Filed Under:
Investors in small-cap vaccine biotech Vical (Nasdaq:VICL) received some good news late on Thursday, as the company announced a licensing deal with a major Japanese pharmaceutical company. While this is a solid deal that will bring some more cash into the business, the real question for investors these days is whether Vical's candidate for metastatic melanoma can ultimately obtain FDA approval and then stand with the likes of Bristol-Myers' (NYSE:BMY) Yervoy in the market.

TUTORIAL: Top Stock-Picking Strategies

Astellas Steps Up
While Vical's Allovectin-7 therapy for melanoma gets a lot of the press, Thursday's deal concerns the company's experimental TransVax product for cytomegalovirus (CMV) in transplant patients. Astellas Pharma (OTCBB:ALPMY.PK) has acquired worldwide rights to TransVax and will assume responsibility for its clinical development. In exchange, Vical gets a staggered up-front payment of $35 million in total, future potential milestones, royalty payments (if the drug makes it to market) and the option to co-promote the drug in the United States.

Astellas may not be a household name to most investors, but it is among the largest Japanese pharmaceutical companies. Specializing in urology, oncology and transplants, Astellas may be best known for its acquisition of OSI Pharmaceuticals back in 2010.

How Excited Should Investors Be?
If $35 million in up-front payments does not sound like a huge amount, it isn't. This arguably reflects the market uncertainties about this drug and this category. The prevention/control of CMV in transplant patients is thought to be a big opportunity, but it is hypothetical at this point since there are so few effective treatment options. That may explain why large vaccine concerns like GlaxoSmithKline (NYSE:GSK), Sanofi (NYSE:SNY) and Novartis (NYSE:NVS) felt they could let this one go by.

Investors should also be attentive to the final trial design for the Phase 3 study. Vical is hoping to use CMV viremia as the endpoint instead of actual CMV disease. That would allow Vical to conduct a smaller trial, but that comes at a risk. Smaller trials can lead to more equivocal results for safety and efficacy, and the decision to use viremia as an endpoint may be giving the FDA an excuse to sharply criticize the study results and trial designs if and when the trial merits an application for approval. With even otherwise "clean" biotechs like Seattle Genetics (Nasdaq:SGEN) getting worked over by the FDA these days, it doesn't pay for Vical to take any chances.

How Real is the Melanoma Opportunity?
The biggest question with Vical has to be the potential of the Allovectin-7 product for metastatic melanoma. Though it is described as a cancer vaccine, it is not the same kind of treatment as Bristol-Myers' Yervoy or Dendreon's (Nasdaq:DNDN) Provenge. These later two cancer vaccines use the patient's own immune cells, while Vical uses off-the-shelf DNA sequences. That should make Allovectin-7 more affordable to manufacture, but it is nevertheless important to understand the differences.

The bigger risk with Allovectin-7 is that there may be a level of excitement about the data that just isn't supported by the particulars. To date, the biggest study done with this product was a single-arm study, and while some analysts and investors are excited about the potential survival benefit of Allovectin, survival benefit claims based on single-arm studies are dubious. The question, then, is whether Allovectin will continue to show strong efficacy in the sort of rigorous study that the FDA will require for approval. This isn't to say that Allovectin doesn't work - it just means that there is not enough high-quality data on this drug to have a lot of confidence about its efficacy yet.

The Bottom Line
If TransVax ultimately goes to market, it will likely be a nice (albeit modest) winner for Vical and its shareholders, and there is certainly plenty of potential upside to "nice" and "modest". The bigger question, though, is Allovectin. Maybe this really is a great drug that will significantly extend the lives of some very sick patients. Certainly the eye-popping annual prices of drugs like Yervoy and Provenge make for some compelling potential revenue streams.

On the other hand, two highly lauded melanoma drugs are already getting a lot of investor attention, and would-be rivals like Amgen (Nasdaq:AMGN) and Agenus (Nasdaq:AGEN) are looking to develop their own drugs as well. Vical still has a lot to prove with Allovectin, but investors should get a great deal more visibility in the first half of 2012 when Phase 3 data comes out. That will be the "put up or shut up" moment. Very aggressive investors may well want to consider taking a flier on this name, but this is certainly not a stock for the faint of heart at this point. (For related reading, also check out Measuring The Medicine Makers.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center