Saturday, August 17, 2013

Inovio Gone Wild

Inovio Pharmaceuticals (INO) released Q2 results on August 9, 2013, and you can read my notes here: Inovio Results Q2 2013.

Because Inovio had been an under $1 stock until a few months ago, and then spiked to $3.03 on August 6, and because I had already invested in INO over a year ago, I thought it would be a good time to write an article for Seeking Alpha explaining my understanding of the company.

Here it is: Inovio's Price Spike and the Future of DNA Vaccines

The funny thing is, the article got quite long, and in the end I did not reference the Q2 results. That is okay, because the Q2 results don't tell you whether any vaccine in the INO pipeline is going to eventually get data good enough for FDA approval. Which is the crucial issue for start-up biotechnology companies like Inovio.

I tried to show what I think if the proper way for investors to think about startups and therapies that are in clinical trials, or even preclinical. Most analysts want to reduce everything to a "buy, hold, or sell" paradigm. But with healthcare pipelines no one really knows what the result of a clinical trial will be. IF we knew, why conduct the trial? And since nobody knows (including Wall Street sell-side analysts and hedge fund managers), the sensible approach is probability based and statistical. Bets should be spread out over a variety of companies that have a good probability of a high return on investment, with the expectation that some will have failed therapies. You have to make up for your losses with your gains.

If you have not learned basic probability and statistics (that's all you need), stay away from biotech therapy pipelines (or let someone manage your money who does. I do not manage other people's money, and I don't trust anyone to manage mine. Call me quirky.)

In particular, avoid stocks where the investment community, usually driven by sell-side analysts at major banks, has fully priced in victory. If FDA approval is priced into market capitalization, there is no reason to buy a stock (but your broker will suggest you do it anyway). What those of us who manage our own accounts want is companies where the market cap does not take into account the probable outcome. My usual examples of this for the past 5 years were BIIB, GILD, CELG, and ONXX, all of which had pipelines that were undervalued by the street. I continue to own all 4 of these stocks because while I think their current prices do predict a healthy 2014 in each case, I think the rest of the decade is not priced in.

But what I want to continue to search for, when I have time, is stocks like INO that still have a long way to go.

Keep Diversified!

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