The zika virus has garnered a reaction not that different to the ebola breakout in March of 2014. Event-driven opportunities, like the ones the zika virus is generating, can be profitable if investors are on the right side of the transaction and an exit point is established. Personally, I feel that zika and ebola are different in the proximity to the United States. If zika were to cross the border from Mexico into the United States, it would be reasonable to expect a full-scale assault with mosquito control programs and fast-track eligibility for any useful vaccine with the FDA. In fact, Texas has already begun preparations for the zika virus to assault the United States from Mexico.
Zika may be the catalyst needed for a company like Inovio Pharmaceuticals (NASDAQ:INO) to propel the financial ladder while the virus remains on the radar of concerned citizens. INO has attempted to apply the technology and research behind CELLECTRA to the zika virus and looks to begin human trials in 2016. At the current valuation, INO is an attractive option for investors looking to profit off of the events surrounding the zika virus. Finally, INO is engaged in ongoing trials surrounding HPV, HIV, Hep C, and ebola.
The two maps below show the stark contrast to the geographic region of the world affected by ebola and zika. As I observed on an international flight during the ebola panic, the United States was largely reliant on screening individuals from high risk countries before they landed in the United States using customs checkpoints at airports. The problem now, however, is that zika uses mosquitoes as vectors to affect the human population. The United States can ramp up mosquito control programs, but reducing the zika virus to a non-zero probability of entering the United States is impossible.
INO recently in a 2/17 press release announced:
Using our SynCon® technology we rapidly generated a synthetic vaccine candidate that shows promise as a preventive and treatment ...
We plan to initiate phase I human testing of our Zika vaccine before the end of 2016.
The promising pre-clinical trial is a large hurdle passed into emerging as the zika virus lead company. At this stage in research, INO has found a positive immune response in mice and now looks to replicate the results in non-primate humans. This breakthrough means that INO has relevant research on hand that can currently be applied to the zika virus. Simply, while other companies are starting from the first floor on developing a vaccine, INO appears to have an advantage in the currently developed immunotherapies which is significant to investors even though the results were found in mice.
INO is not developing a solution to the zika virus alone. The partnership with GeneOne Life Sciences is another strategic advantage that generates a larger base of research and distribution channels on the international level. The partnership is semi soothing to an investor that may be pessimistic about INO finishing first in the zika virus panic, due to the collaboration ongoing between two companies that can both benefit.
There are also perks associated with being a company and engaged in research on an important vaccine. Often, the FDA will "fast-track" a drug to completing because of the ramifications associated with the sensitivity to time. The possibility of the zika virus emerging in the United States is an ugly thought for lawmakers, the CDC, and the FDA. Regulatory agencies such as the FDA will be sure to give companies like INO the cooperation they need to complete a vaccine in a contracted timeline.
Modeling Zika Using Ebola
One of the stocks that absolutely caught fire following the March 2014 ebola panic as Arbutus Biopharma Corp (NASDAQ:ABUS). On 1/14/14, ABUS announced the first human subject for their ebola vaccine had begun the trial. On that day, ABUS stock closed at $12.73. Over the next 12 months, the stock reached a high of $29.93.
ABUS managed to make gains of 135% over the short term by simply being associated with the attention of ebola. While phase 2 of the ABUS-ebola trial in Sierra Leone is closed, ABUS stock has quickly returned those gains and a lot more, and sits at $3.21.
The point of this article is not to demonstrate a long-term growth investing opportunity. Event-driven gains like ebola give short term opportunities to investors, which means the exit point is also important to profit from a high beta small-cap stock like INO. At the moment, even with the zika virus being on the radar of many is not enough to let INO near the 52 week high levels. Therefore, the opportunity to enter this investment may not be closed just yet.
One more important scenario to describe is that the zika virus is prevalent in Brazil, the site of the 2016 Summer Olympics. This scenario is similar to if ebola would have been ongoing in the 2010 FIFA World Cup hosted by South Africa. The "perfect storm" of event driven news may launch the price of any company associated with the zika virus, not to mention a company that is working on a vaccine.
The Bear Case
As other contributors have noted, INO may be caught up in a stunt to return value to investors by simply being in the conversation around crises like ebola, MERS, and zika. Initiating research on popular medicine this cyclically may have damaged the reputation of management.
To this point, I point towards the pre-clinical testing on zika that INO has initiated. It is one thing to "say" your company will begin research on a drug, but actually going through the trials and announcing positive pre-clinical data is assuring as an investor. Additionally, INO last quarter reported a Q/Q revenue increase of 1214.1%! Meanwhile, operating expense and R&D expenditures were relatively flat, decreasing by less than $1mln in aggregate. For investors to observe the expenditure increase on developing a zika vaccine the next quarter financial statement must be released, which at the moment isn't expected until 3/21.
Furthermore, most bears are concerned with INO's beta metric of 2.50, making it a risky equity for investors to engage in. The biotechnology sector has been extremely volatile over the past 12 months for a range of reasons, however small-cap biotechnology stocks may continue to suffer in 2016. While the beta metric is concerning, the risk of an investment with INO has greater upside I believe due to the ongoing zika virus concerns and the "hype" regarding INO.
INO looks to remain on the cutting edge of the zika virus vaccine for the remainder of 2016. If the company can continue to attract investor attention and the zika virus proliferates in panic, INO may reach a valuation it has not seen since 2014 at $15. If the zika virus becomes the monster that many of us fear, INO may reach levels greater than $15 over the next year and into the future.
Disclosure: I am/we are long INO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.