Inovio Prospects
INO

June 18, 2012

Inovio (INO) is a micro-cap biotechnology company that is developing innovative vaccines and delivery systems. It has a market capitalization, today, of $56 million and a stock price of $0.42 (52wk High/Low $0.94/$0.35). Its therapies would need a successful Phase III trial enabling FDA approval before being commercialized, and the most advanced therapy is only in Phase II, which means it may be years before it turns a profit.

So why own Inovio? A lot of money has gone into developing its products. Paid-in capital is $257.8 million. Results from some early, Phase I, trials are encouraging. The thing to do, in this situation, is to look at the technology and make an estimate as to whether or not it can be commercialized. Also consider how much more capital might need to be raised, resulting in dilution of current stock, in order to achieve that crucial first product commercialization.

Inovio's vaccines are aimed at difficult to treat viruses that typically exist in multiple strains. This means a specific traditional vaccine has to be developed to protect people from each strain. That takes times, and a new strain can emerge and infect a global population faster than a traditional vaccine can be developed. Inovio's SynCon vaccines are believed to provide cross-protection against multiple strains.

Inovio has a Hepatitis C vaccine in a Phase II trial, and HIV, Avian Influenza, and Universal Flu vaccines in Phase I. It has 2 pre-clinical viral vaccine candidates. It also has cancer vaccine candidates: cervical dysplasia in Phase II, leukemia in Phase II, prostate in preclinical, and a breast/lung/prostate cancer trial in Phase I.

There is major outside recognition and even funding for Inovio's vaccines. Partners include (it varies by vaccine) Merck, ChronTech, the National Institute of Health, the University of Southampton and the University of Pennsylvania.

What is innovative about Inovio vaccines? They are DNA vaccines. Traditional vaccines consist of weakened or dead viruses or their protein coatings. DNA vaccines need to be inserted into cells (instead of into the bloodstream), but once there can trigger both antibody and T-cell immune responses. To insert the vaccines into cells Inovio uses an electroporation device it developed and has successfully tested. Inovio, in fact, resulted from the merger of a vaccine company and an electroporation developer.

In its latest results, in May, Inovio announced Universal Avian Flu vaccine generated protective antibody responses against six H5N1 avian flu strains in a Phase I trial.

So this is exciting technology. But most therapies drop out after Phase II trials, and many that show good Phase II data fail for some reason in the larger, usually double-blind, Phase III trials. At best it is a low process. Is Inovio equipped to go the whole hog?

On March 31, 2012 Inovio had almost $26 million in cash and short term investments. It generated a GAAP net loss of over $8 million in the quarter, although cash use was less at near $5.5 million. So with the current cash available Inovio could run for about 5 quarters, not enough to get any final Phase III data, much less an FDA approval.This is despite much of the development being paid for by outside grants or third parties.

Financing could come in several forms, but they all amount to dilution. Inovio could partner with a larger firm, possibly Merck. It could sell stock or bonds, but the market has been leery of unproven biotechnology deals these last few years. Or Inovio could simply be bought by a larger pharmaceutical company, which is a likely scenario if its market capitalization stays low even if it gets further proof of concept.

The near future value of Inovio all depends on what Inovio can prove in the next 3 quarters. But on the whole, there is room for dilution, if it is based on more good data. If their DNA vaccine platform does succeed, there is no reason the company would not be worth in the hundreds of millions, or more. Raising money from investors to allow Inovio to prove itself would be good for everyone, including current investors.

Despite the obvious risk of failure common to all new biotechnology, I believe Inovio is more likely than not to be worth far more in a few years than it is now. Still, it is only for investors who can handle a high degree of risk.

Disclaimer: I took an initial, small but long, position in Inovio in May. I won't trade it for the next week, but I expect to accumulate more if future trial results are positive.

Keep diversified! You should also take a good close look at inovio.com and SEC documents before risking your capital.

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