When it comes to investing your money, the biotech sector is truly like no other industry. While all investors are forward-looking in determining a company's value, sometimes the entire valuation of a biotech stock can be based on its drug development pipeline. This is because it can take years, or even decades, to get an approved drug to pharmacy shelves.
Of course, the process of developing a drug from the ground up also comes with one potentially fatal drawback: cash burn. Because a clinical-stage or early commercial-stage biotech isn't likely to be profitable for many years following its inception, investors need to ensure the company has enough cash on hand to survive. Put another way, running out of money is a genuine concern for biotechs, and keeping a close eye on such a company's stock's cash position is a must for healthcare investors.
Today, we'll look at whether clinical-stage drug developer Inovio Pharmaceuticals (NASDAQ:INO) might be running out of money. In order to properly analyze Inovio we'll need to consider the state of its drug development pipeline, its cash balance, and what avenues the company has to raise additional funds.
Inovio's business model
Inovio is part of a highly touted group of clinical drug developers focused on improving the body's immune system to fight cancers and infectious diseases. The company is conducting more than a dozen combined clinical and preclinical studies for diseases ranging from Ebola, HIV, and hepatitis B and C in infectious diseases, to cervical cancer, head and neck cancer, and prostate cancer.
Though most of Inovio's pipeline is early in development (preclinical or phase 1), the key experimental drug that has investors captivated is VGX-3100, a vaccine treatment for cervical dysplasia associated with human papillomavirus types 16 or 18. Just three months ago, Inovio reported midstage results on VGX-3100, noting there was a statistically significant regression of patients' cervical intraepithelial neoplasia 2/3, or CIN 2/3, to CIN1 or no disease presence whatsoever. Outside of some localized redness around the injection site, the vaccine was well tolerated.
Inovio's cash position
Inovio ended the second quarter with $109 million in cash, cash equivalents, and short-term investments, according to its earnings report. This was up from just $52.7 million at the end of December 2013.
Though this jump might give the perception that Inovio is a cash cow, it has no approved products and last year only pocketed $10 million in an up-front payment from its partnership with Roche (OTC:RHHBY), which we'll get into further in the section below. Instead, Inovio issued approximately 21.8 million shares of common stock in early March of this year, which netted the company $59.2 million after expenses. Execution of warrants has also raised its cash balance.
The company believes it has sufficient cash to operate through 2017, but the implication is that in 2018 it could be running out of money.
How Inovio can raise cash
The good news for investors is that Inovio has a number of options to raise cash should it become necessary. As you might imagine, however, not every cash-raising method would be good news for shareholders.
The easiest way for Inovio to boost its cash position is through licensing agreements. As I noted above, Inovio struck a deal with Roche in September 2013 that netted the company $10 million, as well as the possibility of earning $412.5 million in additional development milestones. Specifically, as FierceBiotech noted last year, Roche was drawn to INO-5150 and INO-1800, Inovio's prostate cancer and hepatitis B vaccines, because Roche saw the potential to combine these immunotherapies with experimental immunotherapies already within its oncology and infectious disease pipeline. One thing investors will want to remember, though, is that Inovio's pipeline is still early in development, so many of these milestones are a ways off.
Food and Drug Administration approval for VGX-3100 would be another opportunity for Inovio to reduce its cash burn. The drug itself has annual peak sales potential of slightly more than $500 million, but similar to its Roche-partnered experimental drugs is still a few years from having any chance of reaching pharmacy shelves.
Lastly, Inovio can do what it has done with some regularity throughout the years: turn to shareholders and offer common stock in order to raise cash. Inovio's outstanding share count has already more than tripled from roughly 19 million shares at the end of 2009 to more than 60 million through the first half of 2014. Selling shares keeps the hamster on the wheel moving, but it also dilutes existing shareholders and hampers any upside in Inovio's share price.
This brings us back to the original question.
Could Inovio be running out of money?
In the most literal sense of the term, yes, the company is running out of money. By the company's own admission in its second-quarter earnings release, it could empty its coffers in 2018. It has also accumulated a whopping $317.3 million deficit since its inception.
However, that doesn't mean Inovio is simply going to go quietly into that good night. Instead, I'd expect Inovio to focus on INO-5150 for prostate cancer as a possible way to generate additional collaboration revenue. Unfortunately, I also expect Inovio to remain pretty liberal with its share offerings, as it has been in many previous years. For investors, this means any significant rally in Inovio's shares could be met with the grinding halt of a new stock offering.
While I'm personally intrigued by all immunotherapy vaccine developers, especially those focused on various types of cancers, I simply can't get behind Inovio until it has at least one product submitted for approval with the FDA.