Is Inovio Undervalued After Positive HPV Therapy Results?

| About: Inovio Pharmaceuticals, (INO)


Inovio released positive topline Phase II data for its HPV vaccine.

In addition to clearing up HPV, it results in cervical tumor regression.

This confirms the possible efficacy of DNA-based vaccines in general.

Inovio has a broad pipeline of early-stage DNA vaccines.

Inovio Pharmaceuticals (NYSEMKT:INO) is the key developer of DNA-based vaccines. This relatively new method of inducing the immune system to destroy a bacteria, virus or cancer has been controversial among investors. Generally, 2014 has been a year in which this still small cap, still early-stage biotechnology company has seen some recognition, driving its market cap up to the $700 million range.

On Wednesday, July 23, 2014, Inovio announced positive top-line results in its Phase II trial of VGX-3100 vaccine. The trial had 107 women with HPV (human papillomavirus) who had cervical neoplasia (precancerous tumor) at CIN stage 2 or 3. All HPV in the trial were strains 16 or 18. One-quarter of the patients received a placebo.

The primary endpoint of the trial was regression of the tumors to either CIN 1 or no disease. Such regression was known to happen without therapy, and in the placebo arm 30.6% displayed regression, in line with prior science. In the VGX-3100 arm, 49.5% showed regression. This was statistically significant with a p value less than 0.025.

In addition, HPV was cleared from most of the patients whose tumors regressed. 40.2% of active patients both saw virus cleared and tumor regression. In the control arm, 14.3% both regressed and had virus cleared.

Side effects in the active group were similar to the placebo group, except redness induced at the vaccination site.

Following the announcement, INO, after closing on June 12 at 11.14, traded on Wednesday in a range between $12.00 and $14.20. At $13.00 per share, its market capitalization is about $780 million.

This should put to rest the idea that Inovio may not be able to create commercial human vaccines. A Phase III trial is needed to confirm the results and gain FDA approval, but the Phase II results are pretty convincing, in my opinion.

There are already two HPV vaccines on the market, Gardasil, marketed by Merck (NYSE:MRK), and Cervarix, marketed by GlaxoSmithKline (NYSE:GSK), but they are preventative. They do not work once an HPV infection has taken hold.

Inovio has a broad pipeline of mostly preclinical and Phase I candidates. INO-3122 also targets HPV-caused cancers. Additional therapies are being tested for prostate, breast, lung, and pancreatic cancers; hepatitis B and C; HIV; influenza; and malaria.

It should be noted that Inovio already had proven its concepts with the commercialization of DNA vaccines for animals.

Note that risks are high when investing in potential, yet-to-be approved therapies. Yet by looking at the potential of the pipeline, and discounting the probability of failure to achieve commercialization, early stage investors do put a value on companies like Inovio.

Patients in the trial were tested for improvements nine months after the vaccination. To plan, enroll, get results, and submit data for FDA approval from a Phase III trial is likely a roughly two-year process. So earliest commercialization will be in 2016.

Inovio has already raised cash to continue its trials. The cash balance at the end of Q1 was $117 million. $70 million was raised in the quarter by issuing new shares and from the exercising of warrants and options. Aside from the raising of cash, the burn in the quarter was about $10 million. Management stated cash is sufficient to operate through 2017. In addition, Inovio may receive milestone payments from Roche for the licensing of a prostate cancer vaccine.

Given the breadth of Inovio's pipeline and the encouraging results to date, I see Inovio as a possible Coca-Cola stock. I use that term because there are families living in Atlanta, in style, whose only investment was a few shares of Coca-Cola back when. Inovio could still turn out to be a dud, but if its vaccines work against cancers and other notoriously difficult targets like HIV, its market cap will be measured in the tens of billions, not a fraction of a billion.

I suspect Inovio will cross the 1 billion market capitalization mark some time after the full data from the trial has been presented and digested by analysts and investors (barring any troubling details not included in today's announcement). This round figure is based on a minimal increment in value given that some investors and columnists assumed the VGX-3100 trial would fail and consequently the rest of the pipeline would have little value.

Merck's Gardasil revenue was $383 million in Q1. GSK's Cervarix revenue was $37 million in Q2. Inovio's VGX-3100, if approved, might be priced more like a cancer therapy, but would address the fewer number of patients who have developed cervical tumors. It looks like it could achieve a $1 billion revenue run rate, depending on pricing.

Also note $400 million in potential milestone payments ahead from Roche for the prostate cancer vaccine, and the possibility of developing more DNA vaccine candidates that can be licensed for cash and milestone payments or royalties.

How fast and how high INO goes will be driven by data and investor enthusiasm, as well as any competition that is out there for particular disease indications. So at $13.00 per share I consider INO undervalued, assuming the risks of investing in a development phase biotechnology stock are well understood. Investing in Inovio is investing in a technology revolution, not just in a single vaccine.

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.

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