Inovio's Game-Changing 2013

Roche (NASDAQOTH: RHHBY  )  paid Inovio (NYSEMKT: INO  ) a small $10 million payment in September and promised up to another $412 million in milestones to lock up Inovio's promising INO-5150 and INO-1800 pre-clinical drugs. Those drugs have put up intriguing results in animal studies and the deal paves the way for human trials in 2014. 

Seeking and destroying cancer cells
In pre-clinical studies, monkeys treated with Inovio's 5150 saw prostate antigen response, suggesting an opportunity to treat prostate cancer. And INO-1800 eliminated liver cells in mice, suggesting it may offer hope as a treatment for hepatitis B and liver cancer. Roche thinks those results are promising enough to speculate the drugs may increase the efficacy of other drugs in Roche's cancer pipeline.

To foster that effort, Roche is taking over development of the two drugs from Inovio, including the costs associated with bringing them into human trials.

The move reflects the high hopes held by Roche, and competitors Merck (NYSE: MRK  ) and Bristol-Myers Squibb (NYSE: BMY  )  that immunotherapy treatments targeting PD-1 and PD-L1 receptors can help T-cells in our immune system better identify and destroy invading cancer cells. 

Lining up for immunotherapies
The Inovio deal isn't the first immunotherapy partnership struck by Roche. The company announced in June that it's linking up with Immunocore, another pre-clinical player.  In the Immunocore deal, Roche agreed to pay up to $300 million or more if Immunocore's compounds are successful.

That prompted GlaxoSmithKline  (NYSE: GSK  ) to sign a licensing pact with Immunocore in July, agreeing to pay Immunocore $212 million if it can hit pre-clinical milestones. Glaxo offered another $300 million in milestone payments, as well as royalties, if compounds covered by the deal ever make it to market.

Cozying up with Inovio isn't surprising
The need to protect Roche's market leading cancer franchise gives Roche a vested interest in ushering along promising pre-clinical oncology drugs from Inovio and Immunocore. Roche's blockbuster cancer drugs Herceptin and Avastin -- acquired in its 2009 purchase of Genentech -- accounted for a third of Roche's global revenue last year.

That oncology leadership position is being challenged by promising PD-1 drugs in mid-stage trials at Merck and Bristol-Myers.

Merck hopes its MK-3475 can offset faltering sales tied to patent expiration of its multi-billion drug Singulair. Merck is studying MK-3475 in eight programs targeting a range of cancer, including advanced melanoma. MK-3475's success in a phase 1b trial for that indication prompted the FDA to grant MK-3475 breakthrough status earlier this year, which may accelerate the drug's march through additional trials.

Meanwhile, Bristol has 25 studies under way for its drug nivolumab, including a promising phase 3 trial combining the drug with its potential blockbuster drug Yervoy in advanced melanoma. Updated results from an earlier phase 1 study showed 53% of patients treated with the combination cocktail responded.

Capturing the big opportunity
Excitement over Inovio and immunotherapy is big enough for analysts to consider the approach the next big breakthrough in battling cancer. Citigroup analyst Andrew Baum estimates that immunotherapy cancer drugs could generate $35 billion in sales within a decade, according to a report in May.

For that reason investors will want to keep a close eye on Inovio in 2014. The Roche deal frees up Inovio's balance sheet to develop its cervical cancer vaccine VGX-3100, which has shown promise in phase 1 trials and is currently in phase 2. And the partnership gives Inovio access to the global leader in oncology, which could be very valuable in accelerating drugs into trials next year.

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