioned itself to be in tremendous shape through the year 2017.
The company has over $100 million in cash, taking a very opportune time to generate funding while at the top of the biotech cycle. If you were to look at a chart of the biotech index, you will find that February 26, 2014 was a topping point for the index. In hindsight, Inovio management pulled off a well-timed feat in selling stock at $2.90 per share. Although the stock traded higher during the last leg of its dramatic run, the timing and pricing of the offering turned out to be quite lucrative for Inovio, maintaining shares and perhaps taking advantage of big money wallets while they were still open.
The point of this article is not to highlight and rehash the potential of the science that has been publicly discussed numerous times; it is to remind investors that the science is progressing in rapid fashion at Inovio, and has not shown any signs of slowing down. Also, there has not been any indication that pending results will not amplify the results from the Phase l trials. So why would I want to sell now, especially as I sit on the eve of trial and milestone data?
Simply put, I wouldn't.
The significant cash balance, the pending trials and the expected initial milestone from the Roche partnership are significant reasons that investors should remain focused on the entirety of Inovio and not base trading decisions on external factors and market conditions.
June Data Approaches
The month of June should prove to be exciting, as I believe that the company will execute on its long-term strategy, leaving the prior few months as nothing more than a speed bump in its path to an appropriate valuation. Long-term holders that are considering selling stock after waiting patiently for months for the pending data should certainly reconsider. There has been no fundamental cause for this recent meltdown, and the quiet period of news flow has allowed short sellers to take advantage of a sector rebalancing.
The short position in Inovio has ballooned to over 28 million shares. Keep in mind that these are professional traders, and the motive is not always clear. Is the increase in the short position a hedge? Is it a means to purchase shares to cover a position at a thirty percent discount as to where the position was initiated? Or, are the professionals simply taking a calculated gamble on the pending data?
In my opinion, the prior three scenarios are all viable causes for the spike in short interest. However, none of them are related to a fundamental shift in the science or management of the company. Therefore, I do my best to focus on the things that I can do to keep appraised of current data and potential future releases, which is, to monitor news flow and investor presentations.
I have waited many months to get to the primary endpoints of the VGX-3100 trial. This position has certainly been volatile; however, my focus remains on long-term development of Inovio, and any consideration to sell on the eve of significant milestone data is not a part of my investment plan.
A few months of sector volatility does not have the fundamental reasoning necessary to shake me from a company that can truly become a revolutionary force in the fight against cancer and infectious disease.
Unless data is presented that compromises the potential and current leadership position that Inovio has built in preliminary studies, I will continue to believe in the near- and long-term potential in Inovio, keeping Inovio as a valued position in my portfolio.
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.