Summary

Genocea is a small cap with an interesting platform for vaccine development.

Developed at Harvard, the ATLAS platform is the long-term value driver for the company.

Its immediate value is in GEN-003, a vaccine being developed for the HSV-2 virus.

Note - Complete valuation is available to my subscribers only, at thislink.

When dealing with small- and micro-cap biotech, probably the biggest issue investors face is trust. Is this company for real, or did some schmuck create a pipeline and a story out of thin air to dupe me out of my money?

That is an issue Genocea (NASDAQ:GNCA) isn't going to have despite its one failed trial. I was able to talk not only with the CEO about that, but also with the Harvard professor who discovered the platform on which Genocea is based.

For me, at least, that pedigree, that Harvard connection, is the biggest sell for GNCA and why I consider the pullback post the failed trial a buying opportunity. I believe that the market overreacted, without seeing the broader picture, and based on short-term expectations.

Recall that GNCA recently failed its phase 2 trial for GEN-004. Here's what CEO Chip Clark said about GEN-004, that although it failed to achieve stat sig, it "showed consistent reductions versus placebo in the rate and density of colonization." I can tell you, though, that without seeing the bigger picture, investors wouldn't buy post hoc justifications for failure. However, there is, indeed, a bigger picture. That is what both the CEO and the Harvard professor Dr Darren Higgins (profile) told me via emails: that GEN-004 is based on their ATLAS platform, which has been consistently proven in academia to be both potent and efficacious. Here's a quote from the professor's email:

"Nonetheless, I would disagree with a hypothesis that the lack of achieving the statistical significance set in the GEN-004 trial would be due to some inherent problem with the ATLAS platform. The ATLAS platform has been vetted for well over 10 years and has proven in each case to be successful in identifying the specific T cell stimulating antigens in academic research development, preclinical and clinical vaccine development programs for multiple pathogens (Chlamydiatrachomatis,Herpes Simplex Virus, Streptococcus pneumonia, Plasmodiumfalciparum). In addition, the ATLAS platform has recently been applied to identify tumor-associated antigens to which T cells are activated that are relevant in checkpoint inhibitor efficacy for cancer immunotherapy. I am pleased with the continued success and excited for future programs to be developed by Genocea Biosciences utilizing the ATLAS platform."

I wanted to address the issue of the failed GEN-004 trial right at the outset because, unless we can understand that, there's no mileage in discussing the stock. Basically, what they are saying is that the trial may have failed due to some issue with its design, rather than due to non-viability of the platform. As the CEO insists, it is more likely that they would just need to "change some combination of dose, adjuvant or trial population in future trials to advance GEN-004."

A statement like that, coming from a small biotech with a failed trial at hand, would be suspect. But this statement is backed by a reputed and reputable faculty at Harvard's famed Medical School. That gives it the trustworthiness that a retail investor like me can depend on. This is true not only for me, but also for big name institutions like Dana Faber and Memorial Sloan Kettering, which are working with Genocea, a small biotech with less than $200mn market cap, probably because they too recognize that pedigree; and for the funds that are buying into it.

Overview

Genocea Biosciences is a small-cap biotech with significant upside. The company's current market cap of $181 million is just a fifth of the potential peak sales estimate of its lead product candidate GEN-003. GNCA has had a mixed year so far, with GEN-003 progressing well in clinical stages but the company has also had to drop the development of GEN-004. The market may have overreacted after the company decided to drop the GEN-004 program. By focusing just on GEN-003, the company will be better able to utilize its resources. And GEN-003 has significant potential.

According to their corporate presentation, if approved GEN-003 could become the first ever therapeutic vaccine in infectious disease. GEN-003 has several catalysts coming up in 2016 that could provide a boost to GNCA shares. According to the CEO, these are:

  • 12-month durability data from the ongoing Phase 2 trial in Q1;
  • Post dose 3 viral shedding data in the planned Phase 2b bridging study in Q2;
  • 6-month efficacy data from potential Phase 3 endpoints in the planned Phase 2b bridging study in the second half;
  • Post dose 3 viral shedding data in the planned Phase 2b combination study in the second half.

Additional, we are advancing ATLAS into immuno-oncology via our ongoing collaborations with Dana Faber and Memorial Sloan Kettering and continuing to invest in our infectious disease pre-clinical pipeline.

Developing vaccines for infectious diseases is a high-cost, low-profit business. The reason why it is expensive to develop vaccines is the trial and error method at the heart of the process. You take up a pathogen, you modify it, hoping its disease-producing capacity has been destroyed without even knowing what part of it produced the disease in the first place, and then you inject that into a healthy volunteer. Often, the volunteer gets the disease because the pathogen was not properly modified. When a subject in a trial gets the disease which the trial is supposed to prevent, apart from everything else, that is expensive for the company running the trial - and time consuming. They have to go back to the work bench and stay there for another couple years trying to come up with a better idea.

A small lab at the Harvard Medical School, run by Dr Darren Higgins, claims to have solved the problem. They try to identify the exact protein that is behind a particular ID, and then they use that protein to stimulate our immune system. That way, a specific immune response can be generated against a specific protein, instead of risking a broad response against an entire range of proteins.

Genocea is a spin-off of this idea, and Dr Higgins is its founder. In the very early stage, it received funding from the Gates Foundation, as well as some of the big names in the industry.

Genocea failed its first round with GEN-004, a universal vaccine candidate for all strains of pneumococcus. Prevnar from Pfizer (NYSE:PFE) currently targets 13 of the 90 known strains of pneumococcus, and generates over $4 billion dollars in annual sales. Prevnar 13 took 14 years to develop:

"Pfizer maintains that Prevnar's prices are justified because of its investment in "one of the most complex biologic products ever developed and manufactured," said Sally Beatty, a company spokeswoman. She noted that it takes five years and costs $600 million to build a vaccine manufacturing site, and that one batch of Prevnar 13 takes two years to create, with more than 500 quality control tests. Development of the first Prevnar vaccine took 14 years, Ms. Beatty said, from the initiation of research to licensing."

So, a single trial with non-significant results is not the key point here, but rather the technology and its pedigree. That means, GNCA's principal asset is the work being done at Dr Higgins' Harvard lab, which is the ATLAS platform. GEN-004 may have had less than satisfactory results, but ATLAS itself is more important, which is why GNCA has huge institutional interest and every hope of not only developing a vaccine in some years but also of licensing its technology out to big pharma after a single proof of concept trial.

GEN-003

GEN-003 is the company's lead program. The therapeutic vaccine candidate is currently in Phase II for the treatment of genital herpes infections. Data from Phase 1/2a trial so far has been encouraging.

Most recent data from the Phase II trial was released in October. The data showed that at its best performing dose, GEN-003 showed a statistically significant 58% reduction from baseline in viral shedding rate, which was the primary endpoint of the study.

GEN-003 comprises two protein antigens; ICP4.2 and glycoprotein D2 or gD2. This is the critical difference between GNCA's technology as developed by Dr Higgins and his lab at Harvard, and older vaccine technology. Here, the exact protein antigen has been isolated, thereby reducing side effects. The idea is simple - a complete pathogen would be comprised of these two proteins, as well as other proteins - so, side effects related to these proteins, and side effects from other proteins where relevant. However, that does not happen here. Moreover, the targeted antigens hypothetically create more T-cell reaction than older technology, making the immune response stronger and longer lasting.

Some technical material from the 10K filing for those interested:

"The first antigen is ICP4.2, a large fragment of the protein ICP4 that we discovered in ATLAS screens to be a T cell antigen associated with protection from infection or with less severe infection. The second antigen is glycoprotein D2, or gD2, a B cell antigen that is the target of antibodies that provide anti-viral activity during the time in the life cycle of HSV-2 where the pathogen is susceptible to inactivation by antibodies. gD2 was also a target of T cells in our ATLAS screens and was selected based on such ATLAS screens as ATLAS prioritized gD2 as the B cell antigen most associated with T cell responses. We pair the antigens with Matrix-M2, a novel adjuvant that we have licensed exclusively for this indication from Novavax."

Approximately 16% of the U.S. population between the ages of 14 and 49 have genital herpes. Globally, the disease affects 400 million people, according to data from the World Health Organization (WHO).

While several treatment options are currently available for HSV-2, there is no known cure for HSV-2. Oral antiviral drugs from GlaxoSmithKline (NYSE:GSK), Novartis (NYSE:NVS) etc. are currently the only options available. According to IMS Health, global and U.S. sales were $1.6bn and $700mn, respectively, in 2012. That gives an indication of the market size targeted by GNCA.

The problem with existing symptomatic treatment is that such patients are neither themselves protected from non-symptomatic viral shredding, nor are their sexual partners protected from transmission. Even daily antiviral treatment only reduces viral shredding and risks of transmission, but does not eliminate it. Here's some more interesting excerpt from a study conducted with more than 300 physicians in the U.S., U.K., Germany, France and Brazil and a review of secondary sources. The study indicated that

"…approximately 11 million people in the U.S. are diagnosed with genital herpes. Of those diagnosed, approximately 7 million are treated with oral anti-viral medicines. This research also indicated that approximately 2.5 million patients treat their disease chronically with daily anti-viral pills, and approximately 4.5 million patients treat episodically to reduce the severity of outbreaks when they occur. Of those patients treated chronically, approximately 30% continue to suffer three or more outbreaks of genital herpes per year and of those treated episodically, approximately 50% continue to suffer three or more outbreaks per year. This market research also indicated that the prevalence of genital herpes outside the United States is similar to the U.S."

The issued U.S. patent 8,617,564 for GEN-003 extends until at least January 2031.

ATLAS Platform

Any discussion of GNCA is incomplete without discussing the ATLAS (AnTigen Lead Acquisition System) platform, which is the important thing to come out of Dr Higgins' lab at Harvard. To put it simply, the basic idea of this platform is to identify the precise protein((s)) in a pathogen that will stimulate the highest T cell response. These proteins are then separated and used to develop the vaccine. The difference between old-type vaccines and this is that the old vaccine is a whole set of un-separated proteins, resulting mostly in B-cell response; while GNCA's procedure creates a stronger T cell response from the immune system. The actual process is interesting but complicated, and I do not want to bother you with the microbiology details. Suffice is to say that, while GEN-003 is the key value driver for Genocea right now, it is the company's ATLAS Platform that could be a key long-term growth driver.

GEN-003 itself is based on the ATLAS platform. Last month, GNCA announcedan immuno-oncology research collaboration with Memorial Sloan Kettering Cancer Center. The collaboration seeks to utilize the ATLAS platform to discover biologically relevant neoantigens for vaccine development. The procedure targets antigens from human rather than animal responses, even if ex vivo, which takes it a step closer to identifying antigens that have the "best likelihood of inducing protective immune responses." The collaboration is also important because ATLAS has already proven its worth by identifying several critical T cell antigens from herpes simplex virus-2, pneumococcus, and chlamydia.

As the CEO said about the platform:

Power of ATLAS platform -We believe that the overall results from the GEN-004 program support the power of the ATLAS platform.

a. ATLAS identified T cell targets that generated a TH17 response, that we believe is relevant for the reduction of colonization by S. pneumoniae.

b. These antigens were highly effective in animal models of colonization.

c. The impact on colonization in the human challenge model may have been present, but at a level below the limits of detection (statistical power for the statistical model used) for the study.

Funds

64% of the float is held by institutional and mutual fund investors, including Polaris, Blackrock, FMR and Millenium. Insiders and 5% owners hold 26% of outstanding shares.

Cash Position and Burn rate

Ended September quarter with $112.5 million in cash on its balance sheet. Sufficient cash to fund operations into the second half of 2017 so near-term dilution risk.

Upcoming Catalysts

GEN-003 Phase 2 12-month efficacy in the first quarter of 2016, virologic efficacy in the second quarter of 2016, clinical efficacy in the second half of 2016, combo efficacy with antivirals in the second half of 2016. End of Phase 2 meeting with FDA also expected in the second half of 2016.

Management

CEO Chip Clark has expertise in biotech and deal-making. He served as Chief Business Officer at Vanda (NASDAQ:VNDA) and was a Principal at venture capital firm Care Capital LLC. CFO Jonathan Poole has worked at Shire and also in investment banking in the U.K. Poole's I-banking experience will be useful if the company is looking for non-dilutive funding through licensing agreements.

Valuation

Based on the assumptions I made in my valuation, I get a value of $10.27 per share for GNCA based on these assumptions. As I said earlier, this value is based on the potential of GEN-003 in the U.S. alone. If GEN-003 is approved in the EU and GNCA commercializes the vaccine on its own, GNCA's value would probably be double. But given GNCA's lack of commercialization experience, I believe that the company will strike a licensing agreement at least for ex-U.S. An ideal time to look for partner would be after the release of Phase II efficacy data early next year.

Genocea ended September quarter with $112.5 million in cash on its balance sheet. The company's current cash balance is sufficient to fund operations until at least the second half of 2017.

Risks and differing viewpoints

Dilution is a medium-term risk. But by the time this risk surfaces, GEN-003 would have progressed in clinical stages, so the vaccine's probability of approval would have improved. As a result, dilution is not going to have an impact on valuation. For example, if GNCA completes an offering in early 2017 and outstanding shares increase to 35 million, price per share drops to $8.25 per share. While this still represents an upside, it must be noted that by then GEN-003 would have progressed to Phase III and so the probability of approval would improve to 60%. Therefore, the dilution would not have a negative impact on valuation. In fact, the higher probability of approval would boost the price per share by at least 20%. Also, there is a possibility for GNCA to obtain non-dilutive financing through a licensing agreement for GEN-003. As I said before, positive efficacy results early next year could spark interest.

The other risk of course is GEN-003 failing to reach commercialization stage. While the fair value for GNCA takes this risk into account, GNCA's current risk/reward profile is favorable. Also, remember that the company does have a technology platform on which its GEN-003 is based. That platform and its pedigree is the biggest selling point for GNCA for me.