The biotech sector, perhaps more than any other sector, is a breeding ground for large stock moves. This is because biotech stocks are predominantly valued based on their future sales potential as well as Wall Street forecasts for how many people they'll eventually treat with their drugs in development. One of those highly volatile clinical-stage biopharmaceutical companies is Inovio Pharmaceuticals (NASDAQ:INO).

Since the year began Inovio shares have lost a depressing 10%. That may not sound like a lot, but over the same time span the SPDR S&P Biotech ETF has gained 26%. In other words, Inovio has underperformed one of the most prominent biotech basket ETFs substantially.

INO Chart

INO data by YCharts

"Why is Inovio underperforming most of its peers?" you ask. That's a question we'll answer today, as well as look at what the future might hold for Inovio and its current and prospective shareholders.

Why Inovio shares are down in 2014
First and foremost, I don't think I can properly address why Inovio is down by 10% without first paying homage to what was one of 2013's top-performing stocks.

Last year Inovio shares rocketed higher by 480%, led by optimism surrounding a licensing deal announced in September 2013 with Roche (NASDAQOTH:RHHBY) that earned the company $10 million in an upfront payment and gave it the opportunity to earn an additional $412.5 million in milestone and development payments. The entire reason for the deal was Inovio's ongoing immunotherapy vaccine research, which intends to enhance the body's immune system to recognize and fight disease. Combined, optimism surrounding cancer immunotherapies and the Roche deal caused Inovio's shares to surge.  

That brings me back to my first point of why Inovio has fallen in 2014 – it's a simple pullback. Inovio shares rocketed higher last year, and it's not uncommon for investors to lock in their profits after big gains.

Source: Army Medicine via Flickr.

Profit-taking aside, another key point to remember is that cancer immunotherapies are still largely untested. On paper, cancer immunotherapies make a lot of sense in that giving your own immune system a "boost" sounds considerably better than allowing a global chemotherapy to attack both healthy and cancerous cells within your body. However, many cancer immunotherapies are still in the clinical stage of their development.

Dendreon's (NASDAQOTH:DNDNQ) metastatic prostate cancer vaccine Provenge is probably the most well-known cancer immunotherapy, but it remains one of the most disappointing drugs of all time due to its high price and poor launch. In other words, there are clearly concerns that Inovio's pipeline products could follow a similar path of underperformance to more traditional cancer therapies.

Lastly, there's a focus on Inovio's cash burn rate which has certainly been alleviated by its partnership with Roche. As of the latest quarter Inovio had nearly $109 million in cash. However, the company is on pace to burn through somewhere in the neighborhood of $40 million to $50 million, if not more, annually. Based on Wall Street's current EPS projections Inovio doesn't have a shot at annual profitability until 2018 at the earliest. For investors it means considering the possibility of dilutive share offerings in the meantime.

Why investors are digging Inovio
Inovio may be underperforming in 2014, but clearly there's something about the stock that investors like, otherwise it wouldn't have jumped by 480% last year. Though the company has around a dozen ongoing preclinical and clinical studies, the "X factor" among them is VGX-3100, a vaccine treatment for cervical dysplasia associated with human papillomavirus types 16 or 18.  

Source: NIAID via the National Institutes of Health on Flickr.

In July, Inovio reported phase 2 results from its study which showed that 49.5% of women with HPV type 16 or 18 that were given the experimental vaccine had a statistically significant regression of their cervical intraepithelial neoplasia 2/3 (CIN 2/3) into CIN1 or no disease. By comparison, only 30.6% of patients in the control group went from CIN 2/3 to CIN1 or no disease. Best of all, the treatment was well-tolerated with just some localized redness around the treatment site. Consider VGX-3100 something of a "test" for Inovio shareholders to decide whether or not Inovio's discovery platform will work on a larger scale.

Where Inovio heads from here
Clearly the company's collaboration with Roche is important as it potentially puts Inovio on the radar of other large pharmaceutical companies, but INO-3112, currently an early stage developing vaccine being geared at head and neck cancer as well as cervical cancer, could wind up being the experimental drug with the most merit.

It's really too early to make a call one way or another on Inovio's future because we've only been given semi-substantive data on one phase 2 trial thus far. There are close to a dozen other preclinical and clinical studies under way that are going to have to play out further before we can make an educated guess which way it will head next.

For now what I can say is the company will continue to burn through its remaining cash on hand, it'll likely keep losing money without an approved product on pharmacy shelves, and it's possible the company could seek to sell common stock on the open market in order to raise cash. Of course, it could also form additional collaborations for upfront licensing payments as well, so don't rule that out. I guess what I'm trying to say is your best course of action is probably to park yourself on the sideline and wait for more substantial data to emerge on Inovio's immunotherapy products.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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