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The Signal in the Inovio and Roche Deal Noise

Biotech deals aren't always easy to decipher, which is certainly the case with Inovio Pharmaceuticals (NASDAQ: INO  ) and Roche (NASDAQOTH: RHHBY  ) . The recent collaboration looks pretty simple on the surface: Roche gains exclusive worldwide rights to developmental vaccines for prostate cancer and hepatitis B, while Inovio captures $10 million up-front funding for near-term research and up to $412.5 million in future milestone payments. Pretty cut-and-dry. Inovio's technology has finally been vindicated, right?

Perhaps, but don't get too excited.

Although Inovio could certainly use hundreds of millions of dollars in milestone payments, the risk-to-reward ratio heavily favors Roche in the deal. Let's consider the conditions surrounding prostate cancer vaccine INO-5150, one of the two vaccines in the deal.

Growing competition for prostate cancer treatments
Hy Levitsky, head of cancer immunology experimental medicine at Roche, told Genetic Engineering and Biotechnology News, "INO-5150 will allow promising combination opportunities with the Roche portfolio, particularly with our emerging cancer immunotherapy molecules." Why focus on the vaccine's potential in a combinational therapy instead of as a monotherapy?

Simply put, any new product would have to exceed a pretty high bar set by currently available options to be a success with patients. Take a look at the first half sales for the leading monotherapy treatment options in prostate cancer:



1H13 Sales



$141 million

Medivation  (NASDAQ: MDVN  )


$141 million

Johnson & Johnson (NYSE: JNJ  )


$739 million

Source: Company SEC filings.

Each drug competes or is being studied in overlapping patient populations, which has created a competitive market. Zytiga from Johnson & Johnson has attracted late-stage patients that would have otherwise been prescribed Xtandi from Medivation, while Xtandi could attract pre-chemotherapy patients currently taking Zytiga pending results from an ongoing phase 3 trial.

It doesn't end there. Patients got a big boost earlier this year when Xofigo from Bayer was approved for castration-resistant prostate cancer when symptomatic bone metastases are present. The drug is a much more effective and specialized option for individuals in that subpopulation, which will only intensify competition as sales ramp up after launch.

The biggest loser from each approval, expanded or otherwise, has been Dendreon and its once-heralded prostate cancer vaccine Provenge. I'm actually surprised Provenge managed to capture $141 million in sales from January to June. Doctors have become more comfortable with more conventional treatments such as Zytiga and Xtandi than the vaccine, which must be prepared for each individual patient. It may have sounded like a big leap toward individualized medicine at the time of its launch, but the market doesn't reward style points. Convenience and simplicity are king.

DNDN Chart

DNDN data by YCharts.

For those of you keeping score at home, there are now three major monotherapies jockeying for position. That makes the search for an effective combinational therapy, perhaps even an all-in-one (able to treat all stages of disease) drug, that much more lucrative. And that's where the market is headed.

Johnson & Johnson may have enjoyed a historic launch for its blockbuster Zytiga, but it isn't resting in the lead. The pharma giant recently shelled out $650 million for Aragon Pharmaceuticals and its developmental prostate cancer drug ARN-509, which could be used in non-metastatic forms of the disease. Similar to Xtandi, the drug is an androgen receptor signaling inhibitor. If that isn't scary enough for Medivation (or Dendreon), there's big potential for it to be combined or at least used in a regimen with Zytiga. Can anyone compete with Johnson & Johnson?

The real value of the Inovio-Roche deal
Enter Roche, which wields the developmental drug MPDL320A. The beautifully named molecule is one of three major anti-PD-1 drugs being investigated as a revolutionary cancer immunotherapy. It's behind Merck and Bristol-Myers Squibb in development, but could have the advantage when it comes to selectivity. Roche's drug binds to only one of the receptors in the PD-1 pathway, PD-L1, which scientists believe will give it an advantageous safety profile.

While hopes are already high for Roche's disruptive drug candidate, Inovio's vaccine has the potential to increase its value. For instance, even if INO-5150 proves ineffective on its own, it's not out of the question to believe the two will be a more effective immunotherapy together -- with separate mechanisms of action -- than they could ever be on their own. Each could have a compounding, not additive, effect on the effectiveness of the other.

There is still a lot to prove, however. Neither drug has advanced past mid-stage trials, so investors can't be sure either will actually work, let alone a combination of the two. But the potential for Roche is huge. 

1+1 = Investment worthy?
Shouldn't all of this potential for a combinational therapy put Inovio on your investing radar? Before you're lured by the company's small market cap, consider the multiple uphill battles it faces. Inovio had just $23 million in cash at the end of June. While it's true that the vaccine company can take advantage of grants for funding more readily than other small pharma companies, the exclusively early-stage pipeline will require substantially more funding in the future.

It's also worth noting that Inovio hasn't been the most investor-friendly company in the past few years. The number of shares outstanding is up 80% since 2010! Potential milestone payments from Roche will be few and far between in the coming quarters and years, so expect even more dilution.

Foolish bottom line
Who does the risk-to-reward balance favor the most? Inovio gets to issue the press release of a lifetime and the potential to capture hundreds of millions of dollars in milestone payments in the next decade (mostly back-loaded). But the company still has to deal with funding issues for the foreseeable future and the possibility that INO-5150 fails, which would deflate shares pretty quickly. Now think about the deal from Roche's perspective: The potential reward is adding value to its novel cancer immunotherapy drug and being able to successfully compete in the prostate cancer market -- a hurdle few companies can clear. The risk is going it alone with its own cancer immunotherapies -- the plan to begin with -- and losing $10 million on an up-front payment plus development costs. Seems clear to me.

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Editor's note: A previous version of this article had an incorrect sales figure for Provenge and has been updated. The Fool regrets the error.

Read/Post Comments (16) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2013, at 1:47 PM, KyleRamer wrote:

    $23 million in cash at the end of June..thats crazy you choose that number to include in your article cash as of this month

    Cash, cash equivalents & short-term investments1 $ 45m approx

    Debt1 0 M

    Cash runway 3Q 2015

    Issued & outstanding shares2

    190.8 M

    Recent price3 $2.13

    Market cap3 $406.4 M

    just try to be a little more informed before you go scaring people with skewed numbers and threats of dilution..i was hoping you would add some new info in here but just a recap of the partnership was all..disappointing to say the least

  • Report this Comment On October 09, 2013, at 1:52 PM, Skiidog wrote:

    Seems to be a limited view of the deal. The fact that Roche is paying all the developmental costs associated with the two vaccines, that frees up a lot of cash that otherwise would have been spent developing the vaccines. That is a positive for Inovio. Also, if the vaccines are successful then Roche will be paying Inovio royalty payments in the double digits. That is also positive for Inovio. The deal with Roche also validates Inovio's vaccines. With a pipeline as extensive as Inovios, that brings in the opportunity for more partnerships. They also have enough cash on hand to get them to 2015. Lastly, Roche obviously saw something in Inovio to partner with them. Inovio is a game changer and Roche recognized their potential. Also positive for Inovio. My scorecard tells me the deal was far better for Inovio.

  • Report this Comment On October 09, 2013, at 2:08 PM, rexkwondo wrote:

    Ditto the above, and Inovio is not exclusively early stage, HPV a vaccine Phase II results due in about 6 months. Roche took on 2 INO drugs that were not among their top 5 candidates. Would advise you go to their website and look at the pipeline, several outcomes will likely be in long before 5150. INO is a developmental company, no doubt, but the focus of this article fails to address the the diversity of their pipeline and more importantly, it's lack of dependency on the Roche partnership for success.n

  • Report this Comment On October 09, 2013, at 3:05 PM, trytostayafloat wrote:

    I realize this isn't an article focused on Dendreon, but your first half sales of Provenge for 2013 are short close to 60m. Q1- 67.6m and Q2 73.3m.

  • Report this Comment On October 09, 2013, at 3:49 PM, TMFBlacknGold wrote:


    You're absolutely correct! A correction is coming, my apologies. The only thing I can think of is that I took 2Q12 sales from the 10-Q table. Silly mistake and thanks for catching it.


  • Report this Comment On October 09, 2013, at 5:32 PM, Skiidog wrote:

    Maxx, why can't you address the other remarks that have been made that you clearly made a mistake on? Your "silly" mistake about the cash Inovio has should be corrected. You can easily find that out if you looked. Unless, your agenda is to write an article that doesn't shine a good light on Inovio. Please respond to the other remarks that have been brought into question.

  • Report this Comment On October 09, 2013, at 6:26 PM, KyleRamer wrote:

    Max with all do respect you referenced the finances of Inovios balance sheet from 3 months ago are you aware of the current?..and just to be clear what was your dilution warning about and funding issues for the foreseeable future because as of now the company has never accumulated so much money in their history its actually the longest cash run way they've ever had im just really confused about some of your statements..looks like others are to..did you look into the company at all post 2010?

  • Report this Comment On October 09, 2013, at 6:45 PM, Skiidog wrote:

    Clearly Kyle, Maxx has an agenda. He responded very quickly to the Dendreon mistake but hasn't responded to the obvious mistakes he stated about Inovio. Maybe he is busy writing an article addressing the Dendreon mistake and can't respond. Or maybe he is actually doing some research on his article AFTER he wrote it and soon we will see an article with some facts in it rather than opinion. Please respond Maxx. These are simple facts that we bring up.

  • Report this Comment On October 09, 2013, at 7:06 PM, TMFBlacknGold wrote:


    I stated that Inovio had $23 million at the end of June. That's factual. If we want to count $44 million and subtract operating expenses for the third quarter of about $9 million the company has just $35 million. Doesn't seem like the cash runway extends quite as far as stated in the corporate profile to me.


  • Report this Comment On October 09, 2013, at 9:23 PM, KyleRamer wrote:

    so the company has 35 mill to date was that a good guess or is that the official number, so far you've half heartily corrected your self by 10m keep the honesty coming its the right thing to do you seem capable good job max

  • Report this Comment On October 09, 2013, at 9:24 PM, KyleRamer wrote:

    dont be embarrassed either no ones reading

  • Report this Comment On October 09, 2013, at 9:32 PM, KyleRamer wrote:

    "Operating capital through 3Q 2015"

    Inovio CEO 10/2013

    just to make it clear for you Max even if the target was off by a year your dilution comment would still hold very little wait considering its a mid stage bio..but keep bringing those hard hitting facts you seem really non-bias but at the some time really your DD before blogging

  • Report this Comment On October 09, 2013, at 9:59 PM, KyleRamer wrote:


    please dont take offence to pointing out your multiple errors in the article im not quite sure why you reminded me your article stated the june cash runway... its 10/9/2013 please reference current numbers that would be a good place to start on the overhaul of your article im looking forward to the revised regaurds to your statment on

    "Neither drug has advanced past mid-stage trials, so investors can't be sure either will actually work"

    Max the deal was for pre-clinical vaccines as you stated in your could any of them be advanced past mid stage trials?

    one more thing

    "Potential milestone payments from Roche will be few and far between in the coming quarters and years"

    Max the first milestone comes from the initiation of the trial early 2014..of course milestone payments will occur over qtrs and years clinical trials take years to complete im not sure what your point your statement was making....was it that clinical trials can take years ? surely this cant be new info to you but if it is then that's fine to..I appreciate you take time to write I really do but perhaps withdrawing this article would suit your future writing career better..youll do better on your next article im sure just hang in there man..this is just a learning experience for you

  • Report this Comment On October 09, 2013, at 11:02 PM, TMFBlacknGold wrote:


    Look, I cannot use non-official numbers and must stick to those reported to the SEC. Otherwise we're all just guessing at how much is left after expenses.

    It is my belief that Inovio will need to raise much more money in the near future to advance its pipeline. The company amended its Certificate of Incorporation in May and is now allowed to issue "300 million to 600 million shares". Outstanding share count has already ballooned 80% since 2010. Until management proves otherwise, I think history allows me to be skeptical.



  • Report this Comment On October 09, 2013, at 11:26 PM, KyleRamer wrote:


    The ten million dollar upfront payment in the Roche deal was reported to the SEC as we very well know. I respect your opinion that your skeptical, and thank your for responding to what you could concerning some of the issues raised by me and others in the comment section. The fact that you responded and stood behind the skeptical and fearful tone to your article shows character. I thank you for taking the time to write the article and reply to the comments.


    Kyle R

  • Report this Comment On October 15, 2013, at 5:22 PM, Tradealert8 wrote:

    And now for the amG velocity coming very soon! Cheers!

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