Did Short Sellers In Inovio Listen To The Wrong Piper?

| About: Inovio Pharmaceuticals, (INO)


Current data suggests positive results that will amplify Phase l results.

Short sellers reacted quickly to a headline that was sensational and inaccurate.

Inovio CEO refutes article, reiterates confident position about pending results.

Blog piece shows a clear misunderstanding of the Trimble trial compared to Inovio trial.

I have seen market reactions and I have seen market overreactions in my twenty five years of trading. Beyond that, I have seen investors trade on a headline without so much as taking the time to verify the information it represented.

With that in mind, Inovio Pharmaceuticals (NYSEMKT:INO) has completed quite a volatile two week period since an opinionated blog article was published about Inovio. The stock was trading well after the enactment of a reverse split, trading intraday over $12.00 a share on June 10, 2014. The trend was positive, the company had released news of its initiation of a new Phase l/lla clinical trial for HPV related head and neck cancer and the volume was trending above the most recent weekly averages.

All was going well.

Then, as the afternoon trading began to take hold, with Inovio trading at its high of the day at $12.20, a blog hit the wires on June 10, 2014 that made a bold and speculative comment that the CEO was preparing retail investors for a trial failure. The headline, Inovio CEO Preps Retail Investors for Drug Study Failure, was not factual; it was only representing an opinion by an author.

Within minutes, volume was on fire, trading millions of shares in the final three hours of the trading day, almost six times its average daily volume. The stock dropped from its intraday high of $12.20 all the way down through $9.00 before settling at $9.34 for the day. It was a reversal of great magnitude, a 25% swing in price in a matter of minutes with over $180 million of market cap erased in minutes.

What was quite disconcerting, however, was with the speed at which the trading activity took place. As I was trying to verify information, massive selling pressure was being applied to the shares. There was barely ten seconds between the time the story hit the wires to the time that the selling pressure was exploding. Check the association here. It was quite a coincidental event, to say the least.

I spent considerable time working to find fact to the headline and was unable to substantiate or even correlate the material presented. Then, on the morning of June 11th, Inovio presented a release that directly denied the contents of not only the headline, but, also much of the content in the article. The company response was direct and I would urge caution to short sellers that took a position based on the unconfirmed information that was presented in the original blog. In essence, they might have followed the wrong piper, and, here is why.

First, the Trimble study lacked similar success in generating T cell response. Generating a strong and robust T cell response is the lifeblood of a cancer immunotherapy. T cells are the killing machines necessary to battle cancer and infectious disease. There can be no denying the importance of demonstrating the ability to generate these killer cells.

The Trimble study was, in fact, working to develop treatment and vaccine immunotherapy to treat HPV related cervical dysplasia and other HPV related disease of the lower genital tract. Their study data suggested that T cell response could not predict regression of CIN2/3 lesions, which is the goal for Inovio in its Phase II study.

An argument was made that because Trimble stated that their T cell data did not generate a significant regression or become a predictable indicator for tumor regression that Inovio would follow in their footsteps. But, that jump to conclusion is quite flawed.

A key omission in the comparison is that the amount of T cell response generated by Inovio has been vastly greater than what Trimble had seen, which leads me to my next area of contention.

An important and differentiating factor between the Trimble study and Inovio studies is Inovio's use of its proprietary CELLECTRA electroporation device. This distinction was missing from the comparison and sellers of the stock should at least become aware of the importance of this delivery method.

With a DNA immunotherapy, the DNA has to be delivered into cells to allow the cell to produce the targeted antigens, in this case, the E6 and E7 proteins related to HPV that will serve as targets for T cells that are subsequently generated by the immune system.

Inovio's CELLECTRA delivery device applies millisecond electric pulses to create pores in the cell membrane, which allows significant uptake of the DNA immunotherapy into cells in the locally treated tissue.

Inovio has shown that this approach can increase the cellular uptake by 1000 times or more and that it can increase the production of the antigen coded by the DNA by the same amount, which ultimately can increase the subject's response rate based upon this increased T cell production.

Inovio established in its Phase I study that the response rate of subjects with significant T cell levels was 78% across all three dose groups. This result is a clear and defining distinction between the two studies, since the Trimble study showed poor immune responses. What is compelling about the use of T cells and Inovio's approach is that the therapy is locally applied, but, using the immune system's basic capabilities, the T cells are carried systemically to wherever they are needed.

Third point, the article drew attention to several unnamed studies that are said to have showed natural regression in CIN 2/3 of up to 35%. The Trimble study showed natural regression of up to 26%. These percentages were used to suggest that the study design by Inovio, which is aiming for a 52% regression rate is not a significant difference compared to natural regression rates. Really?

Inovio itself has noted that the range of response rate of natural regression is between 4% and 40%. The fact is that the amount of research on cervical dysplasia has been limited and these studies do not confirm a definitive number. Based on review of the literature, Inovio chose 25%, which is consistent with the number reported in the Trimble study. The fact that there is such a wide reported range confirms that the numbers for natural regression are obviously not definitive. So, with a wide range of established natural regression rates, as low as 4%, how can the blog writer make a determination that the natural regression rate will be 35%? On what basis?

Inovio is setting a primary endpoint for the treatment arm at a 52% response rate achieving the desired regression. Is this a high bar? Let's call it as it is: we don't yet know. Inovio has never been in a position to report efficacy data generated by its DNA immunotherapy technology. This is the first time. It remains an unknown as to what the correlation is between the level of T cells generated and the level of dysplasia regression that might occur as a result.

This is in fact one of the most critical elements of the upcoming results. Can a connection be shown between the two? That is what investors and Inovio are looking forward to. If Inovio can prove this connection, to whatever degree, this will be a real positive for the field of immunotherapy and for the company.

Why be optimistic? The fact that there is natural regression of HPV and cervical dysplasia in some people is in and of itself encouraging. Inovio is simply following the path of least resistance and aiming to enhance what already occurs naturally.

Plus here is something hot off the press that I was quite excited to discover. At the recent ASCO, the National Cancer Institute reported new data from a small study showing that in an adoptive T cell therapy study the majority of subjects with cervical cancer had either partial or complete tumor responses. This is a therapy that generates T cells outside the body and then introduces them to the patient. Unfortunately, there are tremendous side effects as well, unlike Inovio's approach, which has demonstrated minimal patient side effects.

In short, to state that a superior T cell response would be immaterial to Inovio's technology and its Phase II study is the same as saying it is immaterial to immunotherapy, period. That is nonsense. Whether the lack of acknowledgement of this is based on laziness, naiveté, or something worse, I will leave to the reader to decide. But not acknowledging it is a gross oversight to say the least.

Let's look at the reality of what a strong and durable T cell response might mean for Inovio.

In the area of CIN 2/3, the fact is that, yes, there is a surgical procedure that works well. So if you are not someone that cares about invasiveness and the immediate side effects of surgery in your cervix (guys, plug in "prostate" if you want to imagine something more relevant), the potential down-the-road detrimental effect of pre-term birth, or the question of whether there is remaining HPV that might cause a recurrence, then maybe a non-invasive procedure like Inovio's is not meaningful. For the rest of us, we would view a treatment that could potentially address these pre-cancers as a first-line therapy for this relatively slowly progressing disease as a preferable first step with great market potential.

For many investors, however, the greater importance will be what the results might indicate for the greater potential of the technology. Even at a lower efficacy level and background level of natural regression, if the results show correlation between the T cells and efficacy, then I imagine that result is going to be very meaningful to the industry and their desire to advance effective immunotherapies in multiple disease areas. Such results would likely be considered revolutionary.

I have never read a single oncology study that does not highlight the importance of T cell activity in the fight against cancer and infectious disease. Positive T cell responses, especially a duplication of best in class response rates, would generate tremendous interest in Inovio, plain and simple.

VGX-3100 was awarded the "Best Therapeutic Vaccine" by the World Vaccine Congress in 2014. The award was not accidental. The vaccine was judged to be first in class for cervical pre-cancer immunotherapy. VGX-3100 is being recognized by peers as a potentially revolutionary vaccine. Inovio plans to combine this vaccine with other components in its pipeline to further leverage the success shown in clinical trials. What is there not to like?!

Forgetting to include the Roche partnership when making a bear case is not quite fair play to short sellers. The Roche deal is partnering for its INO-5150 vaccine to treat prostate cancer and for its INO-1800 to treat hepatitis B. The deal provided Inovio with ten million dollars up front and allows for an additional $412 million in milestone payments, the first to be expected in the third quarter of 2014 according to Inovio. Based on these studies alone, a short position is risky. If a substantial initial milestone payment by Roche is paid, which is expected in the third quarter of 2014, it can be a crushing blow to short positions in the stock. If the milestone is received after reporting positive results for the VGX-3100 trail, the shorts might very well be squeezed tightly.

Here is my bottom line:

These days, investors trade on impulse. Trust has become a significant part of trading, which is why some analysts receive enormous respect when putting a position or recommendation out for a particular stock. With respected analysts, investors can rely on countless hours of research and a team of researchers to unveil pertinent information. Analysts represent themselves as well as the firms they work for. Thus, when they cover a stock, the report is full of verifiable fact and undeniable research. The fundamental basis for the report is to provide a well reasoned and justifiable target for a company, inclusive of growth prospects and potential long-term success.

Compared to the blog piece that I believe caused this sell off, it is apparent that there was a rush to judgment by the author as well as by the sellers. There was simply too much valuable and available information that was not included.

First, the blog responded to a CEO interview that was published less than twenty four hours before the blog publication. Not much time for deep due diligence. Even a cursory attempt at fact finding would have provided meaningful additions to the piece. Second, the research used as supporting evidence was from 2010 and was not representative of the published success currently available from Inovio. Third, the blog failed to report significant and differentiating factors between the two studies, which is described and linked above. Fourth, the speculative nature of the article lacked foundation, evidenced by the fact that the author has never had any prior contact with the company, obviously making no attempt to substantiate an opinion. Fifth, key milestones, partnerships and peer awards were excluded from the piece, which works to omit hundreds of hours of peer and partner research.

All said and done, for those that based trading decisions on an article that was misleading and lacked comprehensive exposure to what Inovio is actually accomplishing in clinical trials, they may be trading on a false narrative. If I was going to follow a piper, it would certainly not be the piper who wrote an off-the-cuff piece of opinionated journalism. For me, trading on facts, linked above, is more of a tune I will follow.

For quick trigger traders, results might become unbearable...which is not good news if you are, in fact, a bear. Remember three simple words before trading on a blog piece...trust, but verify.

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.