Investors should know in about three to six months if Vical's (VICL) Allovectin has the clinical credentials to get FDA approval for treating advanced melanoma. As another cancer immunotherapy company, Dendreon (DNDN), has ably demonstrated though, approval from the FDA is no guarantee of attaining commercially viable market share or retaining investor enthusiasm. So with all of the attention that Roche (RHHBY.OB) and Bristol-Myers (BMY) have gotten for their melanoma drugs Zelboraf and Yervoy, is there enough opportunity left in advanced melanoma for Vical?
A Small Market, But An Underserved One
Although melanoma is one of the most common cancer types in terms of new cases per year, it is highly curable if caught in the early stages. That leaves a relatively small population of advanced (Stage 3 and 4) cases - around 12,000 per year in both the U.S. and EU.
While it's a small population, it is one that badly needs new effective therapies, as the prognosis and survival rates drop significantly at these stages. What's more, Big Pharma has been relatively successful in securing solid reimbursement for new oncology drugs, even if they do not substantially extend survival. Consequently, I would estimate that the value of the advanced melanoma market is on the order of $2.5 billion, with the potential for an even higher number if a therapy comes along that substantially improves survival.
Can Vical Make It?
Of course, discussions of market size are moot if Vical cannot produce sufficiently positive Phase 3 data and secure the FDA's approval for its Allovectin immunotherapy. Although accumulated data on Allovectin is encouraging in some respects, it is less so in others.
Phase 2 results of Allovectin showed an overall response rate of roughly 12%, with a higher response (17%) in chemo-naive patients - not an uncommon difference in oncology immunotherapies seen to date. More impressively, the overall survival rate was nearly 19 months (over 22 in chemo-naive) and those numbers arguably understate the case - among those included as responders, the survival rates were quite impressive and the response rate may be understated. It's also worth noting that side-effects with Allovectin are meaningfully less severe than with Yervoy or Zelboraf.
On first glance, that looks like a very big deal indeed. In a study of chemo-naive patients, Yervoy and dacarbazine showed roughly 15% response rate and overall survival of about 11 months (in chemo-experienced, patients Yervoy monotherapy had a response rate of about 11% and 10 months of overall survival). For Zelboraf (as a monotherapy in chemo-naive patients), the response rate was much higher (48%). What's more, both of these drugs carry pretty heavy side-effects.
But now for the negative. Vical's Allovectin Phase 2 trial was uncontrolled and the therapy did not appear to work as well in patients receiving the injections in multiple lesions. What's more, the Allovectin study that generated those impressive results enrolled patients that were less sick than those in the Yervoy and Zelboraf studies (the Allovectin study excluded those with liver metastasis, for instance). Given the substantially higher mortality in sicker/more advanced melanoma patients, that really does make the comparison more difficult.
I'm also a little concerned about Vical's Allovectin Phase 3 trial design. The company is targeting a 10% improvement in response rate (14%) compared to DTIC (dacarbazine) and temozolomide, but I worry that the assumed control arm response rate is too low (4%), as prior studies of DTIC have shown response rates above 10% in some cases. That creates a risk that a higher-than-expected response rate in the control arm leads to Allovectin failing to hit the primary endpoint.
What's more, while overall survival is not the primary endpoint for this trial, I think it's fair to assume that it will be a point of discussion for the FDA and it will almost certainly be important to the drug's commercial prospects. For what it's worth, I'm also skeptical that the company will be able to establish efficacy in the sickest patients, and that could leave openings for Yervoy and Zelboraf in the market.
Slotting In Allovectin
If Allovectin gets approval, I believe there is a legitimate commercial opportunity.
Zelboraf is a limited drug in many respects. It works in patients with metastatic melanoma that is positive for the BRAF 600E variant, which includes just about one-half of the patient population. Moreover, it doesn't extend life by all that much and the response duration is low. On the other hand, the drug works quickly, it's oral, and it seems to work in very sick patients.
Yervoy activates the entire immune system, but it seems to take longer to work and works less well in sicker patients. It also happens to be quite expensive, and the side effects of both drugs are not at all trivial.
If Allovectin works, I could see the following environment. I believe that either Allovectin or Yervoy could be used early on and in healthier patients, as both seem to need more time to take effect, including those positive for the BRAF 600E variant. I believe Zelboraf will be used only in those BRAF 600E-positive patients, especially those that are quite sick and need a quick-acting therapy to see any benefit. I also think Merck's (MRK) Temodar (temozolomide) will still see some use, particularly in cases where there is serious metastasis to areas like the brain.
In real numbers, I think Allovectin could see use in 8,000 to 8,500 patients each year. With an estimated blended price of $72,500, that works out to a market opportunity of roughly $600 million, though strong Phase 3 data could support a higher price (especially as Zelboraf really isn't an alternative for the majority of potential patients). This does assume, though, that Vical gets a marketing partner - on its own (and against the marketing machines of Roche and Bristol-Myers), I think it will have a much harder time building that share.
So What's Vical Worth?
On the basis of that $600 million target for 2018 and a 35% discount rate, I think Vical is worth about $7 today (with no value given to the remaining pipeline). That discount rate, when including time value, suggests a roughly one-third chance of approval. Investors who believe the odds are closer to 50/50 would see a target in the low-to-mid teens.
Although I once owned Vical (and made money on the stock), I'm skeptical on Vical's chance of reporting successful Phase 3 results for Allovectin. For those who may think I'm saying that to protect my investment in Roche, I'd point out that 100% penetration of Zelboraf (an impossibility, given the mechanism of action) would be worth maybe $2 to $3 to Roche's share price (and the real potential is much lower).
In terms of cancer immunotherapies, I much prefer Celldex (CLDX) today over Vical. That said, I do believe there is room for Allovectin in the melanoma market and a real commercial opportunity if the company can repeat the Phase 2 data. For those investors who have more faith that Allovectin's Phase 3 results will be positive and lead to approval, these shares look as though they could deliver significant upside from here.
Disclosure: I am long RHHBY.OB.