Vical Gets a Helping Hand

Buying a lottery ticket may be pretty dumb (unless you win), but there's nothing wrong with accepting one as a gift. And to some extent, I think that's what you can say about Vical's (Nasdaq: VICL) partnership agreement with Japan's AnGesMG for the Allovectin-7 melanoma vaccine.

Under the agreement, AnGes will assume nearly all of the costs of the vaccine's phase 3 study. In exchange for fronting those costs, AnGes will receive Asian marketing rights, while Vical will keep the rights for America and the rest of the world. In an interesting twist, there will be a joint royalty setup: AnGes will pay Vical a double-digit percentage of revenue for Japan (a single-digit percentage for other Asian territories), while Vical will pay AnGes mid-single digit royalties for its sales. There are also milestone payments of nearly $78 million in play, should the vaccine reach certain sales thresholds.

All in all, it's a pretty savvy deal for Vical. I don't really see this vaccine as a high-potential product, but it's now a virtually risk-free opportunity for the company. If phase 3 trials show adequate efficacy, there's upside. If the trials fail, Vical really doesn't lose much of anything.

Of course, Allovectin-7 really isn't the story at Vical. The real source of interest is a pre-clinical bird flu vaccine that not only demonstrated 100% efficacy in animal models, but also suggested the potential of cross-protection (that is, one vaccine for a wide range of flu types). Because this is a DNA vaccine, production can be simpler and cheaper (using basic fermentation) than with other types of vaccines.

Alas, it's not so simple. This vaccine likely won't be tested in humans for a while yet, and there's no market in protecting lab animals from the flu. And let's not forget, countless drugs have looked extremely promising in preclinical studies (as well as phase 1 or 2 trials) only to inexplicably fail later on. In other words, this is promising and absolutely high-potential, but there's a long stretch of time between now and approval, and plenty can still go wrong.

Vical is certainly targeting highly visible diseases, with vaccines in testing for HIV, HPV (human papilloma virus), bird flu, anthrax, and Ebola. And it also has well-heeled partners like Merck (NYSE: MRK) and Novartis (NYSE: NVS) already on board.

I actually owned Vical a while back, making a little profit before swapping it for another biotech that I thought had more near-term promise. And while I'd certainly consider a return engagement, today's price seems pretty much fair. Should it revisit the $4s again, though, I'd get very interested indeed.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).