Investment Thesis

Vaccinex share price performance since IPO. Source: TradingView.

A review of Vaccinex's (VCNX) recent share price performance and funding runway might persuade investors to leave this early stage biotech stock well alone, but there is also a case to be made that the stock represents a risky potential buying opportunity ahead of some make-or-break trial results.

Vaccinex's lead candidate, Pepinemab - an inhibitor of semaphorin 4D ("SEMA4D") is a unique and potentially effective treatment not only for neurodegenerative diseases, but also for oncological indications.

So far, the treatment has failed to wow investors. A disappointing IPO that raised $39.6m - at the lower end of the company's $12 to $15 price range - generated little follow-on enthusiasm and the company's stock quickly fell to just $3.7.

Vaccinex's news-flow - from presenting data related to its SEMA4D antibody platform, ActivMAb antibody discovery platform, and Natural Killer T-cell vaccine platform, to updates from its 2 major clinical trials - for Huntington's disease and non-small cell lung cancer ("NSCLC") - has succeeded in lifting the share price to highs of $8 in May '19, $7 in September '19 and $7 in January this year. Trading volumes on each occasion were thin, however, and gains short-lived. As such, the company has struggled to raise cash and faces a mounting funding crisis.

On the flip side, major potential price catalysts lie ahead for the company. Full results from its phase 2 Huntington's SIGNAL study of Pepinemab are due to be announced in October, and the trial has already returned some positive results, with patients showing improvement in brain metabolism, halted brain atrophy and an easing of motor and cognitive symptoms after 6 months of treatment vs. placebo.

Meanwhile data from a phase 1/2b study of Pepinemab and Merck KGaA / Pfizer's (NYSE:PFE) Bavencio for NSCLC showed that 81% of patients treated experienced either a partial response or stable disease response, but it appears the company has not persuaded Merck KGaA to partner on a registrational trial that would progress the indication towards approval and commercialization.

Vaccinex's management say that they are considering trials for other oncological indications, provided they can find a suitable partner. The company expects to receive funding from the Alzheimer's Association and the Alzheimer's Drug Discovery Foundation to begin a study of Pepinemab in Alzheimer's patients, but enrollment has been delayed by COVID-19.

The company urgently requires fresh funding, or a partner, without which it will be forced to significantly scale down operations. There are several scenarios that I believe could play out for the company. One is that the stock remains stable until October, and when the full data from SIGNAL is released, rises on positive results, allowing the company to raise funding and proceed with a pivotal trial (it has already both Orphan Drug and fast-track designation from the FDA). Another is that the company is able to find a partner to further its oncological trials, which again is likely to lift the share price. A third is that the company uses its limited funding from Alzheimer's agencies to progress a trial for that indication. Failure to progress on any of these fronts would likely result in an eventual delisting from the NASDAQ.

In the rest of this article I will provide more detail on the company and try to determine the most likely outcome for this Rochester, New York based microcap. I suspect that October won't deliver the major price catalyst the company is looking for, due to insufficient efficacy, but longer term, its work could attract the backers it needs to support share price gains.

Vaccinex has been in existence since 2001 having been founded by President and CEO Maurice Zauderer, an academic who was an Associate Professor at the University of Rochester, senior faculty member at Columbia University and visiting scientist at National Cancer institute, Ontario Cancer Institute and Laboratory of Cell Biology. The rest of the management team and board combines a blend of academic and investment backgrounds, with some biotech experience, including at Biogen (BIIB) and Surface Oncology (NASDAQ:SURF).

The company has developed 3 platform technologies - its SEMA4D antibody platform and ActivMab discovery platform - marketed on the company website as an outsource-able mammalian cell based antibody discovery platform with unique multi-pass membrane target capabilities - and a Natural Killer T vaccine discovery platform.

As mentioned, the company's lead candidate is Pepinemab, a monoclonal antibody targeting SEMA4D. Within the neurology setting, SEMA4D controls activity of certain cells - most notably astrocytes and microglia, the innate inflammatory cells of the brain, whose activation is thought to contribute to neurodegenerative processes.

Pepinemab (VX15) blocks activities of SEMA4D. Source: company website.

Astrocytes and microglia are involved in the down-regulation of both glutamate receptors and glucose transporters but in their inflammatory state - which can be triggered by up-regulation of SEMA4D - the cells are unable to perform their normal functions and instead initiate secretion of inflammatory cytokines leading to the breakdown of neural networks and, Vaccinex believes the onset of diseases such as Huntington's, Alzheimer's, MS and ALS.

In the oncological setting, SEMA4D is also expressed by many types of tumor cells and may be correlated with tumor aggression and the blocking of immune cell infiltration and activity in tumors.

Vaccinex current pipeline. Source: company website.

Besides the Huntington's, Alzheimer's and NSCLC trials, Vaccinex has studies ongoing for Pepinemab with third party investigators in osteosarcoma and melanoma and certain other "window of opportunity" studies for other indications. There are 2 other candidates in limited development. VX5 - a human antibody to CXCL13, a molecule that regulates the formation of immune tissues - and VX25 - an investigational, bi-specific molecule, involved in the activation and targeting of NKT cell stimulation for cancer immunotherapy.

Prior to its IPO, Vaccinex obtained funding (according to the company's 2109 10K submission) by entering into numerous financing arrangements with Canadian Investment groups, including FCMI Financial. These complex arrangements culminated in a licensing agreement with a group of investors - including FCMI - known as VX3 - who agreed to various milestone payments up to a value of $32m in exchange for the rights to market and sell Pepinemab in the US and Canada.

Post IPO, the company has raised (that I can find, on top its initial $39.6m) amounts of $13.8m and $7.5m and has agreements in place with brokerages Jefferies and Keystone to sell up to $11.5m and $5.0m of shares, respectively, and has also received a small $1.1m loan via the CARES act. At the end of 2019 the company reported an accumulated deficit of $248.6m.

On one hand, investors could take the view that Vaccinex has burnt through a considerable amount of cash without having much to show for it. On the other, Vaccinex has now treated >300 patients across the 2 cohorts of its Huntington's trial and seems to have uncovered some promising, if inconclusive results, and treated 62 patients in its NSCLC trials, again delivering results that appear to be borderline sufficient to warrant further trial progression.

Although securing a high-profile partner such as Merck KGaA (known as EMD Serono in the US owing to sharing its name with Merck & Co.), and its drug - the PD-L1 inhibitor co-developed with Pfizer - Bavencio, could be seen as a coup for Vaccinex, in truth, the company still had to fund the investigational new drug application ("IND"), for this study, and shared trial costs, which may not have been such a wise move.

In 2019, trial costs accounted for $18.8m of the company's total R&D expenses. Although the company does not break down the individual costs of the Huntington's vs. NSCLC trials, we can assume a reasonable chunk of this was spent on NSCLC.

Merck KGaA and Pfizer's Bavencio was designed to compete with the likes of US Merck's (MRK) PD-1 inhibitor and mega-blockbuster Keytruda, and Bristol Myers Squibb's (BMY) Opdivo, but to date it has been a disappointment, struggling to secure approvals, and failing to meaningfully outperform its rivals across any indication - the drug pulled in sales of just $114m for Merck KGaA in 2019 whilst Opdivo and Keytruda are multi-billion sellers.

Being a huge market, NSCLC treatment is hugely competitive, and therefore I suspect it would have taken a small miracle for Pepinemab / Bavencio to return the kinds of results required to pursue an approval from the FDA. Instead, although I am not an expert of judging clinical trials, the results do not appear to have demonstrated sufficient promise or efficacy, have not impressed the market, and the experiment now appears to have been all but abandoned.

Having said that, whilst Vaccinex seems to have drawn a line under Pepinemab for NSCLC for now, it is possible that the trial has at least increased the value of Pepinemab as an asset, and perhaps there is a biotech or pharma out there that would consider an acquisition of Vaccinex, or an offer for its lead candidate, should the company's financial woes worsen, and it reach the point of no return.

In a recent Virtual Investor Fireside Chat, Vaccinex CEO Maurice Zauderer spent the majority of the call discussing the progress made in the Huntington's SIGNAL trial, which builds on preclinical studies in an animal model of Huntington's and safety data from a Phase 1 dose-escalation clinical trial of Pepinemab in MS patients that was completed in November 2014.

Data from Cohort A of the trial - which enrolled 36 patients - showed in April 2017 that treatment with Pepinemab induced a sharp increase in glucose metabolism in the brain as detected by FDG-PET imaging, which informed the design of the B Cohort of the trial, which has returned some results of note. After 6 months, Pepinemab-treated patients experienced a significant increase in brain metabolic activity in regions of interest in the brain, plus the treatment demonstrated protection against brain atrophy, and improved motor and cognitive function.

Vaccinex has released detailed data from the trial, and, since FDG-PET is also a clinically relevant biomarker in Alzheimer's, have used the data to justify its move into Alzheimer's treatment. Again, not being an expert in the underlying science, it is hard to judge the merits of this trial or whether the results justify the significant expenditure. What is evident is that SEMA4D blocking is a highly differentiated approach to treating a devastating disease with no known cure, and we also know that the FDA has awarded Pepinemab a coveted fast track designation, which will make it easier for Vaccinex to make a regulatory submission, possibly - according to the trials' Principal Investigator Andrew S. Feigin, MD - treating the current trial as its pivotal trial.

As with Vaccinex's NSCLC trial, there is potentially enough promising data to continue with the study, but equally, potentially not enough to generate real excitement or support amongst the investment community.

I recently covered another small cap stock, Cassava Sciences, (SAVA), whose stock had collapsed from $10, to $2 based on its inability to successfully convert the early promise of an Alzheimer's treatment into a pivotal trial success. In reality, perhaps it was over-ambitious of Cassava to believe it had a potential Alzheimer's treatment given the long history of failed attempts to develop drugs to treat the disease, and the extraordinarily complex nature of neurodegenerative diseases as a whole. Still, with ongoing funding from the Alzheimer's Association, Cassava is working back through its data to identify areas it can improve upon, and has been rewarded by investors for its efforts, with its shares now trading up 67% at $3.36.

I share this information because I think that Vaccinex may fall into a similar category. Whether Vaccinex has been let down by those responsible for the investor relations side of the business, who have failed to drum up enthusiasm for the work the company's scientists are doing, or whether it is the opposite - Vaccinex's data did not ever really justify a stock market listing - is open to discussion.

What I think is most likely to happen to Vaccinex is that it will not immediately find support either for progressing Pepinemab for NSCLC, or for Huntington's - unless the full data from SIGNAL is exceptional - which is, to my mind, so unlikely that it may as well be discounted. But I don't see this as the end of the company as a going concern, rather I think that it can cut its losses , stop funding trials that burn through >$20m per annum, accept funding from its Alzheimer's backers and continue its research on a smaller scale.

As with Cassava, this would generally support the company's current share price, whose recent spikes I would put down to insider buys rather than new backers or heightened interest in its progress. This thesis does support potential price gains, however, because the company can drip feed its progress to the market without the pressure of having to support an unrealistic valuation, or of having to constantly try to raise funding in the hundreds of millions - as it appears to have attempted, and failed to do with a recent filing for a shelf offering.

I hope I am wrong and the Huntington's trial delivers excellent results, which would be a great coup for the company and its investors, and most importantly for patients suffering from this horrendous disease. But a more realistic scenario sees Vaccinex scaling down its operations and focusing on small wins. That is natural for a drug development company, and with such a strategy in place, it might, down the line, secure the investor goodwill the company needs to start scaling the mountain again.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Versatile Vaccinex Needs A Trial Or Partner Win, But Scaled Down Operation May Be More Likely - Seeking Alpha