Piper: VICL :Initiating Coverage with a Market Perform Rating
2005-10-25 02:15 (New York)
(VICL - $5.17)
Market Perform Volatility: Medium
Edward A. Tenthoff, Sr Research Analyst 212 284-9403, edward.a.tenthoff@pjc.com
William T. Ho, Research Analyst
212 284-9308, william.t.ho@pjc.com
KEY POINTS:
* Dominates Non-Viral DNA Delivery. Since its earliest discoveries in 1989,
Vical has dominated the field of non-viral DNA delivery. This core
technology enables Vical to deliver plasmids (circular strands of DNA) as
vaccines or immunotherapy. Vical now has 4 proprietary and 10 partnered
programs in the clinic.
* Partner for Allovectin-7. In February, Vical received an SPA for the Phase
III trial of Allovectin-7 in metastatic melanoma. The trial is designed to
randomize 375 patients to Alovectin-7 vs. standard of care with the primary
endpoint durable response rate at 24 weeks. We expect Vical to partner
Allovectin-7 prior to commencing Phase III trials.
* Emerging Clinical Pipeline. Vical's lead program is now a CMV vaccine for
bone marrow transplant patients, which should advance into Phase II trials
by early 2006. Vical is also conducting a Phase I trial of a novel IL-
2 eletroporation therapy for melanoma. Vical has received a $3 million grant
from the NIH to develop a new flu vaccine that may address the threat of a
pandemic.
* Several Valuable Partnerships. Merck is using Vical technology to develop
cancer and HIV vaccines. Vical also receives considerable grant revenues
from the NIH for a variety of infectious diseases and biothreat agents, and
received a $12 million manufacturing contract to supply an HIV vaccine.
Vical's technology is being used in various angiogenic programs and was
recently approved for a salmon vaccine.
* Stronger Balance Sheet. As a result of a recent registered direct offering,
we estimate Vical now has proforma cash of ~$80 million. With the
Allovectin-7 partnership, we estimate this should be sufficient to fund
operations for 2-3 years.
Price: $5.17
52 Week High: $6.98
Rating -- MarketPerform
52 Week Low: $3.46
Price Target: $6.00
Shares Out (mil): 28.2
Market Cap. (mil): $145.8
Avg Daily Vol (000): 261
Book Value/Share: $3.30
Cash Per Share: $2.83
Debt to Total Capital: 1%
Est Next Rep Date: 10/01/2005
Fiscal Year End: Dec
INVESTMENT RECOMMENDATION:
We are initiating coverage of Vical with a Market Perform rating and a $6.00
price target. Vical dominates the filed of non-viral DNA delivery and has
several important partnerships, however the company's proprietary programs are
early and we look for data before becoming more bullish on the story. We
project an enterprise value of $150 million based on Vical's proprietary
clinical pipeline, plus year-end 2006 net cash of $24 million. Risk to our
price target would be failure to partner Allovectin-7 and clinical failure.
Upside could come from the pandemic flu vaccine.
RISKS TO ACHIEVEMENT OF TARGET PRICE:
Risks associated with Vical are typical with all vaccine development companies
including clinical and regulatory. Vical may fail to partner Allovectin-7 and
advance the other clinical programs. Vical will likely have to raise
additional capital and could face future, unforeseen litigation and have to
defend its patent estate.
COMPANY DESCRIPTION:
Vical is a San Diego biotech company focused on developing DNA vaccines. The
company dominates the science and intellectual property surrounding non-viral
delivery of plasmid DNA.
LEADER IN NON-VIRAL DNA VACCINES
Vical was founded in 1987, but the story really began with the discovery that
naked DNA could be absorbed into cells in 1989. Over the years, Vical has
endeavored to advance the science and develop therapeutic applications. Today,
Vical dominates the field of non-viral DNA delivery. This core technology
enables Vical and partners to deliver plasmid DNA (pDNA) to stimulate the
immune system as a vaccine or immunotherapy, and even for localized
therapeutic protein synthesis. Importantly, Vical has built out GMP
manufacturing facilities for DNA vaccines and can produce product for its own
and partnered clinical programs. At present, Vical has 4 proprietary programs
in the clinic.
As part of the company's legacy, Vical developed Allovectin-7 for the
treatment of metastatic melanoma. The Phase II trial (n=127) demonstrated an
11.8% objective RECIST response rate lasting a median of 12.7 months. In
February, Vical received an SPA for a Phase III trial of Allovectin-7 in Grade
3/4 melanoma. The trial is designed to randomize 375 chemotherapy naive
patients (2:1) to Alovectin-7 vs. standard of care (DTIC or temodar) with the
primary endpoint of durable response rate at 24 weeks. Importantly, we expect
Vical to partner Allovectin-7 prior to commencing Phase III trials.
Vical is developing a cytomegalovirus (CMV) vaccine for bone marrow transplant
patients, which should advance into Phase II trials by early 2006. This
bivalent vaccine is given to both the host and the recipient in order to
prevent infection. An estimated 9,000 BMTs are performed in the U.S. every
year with 40-70% of the transplant patients developing CMV infection after
myelosuppression. The trial will enroll 80 donor/recipient pairs at 20 centers
in the U.S. and will compare the rate of CMV viremia vs. placebo and
historical controls. While we anticipate enrollment may last into 2007, we do
look for preliminary efficacy data to be available in 2006.
The company is also developing a novel approach to treat melanoma where
interleukin-2 (IL-2) plasmids are injected directly into the lesion followed
by electroporation to increase transfection. The plasmids are absorbed into
the tumor cells, which then produce IL-2 locally at therapeutically potent
levels in order to stimulate the immune response to kill the tumor cells.
Proleukin is effective, but used only as a last resort because of serious and
sometime fatal systemic toxicity. The Phase I dose escalation trial is
underway and will enroll as many as 29 patients with initial data available
late next year.
Importantly, Vical has licensed its non-viral DNA delivery IP estate with
leading pharmaceutical companies and government institutions. These
partnerships dramatically expand Vical's development programs and also
generate near-term revenues, milestones and eventually royalties. Vical
partners currently have 10 programs in various stages of clinical development.
Merck is using Vical's technology to develop a high-profile HIV vaccine in
Phase I trials and also an undisclosed number of cancer targets for vaccine
development. We believe Merck may advance a HER2/CEA cancer vaccine into the
clinical near-term.
Vical receives considerable grant revenues from the NIH to develop vaccines
for a variety of infectious diseases and biothreat agents including influenza,
HIV, SARS, West Nile Virus and Ebola. The NIH recently initiated a Phase II
trial for a "prime-boost" HIV vaccine and intends to initiate a larger trial
with several thousand patients in 2007, for which Vical received a $12 million
manufacturing supply contract. Vical is developing a new DNA influenza vaccine
that can be rapidly developed and manufactured, and may address the threat of
a pandemic.
Vical's technology is licensed to three companies that are developing
angiogenic therapies to grow new vessels in peripheral artery (PAD) and
coronary artery disease (CAD). AnGes and partner Daiichi are conducting a
Phase III PAD trial in Japan and could gain approval in 2007. Sanofi has two
Phase II PAD trials that could offer data soon. Corautus is partnered with
Boston Scientific (BSX) and is conducting a large Phase IIb trial in CAD that
should complete enrollment next year. Lastly in the animal health arena,
Novartis AquaHealth recently received approval of an IHNV vaccine for salmon
in Canada and Merial is awaiting approval of a canine melanoma vaccine
sometime next year.
We are initiating coverage of Vical with a Market Perform rating. Vical
dominates the filed of non-viral DNA delivery and has several important
partnerships, however the company's proprietary programs are early and we look
for data before becoming more bullish on the story. As a result of a recent
$23 million registered direct offering, we estimate Vical now has proforma
cash of ~$80 million. With the Allovectin-7 partnership, we estimate this
should be sufficient to fund operations for 2-3 years. Our $6.00 price target
is based on a projected enterprise value of $150 million valuing Vical's
proprietary clinical programs, to which we add year-end 2006 net cash of $24
million.
EXPECTED UPCOMING EVENTS:
* Partner Allovetin-7 for the treatment of metastatic melanoma; partner to
commence Phase III trials
* Commence Phase II trial of CMV vaccine for bone marrow transplant patients
by early 2006; preliminary data late next year
* Continue dose escalation of IL-2 EP Phase I trial with preliminary data
available in 2H:06
* Sanofi may present data on two Phase II PAD trials soon
* Merck may advance a HER2/CEA cancer vaccine into the clinical near-term
* NIH may present Phase I data on the Ebola, West Nile Virus and SARS vaccines
* Vical to deliver HIV vaccine supply to NIH through 2006
* Corautus should complete enrollment of Phase IIb trial in CAD next year
* AnGes and Daiichi should complete Phase III PAD trial in Japan and file for
approval
* Merial is awaiting approval of a canine melanoma vaccine in 2006
* Enter into additional licensing agreements for non-viral DNA delivery patent
estate
VICAL'S DNA PLASMID TECHNOLOGY
Plasmids are short, circular double-stranded pieces of DNA that are separate
from chromosomal DNA and usually found within bacteria. A typical plasmid will
include an origin of replication, a promoter region, and a multiple cloning
site (MCS) region containing restriction endonuclease sites to ensure the gene
of interest is added to the correct reading frame. In synthetic plasmids, an
antibiotic resistance gene such as ampicillin (ampr), neomycin (neor) or
kanamycin (kanr) is often included to allow for plasmid selection during
manufacturing. Plasmids usually contain a strong promoter and are commonly
used to over-express certain genes or to produce large amounts of selected
proteins. Complete plasmids including the inserted gene of interest are
commonly called constructs.
Plasmids are introduced either systemically or locally through direct
injection. Cationic or lipid chemical modifications increase plasmid uptake
across the cell membrane. Vical is able to engineer plasmids that cross the
cell membrane and localize into the nucleus. Plasmids generally have a single
origin of replication and employ the same proteins and enzymes used by the
cell for its own genetic replication. Once in the nucleus, the plasmid will
replicate and transcribe the double stranded DNA into RNA within the
nucleoplasm. Using the cells own replication apparatus, this RNA then migrates
to the Golgi apparatus and will be translated into specific proteins with the
same post-translational modifications as native proteins.
Once the cell manufactures the target protein, it acts as either an antigen to
generate an immune response by the patient or as a therapeutic protein. The
end result is that Vical's vaccines are safe with no potential for viral
infection. The technology can be broadly applied to treat and prevent various
infectious diseases and cancers. Importantly, DNA vaccines are inherently
stable, thereby increasing shelf-life and enabling the stockpiling of vaccine
for future use.
Vaccines and Immunotherapy
The body's immune response can be separated by time into two distinct
processes. The first is the innate immune response. Should physical barriers
such as the skin be broken, within minutes of an infection, the innate immune
system launches a non-specific inflammatory response involving cytokines and
mediators such as interleukins, interferons, and macrophages. These molecules
recognize large invariant classes of receptors and do not lead to protective
immunity.
Following the initiation of the innate immune response, an adaptive (acquired)
immune response commences. The adaptive immune system is triggered when the
infection causes antigen-specific T and B cells to proliferate and
differentiate into effector cells. These cells can form cytotoxic,
inflammatory or helper T cells, or can induce B cells to form antibodies
against the antigen. It is this system that gives our immune response "memory"
to recognize previously encountered antigens and clear them quickly. Once the
infection is cleared, these new B and T cells remain within the system to ward
off future attacks.
Vical's DNA vaccines trigger the immune system for the intend response. First,
plasmids are created that include genes that produce a protein associated with
the infectious organism. Ideally these are proteins that can be found on the
surface of the organism.
As a vaccine, these DNA plasmids are injected into the subject, where they are
taken up by healthy cells within the body. Once inside the cell, the plasmid
enters the nucleus where the encoded gene is transcribed and the protein is
produced.
The resultant protein is recognized as foreign and is processed by the immune
system. The protein is presented as an antigen to B cells that produce
antibodies against the protein. The resultant antibodies remain within the
body, acting as part of the adaptive immune response, ready to attack whenever
that antigen is presented in the future.
Figure 1. Protein Production from Plasmid to Elicit Immune Response
Source: Vical Company Website
Therapeutic Plasmids
As a therapeutic, Vical seeks to use its plasmid technology to cause targeted
cells to produce therapeutic proteins in a localized area, such as a tumor. An
example is the IL-2 program, where tumor cells are transfected with plasmids
that cause the production of IL-2 by the tumor cells themselves. This
localized IL-2 is able to upregulate the immune system to kill these tumor
cells. For the treatment of cardiovascular disease, three companies are using
Vical's technology to deliver plasmids that encode for angiogenic proteins to
grow new blood vessels in ischemic tissue.
CLINICAL PIPELINE:
Allovectin-7
Vical's has developed Allovectin-7 for the treatment of metastatic melanoma.
Allovectin-7 is a cancer vaccine incorporating a plasmid/lipid complex that
co-expresses proteins for HLA-B7 and ß2 microglobulin. These two proteins form
a Class I Major Histocompatibility Complex (MHC-I) antigen. For the immune
system to respond to tumor antigens, T cells must be activated by MHC-I cells,
although the number of MHC-I antigens may be reduced on the tumor cell
surface. Intratumoral injection of Allovectin-7 is believed to enhance tumor
cell antigen presentation and elicit an immune response against the local and
metastatic tumor cells.
Figure 2. Allovectin-7 Expression Vector
Source: Allovectin-7 iSBTc Poster, November 2004
According to a technology review by Evanthia Galanis at the Mayo Clinic,
Allovectin-7 may help combat tumors through several immune stimulating
functions: a) expression of foreign cell surface protein (HLA-B7) in HLA-B7
negative patients, b) increased antigen presentation signal, and c)
replacement of ß2 microglobulin for increased surface expression of the
patient's own MHC class I molecules (Current Opinion in Molecular Therapeutics
(2002) 4(1):80-87).
In the Phase II dose-escalation trial, 133 Grade III or IV melanoma patients
were dosed with weekly intra-tumoral injections of 2mg of Allovectin-7 for 6
weeks followed by 3 weeks of evaluation. Allovectin-7 was found to be safe and
well-tolerated with side-effects including mild-to-moderate injection site
reactions and flu-like symptoms. Allovectin-7 showed an 11.8% (15/127) RECIST
(Response Evaluation Criteria In Solid Tumors) response rate lasting a median
of 12.7 months. Median time to progression was 1.6 months and median overall
survival was 21.3 months. 3 patients (2.4%) had a complete response and
included 2 patients that had resected lesions with no evidence of melanoma.
While the response rates are acceptable, the duration of response and survival
is most impressive in our view.
In February, Vical received an SPA for the Phase III trial. The superiority
trial will randomize 375 metastatic (Grade 3 or 4) melanoma patients in a 2:
1 ratio to receive a 2 mg dose of Alovectin-7 in a single lesion or standard
of care, which can be either dacarbazine or temozolomide (temodar), a
Schering-Plough drug often used off-label. The Phase III trial will utilize a
modified RECIST criteria allowing continued treatment of patients developing
new lesions within defined limits. The primary endpoint is a durable response
rate at 24 weeks (6 months) or more after randomization.
Several changes have been incorporated into the Phase III trial due to Phase
II results. Patients in the Phase 2 trial benefited from having at least two
cycles of treatment and the Phase III trial will begin tumor assessment after
two cycles. The Phase 3 trial also allows upgrades of stable or responding
patients if examination of surgically removed residual lesions after 32 weeks
confirms suspected scar tissue rather than active melanoma. Importantly, we
expect Vical to partner Allovectin-7 prior to commencing Phase III trials.
CMV Vaccine
Vical's next program is a vaccine for the prevention of CMV (Cytomegalovirus)
infection in bone marrow transplant (BMT) patients. CMV infections affect an
estimated 30-60% of the ~29,000 annual hematopoietic cell or solid organ
transplant patients in the U.S. It is estimated that 40-70% of BMT patients
develop CMV infection after myelosuppression and transplant. Vical has
developed a vaccine against CMV to help prevent transplant rejection, serious
illness and even death following transplantation.
Uniquely, Vical's bivalent vaccine is given to both the donor and recipient.
The donor is given 3 doses of vaccine weekly prior to the procedure. The
recipient is also given 1 dose of vaccine prior to ablation and then 2 doses
post transplant. In this manner, the company hopes to improve the efficacy of
the vaccine.
Vical has completed Phase I trials of both the bivalent (2-plasmids) and
trivalent formulations. The Phase I studies were open-label trials to evaluate
the safety and immunogenicity of CMV vaccine in healthy subjects. Each patient
received 3 or 4 doses of either 1 mg or 5 mg of the vaccine with 3 or 4 months
follow up. The primary endpoints were safety, with secondary endpoint of
immunogenicity in CMV seronegative and CMV seropositive subjects.
The results of the Phase I trials demonstrated the CMV vaccine to be safe and
well-tolerated by the majority of patients with temporary injection site pain
being the most common adverse event. The vaccine was found to induce both
antibody and T-cell responses at both dose levels. Dosing schedules tested
with the bivalent vaccine formulation induced measurably higher levels of
immune responses and were selected for future development.
Vical next intends to initiate a Phase II trial of the bivalent plasmid
formulation by early 2006. The Phase II trial will be a randomized, double-
blind, placebo-controlled trial in approximately 80 donor/recipient pairs (160
subjects total). The primary endpoint of the trial will be safety of the
vaccine compared to placebo. An important secondary endpoint is the occurrence
rate of clinically significant CMV levels in vaccine recipients compared to
placebo and in historical controls. While we anticipate enrollment may last
into 2007, we do look for preliminary efficacy data to be available in 2006.
IL-2 Vaccine with Electroporation
In July, Vical initiated a Phase I trial of an IL-2 vaccine with
electroporation in recurrent metastatic melanoma patients. In this program,
the IL-2 therapeutic vaccine is injected directly into the skin lesion. This
is immediately followed by the application of electrical pulses to the lesion
to open pores in the cell membranes to increase uptake of the DNA plasmid into
the tumor cells. This electroporation technology was licensed through an
agreement with Genetronics.
The tumor cells then act as a factory and synthesize IL-2 locally. The goal of
this therapeutic vaccine is to achieve the benefit of IL-2 therapy without the
severe toxicity, risks and vascular leakage associated with systemic delivery.
The open label, dose-escalation Phase I trial will seek to enroll up to 29
metastatic melanoma patients. The first cohort of 3 patients has been
enrolled. Patients will receive 0.5 mg of IL-2 vaccine in a single tumor
lesion every week for two 4-week cycles, each with a 4-week follow up. The
trial will then dose the next cohort at 1.5 mg through the same protocol and
then progress to a maximum dose of 5 mg if tolerated. The highest tolerated
dose cohort will enroll an additional 17 patients and dose as many as 3 tumor
lesions per patient. The primary endpoints of the trial will by safety with a
secondary analysis for efficacy. We anticipate initial data from this trial
will be available late next year.
PARTNERSHIPS
Merck & Co.
Vical's longest partnership is with Merck, who has paid Vical $28 million
since 1991. Vical and Merck maintain a broad vaccine alliance in cancer and a
variety of viral infections. Much of Merck's future pipeline is based on new
vaccine products and Vical fits prominently into this strategy.
In June, Merck licensed 3 cancer vaccine targets triggering a $3 million
option payment to Vical. In September, Merck re-upped for an undisclosed
number of additional cancer targets. In exchange, Vical was returned non-
exclusive rights to develop an HIV vaccine enabling the company to sublicense
these rights to the NIH. We understand Merck may file an IND on a cancer
vaccine targeting HER2/CEA in the near-term. Vical stands to receive
additional milestones and retains optional co-promotion rights.
Merck is developing a high-profile HIV vaccine. Based on efficacy data
generated by the NIH, we believe the product most likely to succeed will be a
prime-boost vaccine. In this approach, the "primer" introduces the antigen to
the immune system and the "booster" reinforces the response. Merck has
completed Phase I studies of the primer DNA vaccine. In January, Merck
commenced an adenovirus vaccine trial for the "boost" component. Merck does
retain an exclusive option for a defined period of time to use electoporation
to enhance transfection of the HIV vaccine.
Merck is also working on early stage Hepatitis-B (HBV) and Hepatitis-C viral
(HCV) vaccines. Interestingly, Vical and Dynavax (DVAX), who is also
developing an HBV vaccine, have cross-licensed intellectual property estates.
National Institutes of Health (NIH)
Vical has been very successful at partnering with the NIH and gaining grants
for a number of infectious diseases and biothreat agents. In fact, the NIH is
funding 4 vaccine programs and has invested in 4 of Vical's other programs.
Earlier this month, the NIH commenced a Phase II trial of a prime-boost HIV
vaccine being conducted by the HIV Vaccine Trial Network (HVTN). Developed at
the Vaccine Research Center at the National Institute of Allergy and
Infectious Diseases (NIAID), the vaccine is derived from multiple HIV subtypes
that account for ~85% of HIV infections globally. The DNA vaccine is
synthesized from portions of 4 HIV genes - gag, pol, sef and env. The booster
is comprised of an adenoviral vector. We understand that NIH intends to
conduct larger trials and granted Vical a $12.1 million HIV DNA vaccine
manufacturing supply contract that should be fulfilled through 2006.
The Phase I HIV trial enrolled 8 healthy individuals. Data presented at the
AIDS Vaccine 2005 International Conference in Montreal in September showed
that the vaccine was safe and well-tolerated. Importantly, the trial
demonstrated that the prime-boost approach appeared to be several-fold more
effective than the adenoviral vaccine alone. We now look for larger Phase II
trials to confirm these results.
The NIH is also developing DNA vaccines against Ebola, West Nile Virus and
SARS. Started in November 2003, the NIAID completed the Phase I trial of the
Ebola vaccine. Initiated in April of this year, enrollment is complete of the
Phase I trial of the West Nile Virus vaccine. Started in December 2003, we
believe the SARS Phase I trial should be almost complete. We anticipate the
NIH should publish the data from all three Phase I trials in the near future.
Vical did develop an anthrax vaccine; however the program is on hold as the
U.S. government awarded VaxGen (VXGN.PK) an $878 million contract to purchase
75 million doses of rPA102. In preclinical testing, Vical's vaccine did
demonstrate complete protection of rabbits against a lethal aerosolized
anthrax spore inhalation challenge administered up to 7.5 months after
vaccination. The company initiated a human Phase I clinical trial in 52
healthy volunteers to evaluate safety and immunogenicity at various doses and
regimens.
The NIH also provided Vical with a $2.9 million grant to develop a new
influenza vaccine. The goal is to develop a cross-protective DNA vaccine that
can be rapidly developed and manufactured. The program is also targeting the
H5N1 strain of avian flu, which is currently spreading globally. Many fear
that if the virus mutates and can be transmitted between humans, it could
present a pandemic threat. The NIH grant should last ~2 years and cover all
preclinical development. Vical is working with St. Jude, who will conduct the
animal challenge models in mice and ferrets. In addition, the company received
a one year, $500,000 grant from DARPA to explore new approaches to rapidly
manufacture large quantities of DNA vaccines.
ANGIOGENESIS
Vical's technology is licensed to three companies that are developing
angiogenic therapies to grow new blood vessels in peripheral artery (PAD) and
coronary artery disease (CAD). In each case, the partner is delivering
plasmids that code for therapeutic proteins via non-viral means.
AnGes MG. AnGes is a Japanese biotech company. In May, AnGes to an exclusive,
worldwide license to develop Hepatocyte Growth Factor (HGF) for cardiovascular
disease. AnGes and partner Daiichi are conducting a Phase III trial of 120
Japanese with PAD. Started in April 2004, we estimate the trial could be
completed late next year. While AnGes has not been active in publishing data,
Daiichi has stated its goal of gaining approval of HGF in Japan in 2007.
In addition, the partners are conducting two clinical trials in the United
States. We look for a Phase II trial of 100 PAD patients to finish up in 1H:
06. The partners are also conducting a Phase I trial (n~12) in ischemic heart
disease. This indication is more advanced in the U.S. because the catheter
required for myocardial delivery has yet to be approved in Japan.
Sanofi-Aventis. Prior to the merger, Vical was working with two divisions of
Aventis: Aventis Pasteur, now Sanofi Pasteur, and Gencell, now Centelion. In
2000, Centelion licensed Vical's technology to develop a FGF-1 for
cardiovascular indications, although to date the company has only worked in
PAD. In a Phase I trial, FGF-1 plasmid was well-tolerated and showed formation
of new blood vessels after 3 months of treatment. In 2002, Centelion commenced
two Phase II trials, one in the U.S. and one in Europe, both of which could
offer data soon. The company also began a Phase II trial in the less severe
form of PAD called intermittent claudication in 2004.
Corautus Genetics (VEGF). Corautus is developing a naked VEGF-2 plasmid to
treat severe cardiac ischemia. The company has demonstrated proof of concept
in multiple Phase I trials. In a mini-thoracotomy trial of 30 Class III/IV
angina patients, the naked plasmid was injected directly into the ischemic
heart muscle. Episodes of angina decreased from a mean 31 per week to only 9
per week, exercise time increased on average 2 minutes and 74% of patients
reported a reduction in angina of >2 classes. Corautus subsequently conducted
two catheter-delivery trials of a total of 18 patients demonstrating the
safety of this approach, as well as a reduction in angina and nitroglycerin
consumption.
Now, Corautus is partnered with Boston Scientific with an equity investment
and use of the Stiletto catheter. The company is conducting a placebo-
controlled Phase IIb trial of 404 Class III/IV angina patients with no other
options. The trial is evaluating 3 dose cohorts of 20ug, 200ug and 800ug of
VEGF-2 plasmid with a primary endpoint of increase in Exercise Tolerance Time
(ETT) and secondary endpoints of decreased angina and SPECT imaging. We
understand the trial should complete enrollment early next year. With 3 month
follow-up for efficacy and 1-year follow-up for safety, we expect data could
be available in 2007. The company initially licensed the target from Human
Genome Sciences. Vical owns a small equity position in Corautus Genetics and
stands to receive royalties if the product reaches the market.
ANIMAL HEALTH
Novartis AquaHealth. In July, AquaHealth received approval of an IHNV
(Interferon Haematopoietic Necrosis virus) vaccine by the Canadian Food
Inspection Agency for salmon. The vaccine is used to prevent fatal infection
of salmon in fisheries. The approval is important because the vaccine is used
in a human food source and has cleared safety concerns. Vical receives small
royalties on the sale of this product.
Merial. Merial is a joint venture between Merck and Sanofi-Aventis. Merial has
options to develop DNA vaccines against a variety of infectious diseases in
animals. Merial is now awaiting approval of a canine melanoma vaccine sometime
next year.
FINANCIALS
Revenues. Vical derives the majority of its revenues from grants and
collaborative R&D funding and milestones. The company does receive a small
royalty from sales of the new AquaHealth salmon vaccine in Canada. We forecast
Vical should post revenues of $3 million in 3Q:05 and $15 million in 2005. We
look for revenues to grow to $16 million in 2006 including the manufacturing
revenues of the HIV DNA vaccine for the NIH.
Operating Expenses. We forecast Vical will invest $5 million in R&D in 3Q:05
and $19.5 million for the full year 2005. Dependent upon the nature and scale
of the Allovectin-7 partnership, we currently forecast 2006 R&D investment of
$22.5 million as Vical starts the CMV vaccine Phase II trial and continues the
IL-2 EP Phase I trial.
We look for Vical to report Manufacturing and Production expenses of $3.5
million in 3Q:05 and $14.3 million in 2005. We look for a healthy step up in
Manufacturing and Production expenses next year to $20 million as Vical
delivers the HIV vaccine to the NIH. We look for Vical to control its G&A
budget at $2 million in 3Q:05, $8.2 million for 2005 and $9 million in 2006.
Net Loss. We forecast Vical will lose $7.3 million or ($0.31) per share in 3Q:
05 and $26 million or ($1.05) per share for the full year 2005. Next year, we
forecast net loss of $35 million or ($1.21) per share.
Balance Sheet and Cash Flow. As a result of a recent $23 million registered
direct offering, we estimate Vical now has proforma cash of approximately $80
million, which is based on end of 2Q:05 cash plus the net proceeds from the
deal. At this point, we expect Vical to continue to lose money for the
foreseeable future. We forecast net cash burn of only $78,000 this year as a
result of the registered direct fund raising. In 2006, we forecast the company
will burn $16 million. On a Free Cash Flow basis, we expect Vical to burn
$22.8 million this year and $30.8 million in 2006.
We thus project Vical will end 2006 with $27.9 million in cash and maintain
roughly $4 million in debt. This equates to a projected net cash position of
$24 million at year-end 2006. This forecast does not include the impact of the
potential Allovectin-7 partnership in this calculation, which could provide
additional money.
VALUATION
We are initiating coverage of Vical with a Market Perform rating and a $6.00
price target. Vical is currently trading at a market capitalization of $145
million and an enterprise value of $70 million. As a result of a recent $23
million registered direct offering, we estimate Vical now has proforma cash of
approximately $80 million.
Our $6.00 price target is based on a market capitalization of $174 million or
a projected increase in enterprise value to $150 million. Our projected
enterprise value is based on the company's two proprietary clinical programs.
Specifically, we value the CMV vaccine, which should advance into Phase II
trials next year, at $100 million, and the Phase I IL-2 EP program at $50
million. To this projected enterprise value, we add back year-end 2006 cash of
$28 million and subtract out $4 million in debt. Risk to our price target
includes failure to partner Allovectin-7 and failure to advance the clinical
programs. Upside could come from the acceleration of the pandemic flu vaccine.
INVESTMENT RISKS
Risks associated with Vical are typical with all vaccine development companies
including clinical and regulatory. Specifically, Vical does not intend to
advance Allovectin-7 alone and may fail to partner the program. Vical or its
partners may fail to advance other clinical programs. Vical may not meet its
obligations under existing partnerships, which could adversely impact our
revenue forecast or future milestones/royalties. Vical may fail to enter into
new license agreements or partnerships. The company could face unforeseen
litigation and have to defend its patent estate. Vical company will likely
have to raise additional money from the capital markets.
Important Research Disclosures
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Analyst Certification - Edward A. Tenthoff, Sr Research Analyst
The views expressed in this report, .... |
