Inovio Pharmaceuticals, Inc. (INO) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Inovio Pharmaceuticals Third Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Richardson. Thank you, sir. You may now begin.

Today's call may contain certain forward-looking statements relating to our business, including our plans to develop DNA immunotherapies and electroporation-based delivery technologies, as well as our capital resources. Please keep in mind that actual events or results may differ from the expectations discussed as a result of number of factors, including uncertainties inherent in preclinical studies, clinical trials, and product development programs, including but not limited to the fact that preclinical and clinical results referenced on the call may not be indicative of results achievable in other trials, studies, and trials may not achieve the results desired and they may not commence or be completed in the time periods anticipated. There may also be risks related to collaborative arrangements, including the timing and receipt of payments, the availability or potential availability of alternative therapies for the conditions targeted by the Company or its collaborators, issues involving product liability, issues involving patents, the adequacy of our capital resources, the impact of government healthcare proposals, and other factors set forth in our annual report on Form 10-K for the year 2014, our 10-Q for the quarter ended September 30, 2015, and other regulatory filings from time to time. There can be no assurance that any product in Inovio's pipeline will be successfully developed or manufactured, that final results of clinical trials will be supportive of regulatory approvals required to market licensed products, or that any of the forward-looking information provided will be proven accurate. Now, Inovio's President and CEO, Dr. J. Joseph Kim.

Good morning, everyone. Thank you for joining us today. Let me get right to our look at the third quarter and upcoming milestones. Executing on our oncology strategy, in August we signed a cancer collaboration and licensing deal with AstraZeneca's subsidiary, MedImmune. In this deal, MedImmune acquired exclusive rights to Inovio's INO-3112 immunotherapy, which targets cancers caused by human papillomavirus or HPV types 16 and 18. INO-3112, which is in Phase I plus IIa clinical trials for cervical cancer and head and neck cancer, is designed to generate killer T-cell responses capable of destroying HPV 16 and 18 driven tumors. These HPV types are responsible for more than 70% of cervical pre-cancers and cancers. MedImmune will study INO-3112 in combination with their immunotherapy products. Both companies believe the benefits from immuno-oncology molecules in MedImmune's portfolio will be enhanced when combined with cancer vaccines that generate tumor-specific T-cells. In fact, MedImmune was recently quoted as saying, this combination has the potential to deliver real clinical benefit for cancer patients. We expect to start the first combination clinical study in the next few months. In the deal, Inovio received an upfront payment of $27.5 million and we are entitled to $700 million in potential future milestone payments. MedImmune is paying all development costs and would pay up to double-digit tiered royalties on INO-3112, once commercialized. Within the broader collaboration, MedImmune and Inovio will develop two additional DNA-based cancer vaccine products not included in Inovio's current product pipeline, which MedImmune will have the exclusive rights to develop and commercialize. Inovio in return will receive development, regulatory and commercialization milestone payments and will be eligible to receive royalties on worldwide net sales for these additional cancer vaccine products. This strategic partnership with MedImmune represents an important step in executing our immune-oncology combination strategy in advancing Inovio's cancer vaccine R&D pipeline with a leading cancer immunotherapy company. Notably, in light of the many collaborations [indiscernible] oncology deals that do not provide financial considerations, our deal with MedImmune [indiscernible] in a very small crowd a comprehensive immuno-oncology partnership with significant financial terms, both short-term and long-term. We appreciate MedImmune's recognition of our ability to activate best-in-class killer T-cells in vivo. This deal builds upon existing partnerships between Inovio and MedImmune on two R&D collaborations in the infectious disease area with DARPA grant totaling $57 million. We have two INO-3112 clinical studies progressing with positive interim immune response data generated in an Inovio-initiated Phase I/IIa head and neck cancer study. We actually reported last week that INO-3112 generated robust CD8 T cell responses in all 10 tested patients with head and neck cancer associated with HPV type 16 and 18. To reiterate and emphasize a critical point, we already generated strong immune responses in patients with cancer. These data were presented at the Society for Immunotherapy of Cancer Conference or SITC last week. These results demonstrate we are on the right path using our DNA immunotherapies to fight cancer. In immuno-oncology, it's all about the T-cells. With VGX-3100, we showed we can generate best-in-class T-cell responses in vivo that these T-cells close to the diseased tissue and that they clear diseased cells as well as the virus that caused the disease in the first place. Now in patients with cancer, we are also showing that we have taken the first step of generating antigen-specific CD8+ killer T cell responses, which are essential to an effective immunotherapy. We expect various steps forward in our MedImmune partnership and on our expanding cancer R&D work. We have only seen the first steps with much more to come. Let me discuss what I think was another important Inovio accomplishment last quarter in a program that represent another strategic footing for the Company, this new result from our DNA-based monoclonal antibody or dMAb. In a mice study, our dMAb targeting the dengue virus provided protection against a lethal dengue virus challenge. Importantly, protection conferred by dMAb was very rapid with 100% survival in mice less than a week after dMAb administration. This short timeframe to achieve full protection is significantly more rapid than vaccine-driven protection which can take weeks to months to reach peak efficacy levels. Together, our dMAb and antigen-generating immunotherapy offer the prospect of an ideal combination of both rapid onset and long-term durability of immune suppression. We are building a comprehensive dMAb technology development program that includes immuno-oncology products as well as infectious disease dMAb products, with significant funding already awarded by DARPA to enable our development of dMAb based products against influenza, antibiotic resistant bacteria and other diseases. One area in which we are advancing dMAb is our Ebola program. In September this year, we received an additional option grant of $25 million. The option exercise, part of the $45 million Ebola program grant announced in April when Inovio received an initial $21 million award, was contingent upon Inovio successfully leading the completion of certain pre-clinical and clinical development milestones. DARPA has funded this program to develop a DNA-based vaccine against Ebola, a therapeutic dMAb to treat Ebola infection, and a conventional monoclonal antibody to treat Ebola. Since the grant award in April, Inovio and its collaborators have already completed patient enrollment of the Phase I clinical study for Inovio's Ebola vaccine, INO- 4212. We expect to report interim safety and immune response data in the next few months. We also expect to report various results and advancements from our dMAb program relating to both cancer and infectious diseases through next year. Continuing with the infectious disease portfolio, we expect to move our vaccine for MERS or Middle East Respiratory Syndrome into a Phase I clinical trial in healthy volunteers in the U.S. before year-end. There is no vaccine or effective treatment against MERS which spreads from human to human. Since 2012, MERS has infected over 1,500 people and killed almost 600, and that's 40% of those infected. Earlier this year, Inovio's MERS vaccine induced 100% protection from a live lethal virus challenge in a preclinical study. We are moving rapidly from achieving complete protection from MERS in monkey studies for our goals of obtaining safety data from our Phase I trial and moving forward to potential regulatory approval. Let me also remind you of two clinical trials we initiated last quarter. First, a Phase I trial of our global PENNVAX-GP vaccine. This latest HIV vaccine trial will allow us to test our universal HIV vaccine with the potential to provide protection and treatment against viruses from all major – from our previous PENNVAX human trials. While HIV AIDS is not the death sentence it once was, nearly 36 million people have already died from HIV related diseases and 35 million more are still living with HIV in the world. Second, we initiated a Phase I trial to evaluate Inovio's DNA immunotherapy in men with biochemically relapsed prostate cancer. The launch of this human trial follows strong pre-clinical results revealing that INO-5150 generated robust CD8+ T cell responses in animal studies including non-human primates. We would expect to report in 2016 interim safety and immune responses data from both this prostate cancer study as well as our hTERT or INO-1400 study in patients with breast, lung or pancreatic cancers. Now, our CFO, Peter Kies, will give you the financial updates for Inovio.

Thank you, Joseph. Good morning, ladies and gentlemen. Let me start out by acknowledging the obvious, Inovio did report a profitable and positive cash flow for the quarter. This result was primarily due to $15 million of revenue recognized in the quarter from the upfront payment received from our partner MedImmune. Accounting recognition of the remainder of the $27.5 million upfront payment received in the third quarter has been deferred and will be triggered by future events. Other contributor to our revenue was development payments paid to us by DARPA for our Ebola program. These financial results are of course based primarily on a specific non-occurring event. The increase in revenue to $24.2 million and $34.6 million for the three and nine months ended September 30, 2015 compared to the $1.8 million and $8 million for the same period in 2014, were also mirrored by increase in operating expenses. Our year-over-year quarterly operating expenses doubled to $20.5 million. This increase in operating expenditures have been due to primarily to our increase in research and development costs. Going forward, we do expect significant development payments from our collaborators and funders such as MedImmune, Roche and DARPA that are related and will partially offset the higher operating expenses associated with our expanding programs in growth. The MedImmune upfront payment contributed notably to our treasury, and as of September 30, 2015, cash and cash equivalents and short-term investments were $170.8 million compared to $93.6 million as of December 31. At quarter end, the Company had 72.2 million shares outstanding and 78.9 million on a fully diluted basis. Now back to you, Joseph.

Thanks, Peter. In the last quarter, Inovio achieved another first, publishing of an Inovio study in The Lancet, one of the world's leading medical journals. In September, The Lancet published a peer-reviewed article detailing the successful results of our Phase IIb trial of VGX-3100 in treating women with high-grade cervical neoplasia. The Lancet reported that in VGX-3100 treated women who regressed their lesion, most, 43 out of 53, completely cleared their lesions to normal or a complete response. Moreover, 80% of VGX-3100 treated women who regressed their lesion also eradicated the infecting HPV genotype, that is type 16 or 18, in the cervix. Let me state that again. We were also able to clear the virus that caused the disease in the first place. This is an important outcome as persistence of the virus is associated with recurrence of the disease. All data analyzed per protocol or modified intent to treat were similar with equal statistical significance. Furthermore, analyses of patient immune responses showed that overall antigen-specific T cell levels in women treated with VGX-3100 were greater than those treated by placebo at all observation periods. At week 14 for example, T cell levels in women treated with VGX-3100 were 10 times greater than those in the placebo group. Remember, for years medical researchers have tried to stimulate therapeutic immune responses against the human papillomavirus and cervical lesions with little success. This publication details that VGX-3100, a first in class product for treating high-grade cervical neoplasia associated with HPV, is the first therapy to demonstrate that activated killer T-cells induced in the body have the power to clear neoplastic lesions as well as the virus which caused the disease. Our DNA-based technology has overcome the elusive and this difficult challenge of activating and multiplying killer T-cells in the body to clear the established disease as well as eradicate the cancer causing HPV virus. This is the first publication to our knowledge that demonstrates the correlation of antigen-specific CD8 T cells directly to clinical efficacy, and we think this is a big deal. Building on this proof of concept Phase IIb study, Inovio is mobilizing to initiate a Phase III trial for VGX-3100 next year. We are methodically setting up our Phase III trial with a goal of achieving regulatory approval. To that end, we are preparing for our upcoming end of Phase II meeting with the FDA. This meeting will also cover our proposed Phase III design scaling up manufacturing and testing of our delivery device with design optimized for clinical use that will also be used in Phase III and in a commercial setting, and scaling up DNA [indiscernible] manufacturing with a commercial CMO for the upcoming trial and for future commercial supply. While we are dealing with Phase III launch logistics, we can't forget that for women with cervical dysplasia, there is no alternative treatment except for surgery, a procedure that can have side effects such as bleeding, birthing and fertility complications and persistence of the virus with this implication for potential recurrences of the dysplasia. Our study of VGX-3100 provides hope for women that a safe, nonsurgical option will be available to them as soon as possible and we really can't wait to get to our trial and hopefully eventual approval as soon as possible. Now I'm ready for our analysts' questions.

[Operator Instructions] Our first question comes from the line of Charles Duncan from Piper Jaffray. Please go ahead with your question.

So I had a question regarding the 3100 program. Thanks for the update on that, but I'm wondering if you have actually scheduled an end of Phase II meeting with the agency and if you can give us some color on when that will be or at least the design and timeline of the Phase III that you are contemplating at this point, rough order of magnitude?

We will be scheduling the end of Phase II meeting imminently and we expect to hold the meeting in the mid-first quarter 2016. So that's the official formal end of Phase II meeting with the FDA where we will look to refine and finalize our protocol as well as all of the other elements that go in to getting the green light for this Phase III. We are methodically preparing our package, including the CMC devices as well as our clinical protocol. But I can't exactly comment on the detailed design of the protocol until we meet with the FDA. What I can tell you is that it's going to be very similar to our Phase IIb study which we were able to show statistically significant regression of the disease as well as the eradication of the virus. We expect the size to be about two to three times larger than our 150 patient study. So we expect the total size to be in the 350 to 400 patient range. We also plan to do a one-to-one randomization and things like that. So there are other elements that are going in that we hope will increase the overall efficacy based on our design as well as the better utility of the product that's a commercial product. So what I can assure you is, we are very excited to get this study started and we expect this to start within a few months after our end of Phase II meeting, and we're very excited to get this started and we want to make sure that we design and execute this study perfectly and appropriately and our team is working extremely hard and intelligently to achieve that.

Okay, that's helpful. And just a follow-up to that, would you anticipate that trial to be a certain milestone analysis, like for example those endpoints that you mentioned add a year or something like that, and is it possible that this could be the only trial that is necessary to drive approval of VGX-3100?

So the second question first, those are the type of requirements, and the answer is that we could only provide after our meeting with the FDA. So I don't want to speak out of line. But we are moving with the most aggressive projections and assumptions. What I can tell you also about the endpoints is, we would look to analyze a full patient set [indiscernible] it would not be a cancer type of survival at a certain [phase] [ph] design. So it's going to be much similar to our Phase IIb design as it was outlined in the Lancet publication.

Okay. And then last question is regarding the MedImmune partnership that you outlined earlier in the call. This is kind of a nebulous question, but I'm wondering if you could share with us what your perspective is on the types of depth of diligence that they conducted or the timing of the diligence? I mean are they just trying this out or is there some [skin] [ph] in the game, was it pretty extensive?

Thank you for that question. No, there was extremely deep due diligence and they have seen our pre-published data from our Phase IIb study of VGX-3100 and all of the up to date data from our head and neck and cervical cancer 3112 study. So for them to invest $27.5 million upfront, which is not trivial and have an extensive and a substantial potential milestone payment, I do believe that as a methodical big pharma company, that they've done the diligence to make it work. As I said, there are trials that get better with drugs [indiscernible] on the combinations and for INO-3112 we felt that such a one night stand approach wasn't the proper path. We just wanted to make sure that we get proper value for this partnership back to Inovio. Now MedI can speak for themselves but we do believe, and they've kind of publicly released statements in the past, the combination of cancer vaccines that can generate T-cells in the body, like Inovio's INO-3112 as well as the other products in our pipeline, would complement and amplify potentially the clinical efficacy in combination with an extensive arsenal of checkpoint inhibitor molecules that MedImmune possesses already. So it becomes perhaps logical but powerful one to punch against cancer and we do feel and we do know that MedImmune is extremely committed to become the leader in this immuno-oncology field.

That's helpful. Thanks for the added color, Joe.

Our next question comes from the line of Tom Shrader with Steve. Please go ahead with your question.

Congratulations on a profitable quarter. Hopefully there's more. I have a little bit of a question on the recognition of the upfront, [indiscernible] will be lumpy [indiscernible] smoothly over the course of the collaboration. Could you give us any detail why?

I could answer that, Joseph. So the revenue recognition is based on the deliverables on the contract, and so it's broken up into various [indiscernible] some 3112 as one of those and that's what was mainly recognized upfront because of that trial's given progress. As part of the agreement, there will be other antigens that are developed and identified over the next two years. So the remainder of that revenue will be recognized over kind of milestone-based over the next probably about two years. The revenue [cash] [ph] has all been received, it's just an accounting recognition of these.

Because it's triggered on specific events?

New revenue recognition guidance from the SEC makes the companies identify all the deliverables to the contract and then recognize a portion of that related to the upfront payment. And so a portion of that upfront payment has been allocated to those other compounds and will be spread out. If not, the money would never be returned. It's again just a revenue recognition policy with the SEC to spread it out over the deliverable period, which will be the next few years.

And our non-account – our team is on it with our accounting partner, Ernst & Young, but I can't say I really appreciate or understand all of these intricacies of creating accounting policies, but rest assured $27.5 million is in the bank and we are following all of the accounting procedures to properly recognize them, but it's [indiscernible] many of us as it is to you.

Okay, we can switch to something we all know better. In the prostate cancer trial, is there a potential quick readout on efficacy to see drop in PSA or is PSA really the antigen, so a drop in PSA, you might just be scavenging the antigen, what's your sense of what a drop of PSA would mean in the trial, because the wait for efficacy is very long, is there a chance to get a quicker read on how things are going?

The short answer is, yes. PSA measurement is one of our biomarker tracking that we are doing from this study. And you made a good point, PSA is one of our antigens, but we have ways to, as I said, PSA, anti-PSA responses. But to get to your overall point, 5150 trial, we'll be getting the interim safety and immune responses data next year, before may be a high hope. But what is going to drive us is, to the extent the answer to the question, because as we get 3100 in Phase IIb study, we have shown that we can generate antigen specific CD8 T-cell in the blood we can measure, we can track them to the tissue and which led to clinical efficacy. In our head and neck 3112 study which we just presented at SITC, we have expanded into having cancer patients being able to measure in the blood these powerful levels of CD8 T-cell responses. Now we want to extend that to prostate cancer. Once we do that, we plan to move that into later stages with quicker survival endpoints, most likely in combination with the checkpoint inhibitor molecule. So we want to be very aggressive in analyzing and dissecting and then making our path forward for the next step in 5150 as well as our INO-1400 study which targets the hTERT in many solid tumor targets today.

Okay. And quickly the last question on the CD8 T-cell response you just had after immunization with the HPV vaccine, do you have additional data on exhaustion markers on those T-cells or these are patients full with the antigen already and you've measured a new response? Can you get into whether the T-cells are different than what would've been sort of assuming the slumbering there already or what kind of data will we see on the difference of these new T-cells?

You will see a whole lot of that data. Currently what I can tell you is we see newly activated CD8 T-cells from our VGX-3100 Phase IIb study. We have published some of that. There will be additional publication from our Phase IIb study that will further elucidate and add to the field immunologically of these cancer vaccine activities and [indiscernible] Without going into too detail to the [grass] [ph], I would just say that we are pretty certain that the CD8 T-cells were measuring or activated CD8 T-cells from a vaccination not from an existing expression from the tumors or HPV infected cells, and we could get into hours of discussion, but we're pretty certain of that, and more data will come rest assured.

Our next question comes from the line of Jason McCarthy from Maxim. Please go ahead with your question.

Congratulations on the quarter, but everything is just continuing to move along. I kind of want to break off a little bit and ask, when we could see more dMAb data from Ebola, and not really about Ebola specifically because the more we look at the separation between [indiscernible] and the vaccine stage, clearly the vaccine stage was focused on long pancreatic, prostate, ovarian and head and neck cancers, where those types of tumors are highly immunogenic, and they already have cells in them often. So I'm wondering if you're going to get that dMAb data, you already have the IL-12 and you also have immunotherapy, if you are thinking long-term towards using these in combination or even triple combination as you start to see your early data from your Phase I studies and thinking about your Phase II kind of building out the vaccine stage in these indications?

Yes, absolutely. So we are building an arsenal of weapons against cancer and very hard to treat infectious diseases as you mentioned. Ebola and other ID, MRSA and flu, have been the area of interest for DARPA to fund our dMAb development program. So we are really leveraging these external funds to bring about multiple products using the dMAb technology and Ebola is just one of the first ones, including having a dMAb against MERS, universal flu targets as well as MRSA and Staph and Pseudomonas. What I can tell you, Jason, is we have published two publications in the development of dMAb. We expect to see about half a dozen more in the next few months to come. So we are really going to bring out and showcase the power and the potential of the dMAb technology. And you also touched on the other assets that we have. Obviously our cancer antigen targeting vaccines or immunotherapy is the most advanced part of our program. INO-3112, VGX-3100, 5150, 1400, that's really our four arsenals against cancer. You also mentioned about us having cytokine immune activators. We have our 12, 15, 33, 28, we have probably the biggest arsenal in terms of cancer antigens specific vaccines, immune activators like cytokines and others in a DNA form as well as the dMAb technology. So in the long run, we want to be the leading immunotherapy and vaccine development company. Along the way, as you stated, we're going to showcase and partner some of these assets as we have done with INO-3112, but our ultimate objective is to bring out our own products that we own 100% to the market through full commercialization and full Phase III, up to Phase III testing and that's really our ultimate objective. We're willing to use strategic partnerships and collaborations as the means to get to our end, which is to bring one or more products that we own wholly to the market, and we believe that's the best path to enhancing and maximizing our shareholder and stakeholder wealth.

Okay. Thank you, again. Congratulations on a great quarter.

Our next question comes from the line of Jonathan Aschoff with Brean Capital. Please go ahead with your question.

This is [Ariba] [ph] in for Jonathan. Regarding 3112, can you tell us anything about any antitumor activities seen in the 10 head and neck cancer patients you reported immune responses data the last week?

That's a very good question. We will look at, we are analyzing our antitumor activities. Going forward we'll have a longer observation period up to three years in these patients, but up till now we have not discussed any antitumor effects. I have to tell you, these head and neck patients are relatively healthy patients. We will likely see the greatest impact of the antitumor effect in the cervical cancer patients which is assistive study to this head and neck cancer patients, and as we go forward, in combination with checkpoint inhibitors from MedImmune, and by the way INO-3112 is now belonging to MedImmune, our partner. So we will be working diligently to bring about those antitumor responses going forward.

Thank you. That's helpful.

Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Thank you very much for great questions and listening to our quarter report. Certainly this was a milestone quarter for us. Although we can't guarantee recurrent profitable quarters because this was driven mostly through our MedImmune partnership deal, this was an extremely eventful quarter for Inovio, and there are few reasons why. Number one, we published our Phase IIb data in one of the world's top medical journals which was very important validation for us. Number two, we were able to leverage these results to get a large pharmaceutical cancer base partnership done which had a huge impact on our top line, bottom-line and more so going in the long run with the combination studies. And number three, although it may not be so visible from day over day, we are making tremendous progress in gearing up for our first Phase III clinical studies for VGX-3100. I am very certain we will be able to execute this as soon as practicable and we are very excited for launching this very important CIN study for VGX-3100. And lastly, we are very excited about all of the progress we are making with our immune-oncology programs, INO-5150, INO-1400 – by the way, we will be launching another cancer target in 2016 which combines the various top cancer antigen choices, so please stay tuned. 2015 rest of the year is going to be very important for us and 2016 going forward is going to drive many important [indiscernible] for Inovio, our shareholders as well as all of the patients who are suffering from these cancers infections. I'd like to thank you for listening to our call. Thank you very much.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.