Piper Jaffray's Charles Duncan Addresses Pot Shots


Charles Duncan Early-stage biotech is a risky investment, but some bets are safer than others. Inovio Pharmaceuticals Inc. is doing high-stakes experimental work in both preventive and therapeutic medicine, addressing HIV, cancers and pre-cancers. The company's lead clinical program is in Phase 2 and a data readout is imminent, which has made the stock both volatile and an easy target for critics. In this interview with The Life Sciences Report, Senior Biotechnology Analyst and Managing Director Charles Duncan of Piper Jaffray & Co. addresses some of the criticisms that overhang the stock.

The Life Sciences Report: How long have you followed Inovio Pharmaceuticals Inc. (INO:NASDAQ)?

Charles Duncan: I've covered Inovio Pharmaceuticals for several years. We initiated on it at Piper Jaffray, along with the rest of our coverage, a year and a half ago.

TLSR: Charles, in a note you published on June 17, I see that approximately 75% of Inovio's valuation is modeled on a still-preclinical immunization called PENNVAX-GP, a preventive and therapeutic vaccine for HIV. But that's not what investors are looking at right now, is it?

CD: Our valuation model is a function of what was most visible in the pipeline when we initially made our projections. That was driven primarily by HIV. But we believe that news coming up on another pipeline product will, perhaps, make that product more visible than the HIV program and some of Inovio's other programs. I'm talking about VGX-3100 (synthetic constructs of DNA plasmids targeting antigenic proteins expressed by certain oncogenes of human papillomavirus (HPV) subtypes 16 and 18). This compound is in a Phase 2 study for cervical dysplasia, or cervical intraepithelial neoplasia (CIN), caused by HPV.

TLSR: These data are expected around the end of July, according to the company. The trial is double-blind and placebo-controlled, with more than 150 patients, and will read out in nine months. Is that right?

CD: Yes. The trial consists of three immunizations, at zero, three and six months, followed by a readout at nine months. The primary endpoint is regression of cervical dysplasia from CIN grades 2/3 to CIN 1, or to completely normal tissue, at nine months.

TLSR: Are institutional investors looking at the trial as validation of Inovio's entire DNA vaccine platform? What does this trial mean to investors?

CD: This trial is important not only for the indication, cervical dysplasia, but also for the broader validation of the technology platform. There are two important things investors should consider with regard to this trial. First, we should appreciate that this is the first human clinical study of the platform that is controlled—it's really the first time we've been able to compare patients treated with this product to a control group. Other studies have been impressive in that they have demonstrated the technology can generate T-cells, but those were not controlled studies. The second thing is that this study is an evaluation of Inovio's clinical trial design capabilities.

TLSR: Charles, the question on everyone's mind right now is about the efficacy of VGX-3100. What will this Phase 2 trial tell us?

CD: Phase 2 studies are not pivotal studies. This study is rigorous in its design, and is looking for differences between the experimental group and the control group in the reduction in a number of CIN lesions. As a Phase 2 study, it is meant to be hypothesis-generating, and therefore several questions can be asked and answered about the study design with regard to dosing, etc. We could see differences in certain patient populations that could inform the next steps in development. There are several outcomes that could be informative as to those next steps, but one of them does not have to be a clean statistical difference in the intent-to-treat population.

There are a couple of outcome measures that we would see as positive, and only one outcome measure that we would see as negative, for both treating cervical dysplasia and for this platform generally. That negative outcome would, of course, be that there were no differences between the experimental and control groups.

TLSR: This is a tricky study because, according to the company, between 4% and 40% of these cervical dysplasia patients will regress to a lower grade of disease, or to normal tissue state, on their own. That makes the outcome very difficult to study, given the number of patients in the trial. Do you think 150 patients are enough? Is this study powered well enough to give positive signals for this therapeutic vaccine?

CD: It is a tricky study in that patients do regress naturally. That's the good news for patients. The bad news is that you don't know exactly what the rate of regression will be. In general, you could guess a 25–30% regression. In addition, certain types of HPV infections regress more readily than others.

"Inovio Pharmaceuticals Inc.'s stock could hit double digits pretty easily, in terms of its trading range, with a good outcome from the Phase 2 VGX-3100 study."

The quick answer to your question—do we think this study is adequately powered, or could there be noise?—is that I think it's adequately powered. That leads me to another thought: I would associate the word "powered" more with a Phase 3 trial. The whole point of this Phase 2 study is to determine the magnitude of clinical benefit we need to power the Phase 3 study.

I would also say that I think we should be able to see a difference in the arms of the study with about 150 patients, even with, let's call it, ~30% of patients regressing in disease grade with no intervention. The hazard is if that regression level turns into 40% or 50% in the control arm. Then perhaps we won't see a large difference.

TLSR: What if this Phase 2 study is not statistically significant? Do you have to generate statistically significant data to justify a Phase 3 study?

CD: No, you don't. If you didn't generate a statistical significance across the entire study population, you could generate meaningful results in a subgroup that you could readily identify up front, prior to a Phase 3 trial.

Let's say, in this particular case, we see a very clear statistical significance and meaningful results in the regression rates in VGX-3100-treated patients who responded, and who also experienced a very robust T-cell response. What we would look for then, as clinically meaningful and mechanistically related, is statistical significance in the patient population where significant immune system modulation occurred.

TLSR: Inovio CEO Joseph Kim recently said that investors should consider the immunogenicity of VGX-3100 as determined by T-cell response, as you just described. Investors and researchers would all love to see T-cell response correlate to clinical efficacy, but in the Phase 2 trial (NCT01304524), T-cell response is neither a primary nor a secondary endpoint. What is your impression of CEO Kim's advice to investors? Some investors are taking his comments as a negative and saying that he could be preparing the market for a letdown.

CD: I don't think investors should look at Kim's comments as a negative, but I can certainly understand why they'd believe that. This is not a pivotal study, but I think the primary endpoint here, reduction in lesions, is absolutely the best first way to see whether this drug is working.

The key question is related to mechanism, and that's why T-cell response is more broadly important. I do not think that Joe Kim is backing away from the importance of the primary endpoint. I think he is trying to help people understand that this is a very interesting study for him, as a scientist who is very knowledgeable in this arena and is interested in evaluating the technology from several perspectives. VGX-3100 is designed to modulate the immunoresponsiveness of these patients, so he, as the steward of the company's cash and a big investor in terms of his time and life's work, is looking at this in a multifactorial way.

TLSR: You have a $26 price target on this company, which would represent almost a 200% implied return from where the company's stock is trading today. Is this a 12-month target price or a 6-week target price? Are you looking to hit your price objective at the end of July, when we're expecting the data on the Phase 2?

CD: I don't think the stock will move that much in a few weeks, but I think the stock could hit double digits pretty easily, in terms of its trading range, with a good outcome from the Phase 2 study.

There are three scenarios. One is that VGX-3100 shows statistical significance in the intent-to-treat patient population, which means across the board. Second, VGX-3100 shows statistical, meaningful and robust significance in just a subgroup. Third, VGX-3100 doesn't work, doesn't show statistical significance in either the intent-to-treat or any identifiable patient population, and it also doesn't show meaningful T-cell responses. In that last case, the stock would trade down. In terms of scenario two, there are probably some number of subscenarios that could prove of interest, not only to management but also to longer-term investors. Remember, we're talking about investors who have different time horizons, and other investors who are much more knowledgeable about this space.

To answer your question, I have a 12–18 month price target. I would not anticipate our price target to be achieved within weeks of the Phase 2 results. But scenario one, obviously, could drive the stock higher, and scenario three would very likely drive it lower.

TLSR: Back in November, Roche Holding AG (RHHBY:OTCQX) obtained rights to two of Inovio's therapeutic immunizations, INO-5150 for prostate cancer and INO-1800 for hepatitis B virus. I understand that the upfront $9.2 million ($9.2M) paid to Inovio is just pocket change for Roche, but Roche does have something more than money riding on this. There's a prestige factor in developing these new technologies as well. In your opinion, does this show confidence in Inovio's platform, or is this just a roll-of-the-dice venture for Roche?

CD: I think Roche is thoughtful about the companies it works with. Although it generates a ton of revenue, Roche is all about making profit, and it wants to make multiple investments in a diversified way to see who's going to win out. The investment in Inovio is very strategic for Roche. There are other platforms it could have worked with, but I think this represents external validation from Roche in terms of it having looked at Inovio's platform and approach relative to other technologies.

TLSR: Although Inovio has a market cap of more than $590M, it reverse-split its stock 1:4 back on June 5. That is normally what you see in a penny stock, and some investors took it in a negative way. Is that a fair criticism?

CD: The timing was unfortunate, given the near-term news coming on the Phase 2 study. But I'm confident there is no insight into the data or into the conduct of the study that suggested the company should do this. The reverse split does take out a very large number of the total outstanding shares, and that was one of the challenges the company had with an equity raise earlier this year. I think that was the company's strategy. I should say that I was not involved in, and did not discuss, the idea of the reverse split with management before it occurred.

TLSR: Are there any other catalysts that could be significant at Inovio over the next 12 months, aside from the Phase 2 study?

CD: I think this Phase 2 in cervical dysplasia is the most significant catalyst. Other studies have started, one in cervical cancer and the other in head-and-neck cancer, both driven by HPV infections. Progress and potential early efficacy readouts are at least 12 to 18 months out.

TLSR: Thank you and best wishes.

CD: Thank you, and have a good day.

Dr. Charles Duncan is a managing director and senior research analyst at Piper Jaffray & Co. focusing on small- and mid-cap emerging growth biotechnology companies. Duncan brings more than 18 years of sellside experience and has been recognized by industry sources, including the StarMine Analyst Awards, as being among the best analysts for his fundamental and timely analysis. He is a graduate of the University of Wisconsin and holds a doctorate in neuropharmacology from the University of Colorado.

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1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Inovio Pharmaceuticals Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Charles Duncan: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Inovio Pharmaceuticals Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. Inovio Pharmaceuticals, its management or its employees, did not participate in this interview and had no part whatsoever in the questions asked or the resulting responses. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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