Investment Thesis

Inovio 1-year share price performance. Source: TradingView

A couple of weeks ago I added 4 biotechs developing COVID-19 vaccines or adjuvants to the Pure BioTech model portfolio I run at my marketplace channel Haggerston BioHealth: Inovio (INO) – the focus of this article – Vaxart (VXRT), Novavax (NVAX) and Dynavax (DVAX).

Unfortunately, I got my timings wrong, since all 4 stocks have dropped by >14% since I added them, but I remain confident that my thesis – that there are many more twists and turns ahead in the race to develop a COVID-19 vaccine, and therefore, a huge amount of price volatility for investors to capitalize upon in the short term, and that over the long term, this period of supercharged development will create sustained share price gains for a number of companies and lead to a variety of effective treatments – remains true.

I believe Inovio’s share price has declined primarily because it has not been selected as a “finalist” by the US Government’s Operation Warp Speed (“OWS”) program, but this fact does not overly concern me. Amongst those chosen, and awarded funding are AstraZeneca (AZ), Johnson & Johnson (JNJ), Moderna (MRNA), GlaxoSmithKline (GSK) and Pfizer (PFE) which suggests to me that, wildcard Moderna aside, OWS has plumped for big pharma over biotech.

That is probably the safe option, but my own feeling is that true innovation comes from the biotechs that more often than not, supply the drug candidates that make big pharma rich, through development deals and acquisitions, since biotechs lack the financial clout to self-fund late-stage R&D, or compete in the post-commercialization market.

Bears may point to the fact that Inovio has yet to commercialize a drug of any kind in more than 30 years of trying, but due to the fact that the pandemic is an unprecedented event and the task of creating a vaccine is a unique challenge, I believe that this should be discounted as a criteria for judging a company’s prospects of success.

In many ways, Inovio has operated more like an R&D center than a late-stage biotech pushing for commercialization in recent years – which has allowed the company to slowly but steadily progress a number of vaccine treatments into late stage trials, and develop a sophisticated delivery system involving plasmid DNA and in vivo, cellular administration techniques that are safer and have a longer lasting effect.

Although Inovio has missed out on the multi-billion funding agreements the US government has signed with its finalist candidates, and others, e.g. Novavax (NVAX), the company has raised ~$450m in 2020 and secured a deal with the Department of Defense worth $71m to develop its CELLECTRA smart delivery device.

The company says it is on track to deliver 1m doses of its INO-4800 vaccine in 2020, and 100m doses by 2021, but investors have backed away from the stock owing to unexpected delays in approval for, and enrollment in late-stage trials. This has caused Inovio’s share price to retreat from $32 to $12.13 at the time of writing, and I make this a buying opportunity.

I expect the company to commence late-stage trials of INO-4800 by the end of September, and based on early data sets, which suggest that INO-4800 has generated the most durable response of all vaccines trialed to date, I expect data readouts from these trials to put Inovio back in contention to be one of the first vaccines approved for treatment of COVID-19.

In the long run, however, I am more interested in INO-4800 being one of the superior treatments to get to market, rather than one of the earliest, and I also believe there is a reasonable chance of one or more of its HPV or cancer vaccines securing approval from the FDA, which could help the company achieve peak sales of >$1bn. Hence, I am bullish on Inovio.

A COVID vaccine would create upside that is hard to quantify, but would certainly be substantial, whilst the downside case is limited by Inovio’s multiple shots at goal and satisfactory funding position. I am hoping to see the share price exceed its current 2020 high of $32 before the end of the year.

Analysts’ consensus target price is currently $15.6. Without the COVID angle, I would be setting a 1 year price target of $15-$20.

Company Overview – SynCon & CELLECTRA

Inovio is primarily concerned with the design, development and rapid commercialization of DNA medicines to treat diseases associated with human papillomavirus (“HPV”), cancer, and infectious diseases, using 3 different types of product candidates: DNA vaccines, DNA immunotherapies and DNA encoded monoclonal antibodies (dMABs).

The company has developed a unique approach that uses a proprietary immunotherapy platform, SynCon that precisely encodes optimized antigens or transgene proteins into close-circular DNA plasmids that generate an immune response in vivo, leading to the production of preventive antibodies and / or the activation of therapeutic CD8+ T cells.

Inovio’s medicines are delivered using the company’s specially developed and proprietary CELLECTRA smart device, which uses electric pulses to create temporary pores in the cell membrane to ensure the delivery of nucleic acids into the cell. Inovio believes this increases the cellular uptake of its optimized plasmids by 1000x compared to an injection, as well as avoiding unwanted immune responses caused by the activation of additional antigens contained within a vector – Inovio’s plasmids result in the production of only the desired antigen.

Inovio’s SynCon and CELLECTRA design and delivery system explained. Source: corporate presentation.

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The company has tested CELLECTRA in more than 2,000 patients and 6,000 administrations and found it to be safe and effective, not requiring an anaesthetic, and with no anti-vector response generated.

There are different configurations of CELLECTRA including intramuscular delivery of DNA medicines and intradermal/subcutaneous delivery, and Inovio was recently awarded $71m of funding from the Department of Defense (“DOD”) to support the large-scale manufacture of its next generation device, CELLECTRA® 3PSP – designed to administer Inovio’s COVID vaccine INO-4800 directly into the skin – and associated arrays.

The current version of CELLECTRA has received CE mark certification, whilst Inovio hopes to secure FDA approval for the device ahead of its planned use in the US military and US population as a whole, as part of the DOD agreement.

Current Pipeline

Inovio DNA Medicine pipeline. Source: company website.

According to research from the Centers for Disease Control (“CDC”), 80m Americans are currently infected with HPV, with 14m new infections annually. If untreated, HPV can quickly progress to low-grade cervical dysplasia, which affects around 1.1m Americans, high grade anal, vulvar, or cervical dysplasia (~150k people), and eventually cervical, anal, head and neck, or vulvar cancer (~40k).

VGX-3100 is Inovio’s most advanced vaccine treatment for HPV, and is currently in pivotal phase 3 trials (REVEAL1 & REVEAL 2) of HPV-related precancerous cervical dysplasia, and high grade squamous Intraepithelial lesion (“HSIL”) with results from the cervical dysplasia arm expected to be announced in Q420. In a phase 2b trial, VGX-3100 met its primary and secondary endpoints, of regression to cervical intraepithelial neoplasia (“CIN”) grade 1 or normal, and regression to normal and virological clearance.

INO-3107, developed to treat rare disease Recurrent Respiratory Papillomatosis, has had an IND accepted for a phase 1/2 study – with the primary endpoint being a doubling or more in the time between surgical interventions – and been granted orphan drug designation.

MEDIO457, developed to treat head and neck and cervical cancers, is being developed in collaboration with AstraZeneca (AZ), who have paid $27.5m up front, and committed up to $250m in development and commercial milestones, plus double-digit tiered royalties, to acquire the candidate, which it is also trialing in combination with its PD-L1 inhibitor durvalumab in HPV associated cancers.

DNA immunotherapy candidate INO-5401, designed to treat brain cancer Glioblastoma Multiforme (“GBM”) is being developed in collaboration with Regeneron (REGN). Results from a 52 patient phase 1/2 trial, released in May, showed that 85% of newly diagnosed GBM patients were alive for at least 12 months or more following treatment, and no serious safety concerns were reported.

Analysts have estimated that peak sales of INO-5401 and INO-3107 could reach up to $1.4bn in annual sales, although it is worth pointing out that the success rates of vaccine candidates even in late stage trials are lower than one-in-three.

COVID Vaccine

Inovio was one of the first companies out of the blocks with a SARS-Cov 2 vaccine, designing a solution within hours of the release of the genetic sequence of the coronavirus by Chinese scientists in January this year.

INO-4800 was designed to precisely match the DNA sequence of the virus and targets the surface antigen Spike protein of the SARS-Cov 2 virus which causes coronavirus. The vaccine was first manufactured in January.

By March, Inovio had initiated pre-clinical studies, and received $5m funding from both the Bill and Melinda Gates Foundation, and in April the company initiated its first clinical trial in humans in the US – enrolling 40 patients – after receiving an IND from the FDA, and also raised $150m to fund development, at a price of $7.7, as well as receiving $6.9m of funding from the Coalition for Epidemic Preparedness Innovations (“CEPI”).

This early progress saw Inovios’ share price briefly spike from a price of $4.4 in early March, to $14, and then spike to $16 in early May, when it released pre-clinical data – published in the journal Nature – that revealed robust neutralizing antibody and T cell immune responses in mice and guinea pigs. 3 separate assays were used to confirm the presence of virus neutralizing antibodies and activity, and antibodies were also detected in the lungs of the vaccinated animals – an encouraging sign given that coronavirus targets the respiratory system.

In June, Inovio expanded its phase 1 trial to 80 additional participants, including older adults, and announced positive preliminary results. 94% of participants receiving a 1mg or 2mg dose four weeks apart, administered using CELLECTRA, demonstrated binding and neutralizing antibodies and T cell immune responses, with no serious adverse safety events reported.

INO-4800 clinical trial progress. Source: Inovio corporate presentation.

Additionally, in the OWS’ non-human primate study in which Inovio participated, durable antibody and T-cell responses were observed more than 4 months after the initial dose, whilst memory T and B cell responses reduced viral loads and resulted in faster clearance of lungs and nasal passages. Inovio pledged to commence a phase 2/3 trial in July / August, pending FDA approval, and began clinical trials in South Korea and China.

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At this point, with a number of positive data sets released, $71m from the DoD, and $150m of funding raised, Inovio looked like a clear front-runner, despite missing out on the OWS finalist program, and the company’s share price rocketed to $32. Profit taking and one or two bearish analyst reports dropped the price back down to $19, but the stock was soon soaring again, peaking at $27 in late July.

Unable to Sustain Momentum

Late July represented a high water mark for Inovio in terms of share price and progress however – since August, Inovio has demonstrably failed to build on its significant momentum.

The proposed phase 2/3 trial has been put back to September at the earliest, , and Inovio stock crashed back down to $14 after management had little to update analysts with in its Q220 earnings call.

The reasons for the delay are unclear, but could be related to issues gaining trial approval from the FDA, or possibly due to supply issues Inovio has been experiencing with its plasmid supplier VGXI, which informed Inovio in June that it was unable to produce sufficient quantities of plasmids. Inovio subsequently asked VGXI to hand over its plasmid manufacturing technology to its contract manufacturers, which the company has refused to do, which has resulted in Inovio taking VGXI to court.

The delays could additionally hint at the fact that as a fundamentally research and development based drug developer, Inovio is struggling to maintain the rapid pace of development due to its lack of experience in this field, or, a more doomsday scenario, that the company has uncovered data that suggests the vaccine’s efficacy or safety profile is not up to scratch.

Meanwhile, other developers have moved ahead in the race. Moderna will shortly commence a phase 3 trial, AstraZeneca may be close to securing an Emergency Use Authorization (“EUA”) nod from the US government, and Sanofi has entered human trials with a promising treatment developed in collaboration with GlaxoSmithKline (GSK).

And furthermore, now that the FDA – aiming to secure a quick approval for a vaccine to meet its Jan ’21 deadline – has set the bar for vaccine efficiency at just 50% compared to placebo, it could certainly be argued that Inovio has dropped off the pace at the worst possible time.

Too early to discount Inovio’s differentiated and economical solution

As mentioned in my intro however, I believe it is far too early to discount Inovio and INO-4800. Market-watchers who wish to will be able to uncover new reasons to discount one vaccine treatment and promote another on an almost daily basis, which is why there has been so much market volatility to date.

When the prize for developing a COVID vaccine has been estimated to be anything from $70bn to >$100bn, or $40bn in after tax profits, or perhaps as much as $150bn, at the high end (think of how much a vaccine will save the government, economy, and healthcare system over time) it is no wonder investors are desperate to back the right stock.

But in reality, I do not see things playing out as simply as there being one winner and hundreds of also-rans, since there are many different variables to consider.

Moderna, for example, may be considered a current front-runner, but its vaccine is also likely to be expensive – estimated at between $32 and $37 based on deals Moderna has already made – since it needs to be stored in sub-zero conditions. Inovio’s vaccine, on the other hand, can last up to 1 year at room temperature, and up to 5-years when refrigerated at between 2-8 degrees centigrade.

The US government has purchased 100m doses of Pfizer / BioNTech’s vaccine for $1.95bn, which works out at ~$20 per dose, whilst other companies – AstraZeneca and JNJ, for example – have pledged to provide their vaccine on a non-profit basis during the pandemic. But there are other costs to consider, such as administration.

Importantly, Inovio’s CELLECTRA based administration system may prove to be more economical and environmentally friendly than using disposable needles, swabs, and gloves. The battery powered devices can be stockpiled in large quantities without maintenance, making them ideal for use during a pandemic.

Most important of all is efficacy, and at this point, it is still anybody’s guess which vaccine will prove the winner in this regard. If a vaccine is approved in January 2021, for, say, 100m initial doses, with an option to buy 200m more doses, but in the interim period, Inovio, say, publishes demonstrably superior results from a late-stage trial, and has sufficient manufacturing agreements in place, then surely governments around the world will turn to the new solution.

Signs that INO-4800 could still prove to be a winner

Under normal circumstances, vaccine development takes up to 5 years at the very least, whereas under pandemic conditions, firms with little or no experience (e.g. Moderna), or big pharmas trying to build a respiratory-based vaccine from scratch in a matter of months, may not be the best options.

Granted, big pharma can use their financial leverage and influence to accelerate the development process, but this is a risky strategy that goes against tried and tested approaches and there is no prior proof that it can work. As far as Moderna is concerned, no mRNA drug of any kind has ever been approved before.

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Inovio, on the other hand, has a great deal more experience of the R&D side of the vaccine development process, which suggests that, although it may take longer to develop, the company’s vaccine may prove eventually to be the superior product.

Its anti-vector technology, for example, is likely to create a more durable response and cause less side-effects. Its cellular delivery system, as already mentioned, is a more effective dosing solution that gets more of the vaccine to the right parts of the body. INO-4800 generates T-cell responses and may be superior at targeting the lungs and nasal passages. The vaccine itself does not require an adjuvant.

Some have argued that Inovio does not have the funds to advance its late stage trials, but this is not the case. The company completed sales agreements of $121.7 million and $330.0 million during the three and six months ended June 30, 2020, and its current cash + short term investments stands at nearly $400m.

That is significantly less than rivals such as Novavax, which has received $2bn from the government, Moderna and its big pharma rivals, but, given its cash burn of $161m in the first 6 months of 2020, enough to ensure Inovio can keep going until late 2021 without needing to tap the market for funds, and in that time it may well succeed in attracting new partners and more funding.

During the Q220 earnings call, CEO Joseph Kim re-iterated that the company’s target was to provide at least 1 million doses of INO-4800 vaccine this year, and 100 million doses in 2021

Conclusion

Inovio’s progress – or rather, news of Inovio’s progress, has been disappointing in the last month or so, while the news-flow generated and funding secured by its rivals has suggested that the company is being left behind in the race to develop a COVID vaccine. I see the cons relating to Inovio as follows:

There appear to be concerns relating to manufacturing, and the delays to Inovio’s late-stage trials have not been properly explained. The company does not have a track record of getting its treatments over the line when it comes to securing FDA approval, and would certainly benefit from a funding injection since it is also running multiple late-stage vaccine trials that are a drain on resources. Finally, going forward, enrollment could be a trickier process with so many late-stage trials ongoing, which could delay trial progress.

These are the negatives I see in relation to Inovio and the bear case for its stock price declining. But I believe the positives outweigh the negatives.

Despite the way the market reacts hysterically to company news flow and the actions of the government, the COVID vaccine race is really just beginning. Inovio has been working on perfecting its vaccine design and administration tools for 30+ years – this R&D advantage may translate into INO-4800 ultimately becoming the safest and more effective long-term solution.

The main criticism of the company is the delay to its phase 2/3 trial and limited data sets to date, but what data there has been has been not only strong – generating antibodies and memory T and B-cells, but strong specific to the requirements of a COVID vaccine i.e. targeting the respiratory system with a larger payload and no anti-vector activity that could cause severe side-effects further down the line.

Although I am not trying to suggest that Inovio is the clear leader in the COVID vaccine field, from a pure investment perspective, my expectation is that the company will deliver plenty more price catalysts in the coming months.

In the seesaw COVID-19 vaccine market, Inovio’s price is currently trading at a 62.5% discount to its late June peak of $32, and that price is likely to be low in comparison to the price the company’s shares could achieve if it can prove that August was simply a slow news month, and that it is still on track to start a major phase 2/3 trial in September, or thereabouts.

In conclusion, it is still too early to discount Inovio’s chances of delivering a successful COVID vaccine. If the company’s share price spiked to $32 on its early stage data, then investors ought to expect that, when genuine progress is reported, as I suspect it will be, the price will match or exceed its previous high.

If you like what you have just read and want to receive at least 4 exclusive stock tips every week focused on Pharma, Biotech and Healthcare, then join me at my marketplace channel, Haggerston BioHealth. Invest alongside the model portfolio or simply access the investment bank-grade financial models and research. I hope to see you there.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in INO over the next 72 hours. 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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