Vical Is Deeply Undervalued: Technology and Pipeline Offer Upside Reward

| About: Vical Incorporated (VICL)
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Vical Incorparted (NASDAQ:VICL) is a "must buy" that offers investors excellent upside reward given its exceptional broad-patented technology and pipeline.

Vical's core technology grew out of an accidental discovery and provided the foundation for two entirely new biopharmaceutical sectors: DNA vaccines and non-viral gene therapy. Vical's management systematically leveraged that technology into a broad portfolio of independent and partnered product development programs. The first products for animal health (Oncept for Canine Melenoma and Apex-IHN Salmon Vaccine) are on the market, and the first human products are approaching fast, which makes this a compelling investment opportunity. As will be discussed further in this article, the company is nearing completion of a phase 3 trial for Allovectin-7 and should have two other drugs (TransVax and Collatagene) in phase 3 in the second half of 2011.


Compared with conventional vaccines that use pathogens to produce an immune response, DNA vaccines offer less risk, more efficient manufacturing, as well as convenient storage and handling. More importantly, this technology allows quicker production and evaluation of new vaccines. Now that genetic coding of target disease pathogens is rapid and economical, the company's technology can provide new vaccines in weeks instead of months or years - without ever having to handle the pathogen directly - a critical factor in addressing emerging global pandemics.

The company demonstrated this speed during the outbreak of H1N1 pandemic influenza in 2009, when they downloaded the gene sequence posted on-line by the CDC and became the first company to produce and initiate animal testing of a vaccine against H1N1. This speed was a reason that the U.S. Navy is partnering with Vical on the further development of a pandemic influenza vaccine, with the goal of establishing a DNA vaccine platform approach for future infectious disease outbreaks. In fact, the company's list of collaborators is a strong testament to the efficacy of their technology, as the list includes, Merck (NYSE:MRK), Novartis (NYSE:NVS), Merial, AnGes, and the National Institute of Health.

Additional advantages of our DNA delivery technology include:

  • Broad applicability, for infectious disease vaccines, novel therapies for cancer, and therapeutic protein delivery.
  • Convenience, typically with simple outpatient administration and no pre- or post-treatment requirements.
  • Safety, with no infectious components and an excellent record in clinical testing.
  • Repeat administration, with no undesired immune reactions against the delivery vector.
  • Ease of manufacturing, using uniform fermentation and purification procedures.
  • Cost effectiveness, combining lower production costs and reduced need for ramp-up.


1) Allovectin-7® is a first-in-class immunotherapy that is nearing completion of a pivotal Phase 3 trial in patients with metastatic melanoma.

Allovectin-7 has U.S. Orphan Drug and Fast Track designations. In patients with advanced metastatic melanoma, median survival typically ranges from six to eleven months.

Vical is encouraged by the trial’s progress – recently an independent Safety Monitoring Board completed the trial's fourth scheduled safety analysis and recommended that the trial continue per the protocol. In combination with the fact that the mean survival rate using Allovectin-7 increased from 7.7 months to 18.8 months versus the control group, the likelihood of FDA approval is highly likely.

The company has estimated the market potential for Allovectin-7® in metastatic melanoma at approximately $500 million. Additional opportunity could follow for other indications. As Allovectin-7® is not melanoma-specific, it has the potential to be used in other immunoresponsive solid tumors as well. Vical has retained rights for the U.S. and European markets, and is actively seeking a partner for further development and commercialization.

Melanoma is the fastest growing incidence rate as per the National Cancer Institute. There is no curative treatment for advanced disease and current treatments (DTIC, IL-2, TMZ) have short-lived responses and are quite toxic. There has been recent validation of immunotherapies such as Dendreon's (NASDAQ:DNDN) provenge for prostate cancer and Bristol Meyer's (NYSE:BMY) Ipilimumab, which just received FDA approval on Friday, March 25th.

While Ipilimumab is a competing therapy, I see its approval as both a near-term and long-term catalyst for Vical shares. First of all, one of the three Ipilimubab studies failed to meet its primary goal of shrinking tumors in at least 10.0% of the study's 155 patients. Secondly, the drug has severe side effects as it caused rashes, diarrhea and hepatitis in a number of the patients being tested.

Finally, and perhaps most importantly, approval and marketing of Ipilimumab should spark interest in the medical community for alternative options such as Allovectin-7, which in my opinion, has much more impressive clinical data.

2) Cytomegalovirus (CMV) is a herpes virus that affects 50-85% of the U.S. adult population (approximately a $4 billion market), yet there is no approved vaccine available.

In most healthy individuals, the infection is benign, but in those with weak immune systems, the virus is highly threatening. And therefore, Vical has been developing vaccines ro target at-risk populations. To address the unmet need to protect transplant patients from CMV reactivation, Vical is developing TransVax™, a therapeutic DNA vaccine encoding the CMV, resulting primarily in an increased cellular immune response. Vical's TransVax™ vaccine has U.S. orphan drug designation for transplant patients.

In September 2010, Vical announced statistically significant immunogenicity and clinical efficacy results with no safety issues from a completed Phase 2 trial of the TransVax™ vaccine in patients undergoing hematopoietic stem cell transplants.

Recently, the European Medicines Agency (EMA) agreed with the company's position that a CMV disease endpoint is not practical. The EMA also provided positive comments on important features of the proposed trial design and overall product development pathway. Vical is currently evaluating plans for the pivotal Phase 3 trial with the U.S. Food and Drug Administration (FDA). The company will provide additional information about the trial upon completion of regulatory agency discussions, and expects to begin the planned Phase 3 trial in the second half of 2011. The company has estimated the market opportunity in this segment at over $500 million and has sufficient capacity for a commercial launch.

3) Collategene's Phase 3 study is planned shortly and the drug has an estimated $2 billion market opportunity.

AnGes has partnered with Vical and will be bearing the brunt of the costs associated. As per Vernon Bernardino (click here for the report) of Dawson James:

Recall that in September 2010, partner Sanofi Aventis (SNY, Not Rated) announced Temusi, failed a pivotal trial called TAMARIS in patients with critical limb ischemia (CLI), which punished Vical shares. We note, however, significant insight was gained from updated TAMARIS results presented by Sanofi in November 2010 at the annual American Heart Association meeting. The updated data was useful in the design of the planned clinical trial with Collatagene, which AnGes submitted to the FDA for special protocol assessment (SPA) and received. As the FDA is likely aware of the failure of Temusi in a similar disease setting, we believe the SPA improves the chances AnGes will successfully navigate the regulatory path for approval with Collatagene.

4) Others - The company has several other drugs in earlier stages (click here for the complete pipeline), on which positive news could be a signifcant price catalyst.

Financials/Price Targets

The company has zero debt and ended 2010 with a cash balance of $61 million. I believe that this is sufficient to fund the company's activities at least through 2012. Dawson James analyst Vernon Bernardino estimates 2013 EPS of $1.13 (read the report here). He used a 20X EPS multiple and discounted 35% annually to arrive at a $7 price target for the stock. Note that this estimate does not even include sales for Collategene. My analysis is more short-sighted and I am looking for near-term upside of $4+ on announcement of phase 3 Allovectin-7 results.

Furthermore, by the end of 2011, I believe the stock could easily trade around $5 to $6 a share with the commencement of Phase 3 trials for TransVax and Collatagene, thus generating an easy 100% upside reward for investors. Simply put, the company is deeply undervalued. It is clearly evident the current stock price doesn't reflect the grand prospects Vical has. Buying the stock under $4 represents a bargain.

Disclosure: I am long VICL.