Inovio Pharmaceuticals: Neutral On INO-3107 Amidst Stock Dilution And High Valuation

Inovio Pharmaceuticals, Inc. (NASDAQ:INO) is a biotechnology company that stands out in advancing DNA-based immunotherapies and primarily focuses on conditions related to Human papillomavirus (HPV), various cancers, and infectious diseases. INO leverages cutting-edge technologies like SynCon DNA plasmids and CELLECTRA electroporation delivery. INO’s technologies permit the development of a broad range of drug candidates, which includes medicines such as INO-3107, its flagship drug indicated for recurrent respiratory papillomatosis, and VGX-3100 for HPV-related cervical and anal high-grade squamous intraepithelial lesions [HSIL], a precancerous condition. Unfortunately, INO has financial and valuation concerns that we can’t ignore. The stock’s valuation multiple is high, and its cash runway seems too low. Thus, I rate it a “hold” for now.

A Bet on INO-3107: Business Overview

Inovio Pharmaceuticals is a biotechnology company founded in 1983 and headquartered in Plymouth Meeting, Pennsylvania. INO specializes in producing DNA-based immunotherapies for treating Human papillomavirus [HPV] related conditions, various types of cancer, and vaccines to prevent infectious diseases. INO leverages its proprietary SynCon DNA plasmid and CELLECTRA electroporation delivery technologies for drug development. The company remains largely in the pre-revenue stage, although it has received some payments through grants, collaborations, and licensing agreements. Overall, INO’s core technology revolves around DNA plasmids and electroporation as the delivery mechanism.

Concretely, SynCon DNA Plasmid Technology is a platform for designing DNA plasmids, which are small, circular DNA strands engineered to produce a wide range of proteins in vivo, including antigen-specific ones. These antigens generate an immune response against a broad spectrum of strains or mutations of a pathogen, not just one specific form, which allows for developing effective vaccines against evolving pathogens. This platform can design DNA therapies to prevent or treat diverse target conditions. The interesting part about INO’s approach to this technology is that it allows for rapid development, which can be highly effective when dealing with fast-evolving diseases. Moreover, this approach is highly flexible so that INO can target multiple diseases with customized DNA sequences.

On the other hand, CELLECTRA Electroporation Delivery Technology is the electroporation technology that acts as the delivery mechanism. This mechanism helps transport the customized DNA medicine, enhancing the effects of DNA plasmid in protein production against diseases. CELLECTRA devices produce short electrical pulses that temporarily open pores in cell membranes (electroporation), letting DNA plasmids enter the cells. Electroporation increases DNA plasmid absorption and kickstarts protein production to begin the immune response. Once inside, cells read the injected DNA and start producing the targeted antigens, initiating the immune response. Thus, the therapy begins by injecting DNA plasmids, which carry genetic information that produces medicinal proteins. The injection site varies depending on the disease, and CELLECTRA delivers precise electrical pulses after the injection.

Overall, INO’s current product pipeline includes three lines of research: 1) therapies against HPV-related conditions, 2) immuno-oncology, and 3) infection disease medicines. The first is self-explanatory, targeting HPV-related conditions via the previously explained SynCon and CELLECTRA mechanisms. On the other hand, immunology revolves around preventive cancer therapies that use the same principles to strengthen the immune system against cancerous cell growth. Lastly, infectious disease medicines focus mostly on developing vaccines and treatments for pathogen-caused illnesses using the same underlying technology.

In the HPV-related conditions research line, one of INO’s drug candidates is VGX-3100, which is indicated for anal dysplasia with high-grade squamous intraepithelial lesions [HSIL]. HSIL is a precancerous condition that, if left untreated, can develop malignancy. This drug is in phase 2 in the US for this particular application. Also, VGX-3100 has licensing arrangements in China, where it is in phase 3, preparing BLA submission under an accelerated approval program for cervical dysplasia HSIL. VGX-3100 struggled with its primary endpoint for cervical cancer in the clinical trials in the US. However, despite the mixed results, INO continues to explore its potential in China.

Furthermore, another drug candidate, INO-3107 for Recurrent Respiratory Papillomatosis [RRP], is in the registration phase, and the company is preparing for a Biologics License Application [BLA] in 2H2024. INO-3107 aims to provoke an antigen-specific T-cell reaction against the proteins of HPV-6 and HPV-11 that can potentially prevent or slow the growth of new papillomas.

In immuno-oncology, INO has INO-3112 and INO-5401. INO-3112 is in phase 2 for head and neck cancer, which includes mouth, throat, and voice box cancers. INO-5401, indicated for glioblastoma, a form of brain cancer, is in phase 2. INO-5401 is in phase 1 for BRCA1/2 mutations, which increase the risk of female breast and ovarian cancers, as well as several additional types of cancer.

INO’s research line for infectious diseases has four drugs in phase 1: INO-4201 for Ebola Booster, INO-6172 for HIV, INO-6160 for HIV, and dMAbs for COVID-19 (discontinued in 2022). Additionally, INO is developing two treatments that remain in the preclinical stage: dMAb for influenza and dLNPs for various targets. None of these are advanced enough to be considered significant value drivers but are worth monitoring for future developments.

INO’s Accelerated Pathway and Global Partnerships Shape the Future of DNA Therapeutics

In its latest conference call for Q4 and full-year 2023 financial results, INO executives highlighted their focus on INO-3107. They plan to submit a BLA under the FDA’s accelerated approval program and potentially launch the product in 2025. This treatment is designated an Orphan Drug in the EU and Breakthrough Therapy by the US FDA. As a result, INO-3107 has commercial incentives and regulatory mechanisms in those markets. According to the company, it could be the first non-surgical option for RRP and the first DNA medicine available in the US. So, it’s fair to say that INO-3107 is INO’s main value driver at this time, which is why I believe it should be the focus for investors.

Still, it’s worth noting that INO also announced that INO-3112 for throat cancer will be developed in collaboration with Coherus BioSciences. This drug will be evaluated with LOQTORZI, an FDA-approved Programmed Death Receptor-1 [PD-1] inhibitor for nasopharyngeal carcinoma, expecting an improved patient outcome. PD-1 inhibitors target a critical immune checkpoint pathway that cancer cells exploit to evade the immune system, allowing T-cells to recognize and kill the cancer cells.

In the conference call, the company also said that INO, in partnership with the Chinese company ApolloBio, is conducting a phase 3 trial of VGX-3100 to treat cervical HSIL caused by HPV-16 and HPV-18. Note that VGX-3100’s discontinuation was only for cervical HSIL in the U.S. Otherwise, VGX-3100 was indicated for anal HSIL and is sponsored by the AIDS Malignancy Consortium, evaluating the drug in HIV-positive participants. These trials could expand its potential in managing HPV-associated illness across different patient demographics. So overall, there are significant developments and collaborations. I believe INO’s robust pipeline will impact the DNA medicine space in the coming years, but its early research stages make it inherently speculative for now. Plus, VGX-3100’s discontinuation for the U.S. is disappointing, so I don’t think it’s a significant value driver for now, either.

Concerns and Cash Runway: Valuation Analysis

From an investment perspective, INO trades at a relatively small market cap of just $259.6 million, making it effectively a microcap. As previously noted, it almost has no revenues today besides minor grants and licensing deals. It currently holds roughly $14.3 million in cash and $131.0 million in short-term investments. On the other hand, INO has $16.8 million in debt maturing in the short term and $13.4 million in lease obligations. Overall, I would consider INO to have a net cash position of about $115.1 million.

Moreover, I estimate the company’s latest quarterly cash burn to be at about $26.2 million by adding its CFOs and Net CAPEX. Annualized, this represents a yearly cash burn of roughly $104.8 million, which, when compared to its net cash position, is somewhat concerning. After all, this cash burn rate implies a cash runway of approximately 1.1 years based on its net cash position.

Consequently, INO decided recently to raise more cash via a stock offering of 4.7 million shares if warrants are also fully exercised. Before the raise, INO had about 22.8 million shares outstanding, which implies a stock dilution of roughly 20.6%, which is considerable. This offering injected $36.0 million in cash into INO’s balance sheet, effectively increasing its cash and equivalents to about $181.3 million. Based on this, I estimate an optimistic cash runway of 1.7 years post-raise. This is still a relatively low cash runway, in my opinion.

It is worth noting that by 2025, according to Seeking Alpha’s dashboard on INO, the company is projected to generate about $8.0 million in yearly revenues. However, this seems too little and far away for a company trading at a $259.6 million market cap with such a short cash runway and high cash burn. The implied forward P/S ratio is 32.5, which is notably high. For comparison, its sector median forward P/S multiple is just 3.4, so INO appears to be trading at an exceptionally high valuation multiple.

Risks We Can’t Ignore

Moreover, at the time of the recent stock offering, INO traded at about $11.00 per share, but now it trades at $10.37. This is a 5.7% decline since the news broke, but the implied stock dilution was much higher at 20.6%. The initial market reaction sent it down to $8.39 per share, and it has since recovered, but I think that risk remains. Also, it’s worth mentioning that the offering was at $7.692, a deep discount relative to the spot price at the time and even the current price. This also indicates a certain urgency to ensure it was fully subscribed, implying a need for additional liquidity that investors can’t ignore.

Overall, much of INO’s investment appeal rides on INO-3107. The company hopes its BLA submission under the FDA’s accelerated program will be successful, and if so, 2025 could lead to the product’s official launch. However, this remains highly speculative, especially with INO’s history of strategic pivots and drug candidate discontinuations (for example, INO-3100 for cervical HSIL and INO-4800 for COVID-19). After all, this is a company that was founded in 1983 and remains a biotech microcap after all this time. So, I think investors need to be cautious with optimistic timelines, especially after considering their relatively short cash runway and recent equity offering conditions. Plus, if this approval process is delayed at any point for INO-3107, the stock could have a significant downside risk.

Riding on INO-3107: Conclusion

Overall, it’s difficult to be bearish on INO’s underlying technology. I think DNA-based therapies, and particularly INO’s approach through electroporation, are promising in their own right. However, the company’s IP remains largely speculative from an investment perspective. Only INO-3107 seems to have a clear pathway to FDA approval, but that is contingent on the outcome of its BLA and accelerated status. Even if all of that goes INO’s way, there are still financial and valuation concerns that we can’t ignore. The stock’s valuation multiple is high, and its cash runway seems too low.

Moreover, the recent equity offering hints at urgency for additional funds, which is undoubtedly a yellow flag. Plus, the stock doesn’t appear to have retraced as much as the implied dilution from the offering. So, on balance, I lean neutral on the stock solely on the possibility that INO-3107 delivers on its potential. Otherwise, many concerns would make me bearish on the stock today. Thus, I rate INO a “hold” for now.