iBio: Risky, But Early Stage Pipeline Potentially Offers Long-Term Reward

| About: iBio, Inc. (IBIO)

Upcoming events: Protalix PDUFA date Feb 25 and Phase I clinical data expected later this year

iBio, Inc (NYSEMKT:IBIO) – based in Newark, Del., engages in the development and commercialization of plant-based biotherapeutics (biosimilars, biobetters, orphan biologics) and vaccines. Utilizing their proprietary iBioLaunch technology the company aims to leverage its technology platform to provide these biotherapeutics in a safe, efficacious, and reliable manner. This company is an early stage biotechnology company (and therefore highly speculative), with two influenza vaccine candidates in Phase I trials. The company has received a lot of attention recently on seeking alpha, with an article claiming a paradigm shift, and another claiming an overvaluation. However, both agree that Protalix Biotherapeutics’ (NYSEMKT:PLX) upcoming PDUFA date on Feb 25 is extremely relevant to IBIO (and the entire generic biologic marketplace). Protalix has filed a new drug application, under a special protocol assessment, for Uplyso, a biosimilar version of Genzyme’s (GENZ) Cerezyme for the treatment of Gaucher’s disease [Shire (SHPGY) recently received approval for a biosimilar]. I have previously covered Protalix in detail (followup post here), and based on numerous factors concluded that approval of Uplyso is likely.

Why is this relevant to IBIO? Protalix produces its recombinant protein through the use of immortal carrot cells and approval would represent validation of their platform, and more globally, plant-based systems in general. Overall, plant-based systems including PLX’s have advantages in terms of cost and manufacturing with what appears to be similar efficacy and safety. However, while the primary sequence and 3D structure are identical to the human enzyme, Protalix’s Uplyso has a different glycosylation pattern on the surface of the protein resulting from slightly different post-translational modifications. This could possibly explain slight differences in side effects and tolerability from patients (In my previous article in the comments section a patient shared a fascinating story and put a human experience to all this). It is my opinion that this comment highlights the important fact that Uplyso is another, different treatment option, not just a generic stealing market share.

IBIO uses a similar approach, but with important differences. In the iBioLaunch platform, the DNA sequence to be produced (protein, antibody, vaccine, etc.) is inserted into the leaves via specially designed vectors and the new DNA expressed independently from the plants own chromosomes (the plant is not transgenic). This ultimately leads to large quantities of biomass producing relatively large amounts of the desired protein (hundred milligram quantities of protein per 1 kg of biomass) that are subsequently purified by standard techniques to give the desired therapeutic. A good summary from the website highlights the differences between current platforms. As with PLX, the glycosylation patterns and post-translational modifications are potentially different in IBIO’s case as well. But most importantly, IBIO is able to produce a lot of vaccine in a hurry (each plant is its own bioreactor), with low facility startup costs and very short ramp-up times. As the vaccine shortages of the past few years have made numerous headlines, this unmet need should not be underestimated.

Strategy: IBIO, at the moment, is targeting the large vaccine market. While traditionally viewed as a low-margin business, IBIO’s platform has the potential to take significant market share due to its low cost (10-15% of animal cell / virus cultures). The global market size for vaccines is projected at $32 billion for 2012, with Influenza being a $4 billion market in 2010. Additionally, bio-defense spending by the US totaled $5 billion in 2010. IBIO recently announced a licensing agreement with Fiocruz/Bio-Manguinhos of Brazil for the use in a new yellow fever vaccine. Details were not included. However, due to the low cost, most profits would flow directly to the bottom line. While the market would like to see some partnerships inked with larger players, the fact remains the further a firm can get products in the clinic, the more negotiating room in payments and royalties.

Pipeline: Currently the company has two Phase I clinical candidates. Acceptance of an H1N1 influenza IND application was announced on Sep 20, 2010 and another H5N1 avian influenza IND application acceptance was announced on Dec 6, 2010. Further vaccine formulations are in the preclinical stage (HPV, Anthrax, etc.)

Fundamentals and Financials: With the recent capital raise of $7.4 Million (net) and according to the most recent 10-q and 10-k’s filed with the SEC, the company has a strong balance with approximately (extroplating) $7 million in cash and should “ be sufficient to meet our projected operating requirements through the balance of calendar 2011.” IBIO owes roughly a minimum of $11.8 million over the next six years to Fraunhofer for R&D services (explaining the three employees on the website), although it is expected that expenditures will exceed this minimum as clinical candidates are developed and advanced through trials. Rough calculations come up with approximately 50 million shares fully diluted (full exercise of warrants, which all are in the money with the shares currently trading above 4).

Conclusion and Future Directions: While it is challenging to assign a specific value to such an early stage biotechnology firm due to the uncertain timing of future clinical trials and potential licensing agreements, qualitative validation of the platform is extremely important. Given Fraunhofer’s prestigious scientific reputation, the Gates Foundation’s blessing, and the department of defense funding, it appears the platform is being validated by credible outside entities ($70 million total outside non-dilutive funding).

In terms of competition, there is currently a Canadian-based company working in this area of plant-based transient expressed vaccines, Medicago (OTC:MDCGF). This firm uses virus-like particles in a fashion similar to IBIO, and recently initiated a Phase I trial with H1N1, which is expected to lead into a trivalent vaccine with H1N1, H3N2 and B influenza strains later in 2011. Furthermore, the company recently reported favorable results of a Phase II study for an H5N1 vaccine. Given this, I believe IBIO will have success as well in its early stage trials.

Immediate risk factors include possible FDA rejection of Uplyso along with rejection of the entire plant-based expression systems based on currently unforeseen problems with the recombinant proteins. Longer-term, current IBIO investors face potential dilutions during the long drug approval process, thus even successful validation and commercialization of the platform may not translate into significant appreciation of the stock. This stock is not for the faint of heart.

Disclosure: I am long PLX.

Additional disclosure: I have a covered call on PLX at the 12.5 Strike, March 2011 expiration.