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Timing in the markets is critical. Sometimes things simply happen more quickly than desired. I had shorted Vical (NASDAQ:VICL) at $1.70 per share based on my assessment of what the company was doing with its clinical trial on a herpes simplex 2 vaccine. I wrote the following, but the article had not yet published. Over the weekend, the company announced that its phase 2 clinical trial failed to meet primary end point and that the company was ceasing the program. The article I wrote discussing a short opportunity is as follows:
Vical is a small biotechnology company specializing in infectious diseases. It ended Q1 2018 with $58.3 million in cash and investments with full-year cash burn guidance of between $20 million and $24 million for 2018. In May, Vical filed a prospectus for a $40M mixed shelf offering in an effort to raise needed capital to continue its research and conduct additional clinical trials.
Vical has two drugs in clinical trials. The first is VCL-HB01 and the second is VL-2397.
VCL-HB01 is a HSV-2 therapeutic vaccine that has completed phase 2 with top line results expected in June. HSV-2 is commonly referred to as Herpes Simplex 2 and in simple terms is genital herpes. Vical decided to enter the vaccine into phase 2 despite not meeting top line results from its phase 1/2 trials. The company stated the following:
... Initial top line 3-month data announced in June 2015 showed that neither the monovalent nor the bivalent vaccine met the primary endpoint of viral shedding rate reduction from baseline.
In my opinion, not meeting topline results is a resounding failure. However, Vical spun the results this way:
... The bivalent vaccine achieved statistically significant reduction in a prospectively defined secondary endpoint of genital lesion rate at three months versus baseline.
Let's look at this in simple terms. Viral shedding is the standard by which a HSV-2 vaccine or antiviral drug is measured. For example, Genocea (GNCA) is also developing a herpes simplex vaccine and reported 12-month top-line data from the Phase 2b clinical trial for GEN-003, its immunotherapy candidate for patients with genital herpes.
Genocea reported that the trial achieved its primary endpoint, with GEN-003 demonstrating a statistically significant reduction in the rate of viral shedding in the 60 µg per antigen / 50 µg of adjuvant dose group compared to both baseline and placebo.
Another company, AiCuris (a non-public company) developing the antiviral pritelivir, presented data that demonstrated reduced viral shedding and lesion rates.
Pritelivir has successfully completed a phase II clinical trial in 156 participants with genital HSV-2 infections showing reduced viral shedding and genital lesions.
Despite failing to meet the primary endpoint, Vical has decided to pursue another phase 2 trial but with different endpoints. This time instead of testing for viral shedding, its primary endpoint is lesion rate.
After a 4-dose vaccination series, subjects will be evaluated for recurrences over a 12-month period. Following extensive discussions with the FDA, Vical has selected the recurrence rate as the primary endpoint for the study.
What investors need to consider
Here is the rub. Viral shedding is a precursor to lesions. Simple logic dictates that if a vaccine or antiviral does not reduce viral shedding, it will not reduce lesions to any significant extent. Vical has chosen a low bar as its primary endpoint. Even with the primary endpoint being lesion rate, I expect Vical to report disappointing results this month based simply on the relationship between viral shedding and lesion rate. In my opinion the company is trying to raise funds prior to the data being announced because the data will be less than impressive to potential investors.
With the anti-fungal two years away from phase 2 completion, and the herpes drug being questionable in my mind, there's not much to get excited about. With additional dilutions very possible, the street will quickly develop a strategy on trading this equity for maximum profit.
Vical ended Q1 2018 with $58 million and is expected to burn $20-$24 million during 2018. If the HSV-2 vaccine fails, which is essentially the only possible near-term catalyst, this will leave the company dependent on the anti-fungal.
If, as I anticipate, the HSV-2 vaccine fails to deliver compelling results, the company may only be worth its cash per share. If one assumes the company raises $40 million by selling shares at current prices $1.70 that would add approximately 23 million shares to the 21 million already outstanding for a total of 44 million shares.
Assuming the entire $40 million is available by the time anti-fungal results are announced, the cash per share values at less than $1 per share. I anticipate this equity to trend down to sub $1 and that will open a whole new can of worms relating to listing requirements.
I covered my short position in early trading on June 11th at $1.09. That represents a gain of 56% on my short call. While the timing of my pending article did not make it to press in time for other traders to take advantage, there's still a strategy around Vical as it relates to the anti-fungal product that the company has in clinical trial.
Clearly Vical is reeling a bit on the failure of its herpes program. In fact, this stock is in danger of flirting with Nasdaq listing requirements which require an equity to trade over $1.00 per share. Should the company dip below $1.00, it will be out of compliance with listing requirements. If the stock remains below $1.00 per share for 30 consecutive days, it will get a delisting notice. That notice allows the company 180 days to regain compliance. The most oft used mechanism to regain compliance is a reverse split. Reverse splits from a position of weakness do not typically bode well.
Vical has a hepatitis B drug in very early stages with results of preclinical proof of concept studies not anticipated until the second half of 2018.
Given that readouts on the anti-fungal treatment are two years away, and the hepatitis B drug is in the proof of concept stage, Vical has very little positive catalysts to rely on.
Disclosure: I am/we are long GNCA.
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.
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