On June 11, TheStreet published an article that advanced the ideas that the Inovio (NASDAQ:INO) Phase II clinical trial for cervical dysplasia had failed, that CEO J. Joseph Kim was already doing damage control before the failure was announced, and that the science behind the clinical trial indicated that the trial was bound to fail. Similar themes have been present on various stock bulletin boards. Volatility in Inovio stock price can be linked with these issues.
A press release the next day by Inovio stated that the results of that trial were still blinded, and it refuted some of the claims in TheStreet article. However, these and other related issues are worth exploring further for those who follow this company.
1. The quirks of a scientist CEO
The recent reverse split in Inovio stock has been interpreted by some as a preemptive strike to compensate for a coming announcement of failure. Also, two quotes from the Inovio CEO in a Seeking Alpha article, and cited by TheStreet, have been interpreted as damage control.
The company has said since early in 2014 that the reasons for the reverse split were to improve its image and to encourage institutional investment. While that may have been the intent of the reverse split, that is not how it was destined to be interpreted by those who have taken a short position in Inovio stock, and by others. If you think like a scientist, 8 shares at $2 are the same as 2 shares at $8. In reality, the association between failure and a reverse split is strong in the minds of many market players, and Inovio was naive if it thought it could evade the consequences of that association. In pushing a reverse split, CEO Kim handed the market a paddle to punish him with, assumed the position and said, "Thank you, sir. May I have another?" A better, if slower, approach to a more respectable stock price would have been to continue the organic increase in stock price seen over the past year.
Regarding the quotes from CEO Kim, they are the type of comments that any of my scientific colleagues might have made when trying to discuss all sides of an issue. That is something that scientists are trained to do, but CEOs might do well to avoid. We all expect a constant stream of positive spin from a CEO. Kim's answers are too complex and nuanced for the good of the company. Go to the original Seeking Alpha article and interpret for yourself his comments in the context of the questions that he was asked.
Some will defend Kim, especially for his many accomplishments, including his deal with Roche. I also view much that he has done as impressive and in the shareholders' best interests. However, I still maintain that he and some other scientist CEOs have a tin ear where market matters are concerned.
2. A muddled view of the science prevails
The results of a study by Trimble et al., showing that the level of systemic T cell response did not predict spontaneous regression of cervical dysplasia from an infection with human papillomavirus (HPV), have been much discussed recently. If this type of virus infection is to be successfully eliminated from the body, we know that a T cell immune response must be involved. Yet, the level of the T cell response measured in the circulation was unrelated to the elimination of the HPV-infected cells in the cervix. That the two factors could be disconnected seems mysterious at first, and might lead one to wonder if vaccination to increase T cell response is fruitless.
One possible explanation for that seemingly mysterious disconnection is not very complicated. T cells move through the body to attack an invader and congregate at the site of infection. That makes perfect sense: A T cell in your foot is totally useless if you have an infection in your sinuses. So, if T cells are busy fighting an active infection, they probably will not be represented well in the general circulation.
A team of researchers, including that same Dr. Cornelia Trimble, published a study that showed that the level of T cells near HPV lesions on the cervix does predict the regression of the infection. Further, this second study showed that T cells activated by intramuscular vaccination with Inovio's VGX-3100 move through the body to congregate at the site of infection in the cervix. This second study clears up any mystery created by the first one.
In addition, from this second study, we learn that five out of six patients vaccinated with the highest dose had a strong T cell response, and three of the six patients had complete regression of cervical dysplasia. This sample size is much too small to draw any firm conclusions, but these results are consistent with a positive outcome in the Phase II trial.
All of this information was considered when the Inovio trial was designed. How do we know that? Cornelia Trimble, MD, is a professor at Johns Hopkins University and one of three Principal Investigators running the Phase II cervical dysplasia trial.
Finally, much has been made of the fact that the control for the Phase II study should show a significant level of spontaneous regression. That factor was considered in the trial design, because Dr. Trimble has been involved in measuring levels of spontaneous regression of HPV infection. I trust Inovio's estimate of 25% spontaneous regression in the control, based on her work. From the trial design, a response rate of 52% in the treatment arm should be sufficient to provide statistically significant results from this trial.
The science behind Inovio's cervical dysplasia Phase II trial supports a prediction of success, but success is far from certain. You should factor into investment decisions your interpretation of the behavior of Inovio management, as well as everything that you can learn about the relevant science.
The field of therapeutic vaccines has not seen many major successes, which would make a success here that much more valuable, and makes a failure more of a concern. I estimate the chances for a statistically significant success of the Phase II goals at 50%. Partial success that misses statistical significance is the most likely other outcome. Lack of any trend in the results toward trial goals would be a failure that I factor in at only 10% because of the information described above.
Complete success would bring a new one-year high to the stock, and complete failure of this trial would assure a new one-year low. For me, the risk-to-reward ratio is favorable, but investors should take care to consider both the upside and the downside of this situation before investing.
Disclosure: The author is long INO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author has no plan to change his position in INO for 72 hours following publication.