May 4, 2013

@PropThinker's Undervaluation of Vical’s Full Pipeline Allows A Cheap Bet on Cancer Trial (and $PVCT)

PropThink provides actionable analysis of publicly-traded, emerging growth companies in the healthcare sector to retail and institutional investors. Recently, the firm put out work on Vical (and Allovectin-7), taking (initiating, perhaps) a long position in VICL because: "The market is discounting Vical on the basis of underestimating the probability of Allovectin success and is completely overlooking a broad pipeline with shorter developmental timelines. These oversights have created what we consider a cheap call option on Allovectin data given the pipeline strength. In the context of the overall success rate of Phase III oncology studies, the existing data supporting a positive trial outcome for Allovectin is alluring."

A blog reader directed me to this. Thank you. It's an interesting article by PropThink, and very worth reading.

The investment thesis, buying Vical shares as a the "cheap call option," appears to be centered around (paraphrasing) the market significantly underestimating the probability of success of Allovectin's MM Phase 3 trial, which [in PropThink's view] creates a near-term, high-return opportunity coupled with a pipeline safety net.

I found several aspects of the author's analysis interesting (aside from the discussion of Vical's non-Allovectin pipeline):
  • The market opportunity and addressable market size there still exists to treat Stage 3/4 melanoma, including "Approximately one-third of all melanoma patients will experience disease recurrence. In patients with advanced metastatic melanoma, median survival typically ranges from six to ten months."
  • Further recognition of Yervoy and Zelboraf's shortcomings: "Both drugs are associated with significant side effects, and neither is considered a cure for melanoma."
  • Allovectin’s novel immunotherapeutic approach to metastatic melanoma: "...cause recognition of the tumor at the local site (break tolerance) to allow a then-sensitized (boosted) immune response to recognize un-injected tumors at distant metastatic sites" and "induces an immune response to multiple melanoma associated antigens."
  • Phase II data is much better than top-line data suggests, because the "...key to the Phase II data is to understand the objective response rate of 11.8% on an intent-to-treat basis. This response rate is clinically meaningful on its own, but when analyzed in the context of the Phase II study and Phase III trial design it points to potentially stellar results."
  • Response rate in context: "If the response rate for Allovectin of 11.8% were extrapolated to a trial population without a 60% dropout rate, then it would be at least 22-24%."
  • Reasons why the Phase 3 trial be a success: "Patients are healthy enough to receive a minimum of two treatment cycles, Patients have functional immune systems, Patients on study for more than 2 treatment cycles, Designed to capture immunotherapy advantages"
The takeaways, among several, for me include:
  • The continued recognition of the growing importance and value of intralesional immunotherapies (e.g., Amgen's T-Vec, Vical's Allovectin-7),
  • The continued recognition of Yervoy and Zelboraf's shortcomings, and that there still remains a clear unmet need for melanoma,
  • The more frequent an immunotherapy is applied, the more likely a better outcome (i.e., more than two treatment cycles in the case of Allovectin), and
  • The still only incremental benefit Allovectin and T-Vec offer. Allovectin and T-Vec receive attention, in many respects rightfully so, because the drugs are in Phase 3 testing. Nevertheless, the drugs are incremental in their benefit when compared to PV-10.
Recall Dr. Andtbacka's comparison on these therapies and PV-10 at the HemOnc conference in New York in March:

PV-10 simply is superior. The above table compares Phase 2 trial data across therapies, where treatment was limited -- limited by the number of Allovectin treatment cycles and number of PV-10 injections.

The attention paid to Allovectin-7 and T-Vec is good for PV-10; however, not including a key intralesional therapy like PV-10 of which medical practitioners and key opinion leaders are fully aware and for which they are very excited makes me wonder about the depth and thoughtfulness of PropThink's Dr. Kotak's article's research or diligence.

Was Dr. Kotak ignorant or unaware of Provectus and PV-10, or unwilling to include an OTC stock in his analysis and article? He included OncoSec Medical (ONCS.OB).

As for the author's cheap call option description, the current Vical market capitalization (per Yahoo! Finance) is about $310MM ($3.58 per share). The author suggests "The Vical pipeline, excluding Allovectin and cash (~$75M at March 31), could support a valuation in the $200-250M range, thus we believe that Vical’s pipeline provides a real backdrop to the Allovectin trial." I read this as his description of downside protection, or down to $2.31-2.89 per share.

A Vical trial success, which many are betting against, raises the share price to, what, $6-8 per share? Higher?

From a risk-reward perspective, your downside is $0.69-$1.27 a share ($3.58 minus $2.31 or $2.89), while your upside could be $2.42-$4.42 a share ($6-8 minus $3.58), for a downside-upside multiple ratio of about 2-4x:3.5-6.5x. As a former currency derivatives (read: options) trader, that risk-reward is not endemic of a "cheap call option."

The notion of buying a call option, cheap or otherwise, is the upside if the option becomes in-the-money (or volatility rises to increase the value of the option) is many multiples of the option premium you pay (and are prepared to lose in its entirety if the trade goes awry). The risk-reward has to be worth it: the potential return you expect to generate is equal to or vastly higher than return commensurate with the risk you believe you are taking.

In Dr. Kotak's example, I ultimately see the risk-reward range as 2-6x (with 3.5x in the middle), which I do not consider cheap. A call option (speculating, where you get more leverage by buying the option rather than the underlying common stock) or cheap call option is smart or cheap at a number of at least 10x (for the risk you're taking).

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