Are Investors Wrong About Inovio Pharmaceuticals?

Inovio Pharmaceuticals is on the cusp of a pivotal mid-stage data readout. Heading into this event, shorts have been jumping into the stock with both feet. Here's why.

Jun 11, 2014 at 5:01PM

Editor's Note: A previous version of this article incorrectly stated that Inovio's short interest as a percentage of its float was 54%. This, however, did not reflect Inovio's recent reverse-split, and its short interest is actually 13.6%. The headline has also been updated to more accurately reflect the analysis provided. The Fool regrets the error.

Because short-sellers take on substantially more risk than individuals long a stock, they tend to be some of the more sophisticated and informed investors in the marketplace. So when they decide to jump into a stock with both feet, it's probably a good idea to pay attention.

Some investors are shorting the DNA vaccine maker Inovio Pharmaceuticals (NASDAQ:INO), buying up 13.6% of the float in recent weeks.  Considering this, let's take a closer look at why shorts are piling into this clinical-stage biotech. 

INO Chart

INO data by YCharts

Inovio's pivotal mid-stage data readout is close for VGX-3100
Inovio is actually a fairly old company by biotech standards, but it has yet to push any of its clinical candidates into late-stage testing. So all eyes are closely watching the company's mid-stage DNA vaccine dubbed "VGX-3100," which is expected to report top-line data at any time now. Briefly, VGX-3100 is delivered by Inovio's electroporation technology and is indicated as a potential treatment for adult women with biopsy-proven HPV 16 or 18 associated cervical intraepithelial neoplasia grade 2/3 or 3. Put simply, it would likely compete with Merck's (NYSE:MRK) Gardasil as a prophylactic HPV treatment in women.  

What's key to understand is that this data readout could be a make or break moment in the life of the company. So far, Inovio hasn't generated an impressive enough immune response for its other clinical candidates to justify initiating a pivotal late-stage study. So a negative trial result for VGX-3100 at this critical junction could cast doubt on the validity of this approach to vaccine development in general. 

DNA vaccines haven't lived up to their promise
Perhaps the bigger problem, however, is that DNA vaccine technology has yet to lead to the development of a commercial product indicated for human use. Despite decades of work, DNA vaccines tend to produce limited immune responses in humans in mid- to late-stage studies. Presently, researchers are focusing on new ways to deliver the vaccines, and potentially employ additional immune boosters, to increase their clinical benefit. But so far, they have yet to outperform traditional protein-based vaccines in human subjects.  

And Inovio is even planning on using its own immune activator called IL-12 as part of the vaccine regimen in further clinical testing of VGX-3100. Taken together, shorts believe VGX-3100's mid-stage trial is more likely than not to fail. 

Foolish wrap-up
In light of the diversity of diseases Inovio is targeting with its platform and the blockbuster potential of a new HPV vaccine, it's easy to understand why investors remain optimistic about the company's future. At the same time, this short position shouldn't be taken lightly.

When push comes to shove, what's going to matter most is VGX-3100's mid-stage results that are set to be released at anytime. If positive, Inovio could see a large short squeeze. On the flip side, a negative readout will undoubtedly cause shares to crater. Viewed this way, I think investors with a long-term outlook should stick to the sidelines for the time being with this battleground stock, at least until after this binary event has passed.  

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George Budwell has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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