Vical Inc. (VICL)

[goodplenty100]

Thanks to Daniel Ward for the following


Vical Incorporated (NASDAQ:VICL) - 10% Allocation: Vical Incorporated is a new name I ran into while reviewing my cheap biotech screen. Vical develops biopharmaceutical products for the prevention and treatment of chronic or life-threatening infectious diseases. When you see me highlighting this name, you may be saying the following:

"Dan, what are you thinking? Did you see the phase 1/2 failure for its therapeutic genital herpes vaccine in June 2015 or the phase 3 failure for intratumoral cancer immunotherapy Allovectin back in August 2013?"

Yes, yes I definitely am aware of its history of futility. Even given this, take a look at the following thesis points highlighting why I believe this stock presents a compelling opportunity:

1. Clean Capital Structure and Rock-Bottom Valuation: Typically biotechs with a history of futility at what appear to be low valuations will have poor capital structures (think Aeterna Zentaris (NASDAQ:AEZS) ), which spells doom for shareholders. Utilizing control+F through a few SEC filings will show you that Vical refreshingly has no outstanding warrants or preferred stock. So, exactly how cheap is it? Well, at a price to book ratio of 0.694x, the stock is the cheapest it's been in the past five years.

VICL Price to Book Value Chart

VICL Price to Book Value data by YCharts

As a matter of fact, you'd have to go back more than a dozen years to find when the stock was this cheap.

VICL Price to Book Value Chart

VICL Price to Book Value data by YCharts

Coincidentally, twelve or so years ago is roughly when notable value investor John Rogers and Ariel Investments initially took a stake in the name. You can read about Ariel's history with the name in a piece by ValueWalk here. While Ariel has managed its position by selling the rips and buying the dips as it kept weightings in line, the company still currently owns approximately 8.1% of the company. Given the company's value investing strategy of exhibiting discipline and capitalizing on mispricings, I believe that the company will consider increasing its stake at current levels. While a clean capital structure and trading well under book value provide are both quality characteristics for a value investment, the company's partnership with Astellas is what clinches the company's spot in my value investment portfolio. My reason for being very positive on this partnership with Astellas is that Astellas is currently funding the ASP0113 program, which includes multiple late-stage trials with a phase 2 solid organ transplant (SOT) trial and a phase 3 hematopoietic cell transplantation (HCT) trial. With Astellas funding multiple late-stage trials, the company is projected to only burn $7-9 million in 2015, and I expect the company to be able to continue to manage cash burn in 2016 thanks to Astellas.

2. Variety of Upcoming Catalysts: While I admittedly do not have a specific catalyst to point to that will rescue shares from a valuation not seen since the early 2000s, there are a nice set of catalysts to note, and it will only take one piece of notable positive news to provide investors with a solid return from current levels. Catalysts on deck include the following:

(click to enlarge)

Source: November 2015 Stifel Conference

ASP0113 Program: From this program partnered with Astellas, we'll receive phase 2 data in SOT in Q3 2016. In this phase 2 study, the company is looking at the highest risk patients where an organ is being transferred from a cyatomegalovirus (CMV) positive donor to a CMV negative recipient. We're also expected to receive an enrollment completion milestone for the phase 3 HCT trial in Q3 2016.

HSV-2 Therapeutic Vaccine: As I previously mentioned, the company failed a top-line efficacy readout for the phase 1/2 trial in June 2015. While herpes vaccine development is difficult and the data was very poor, the company will be reporting additional clinical data in the first quarter of 2016 that will include the change in lesion rate and recurrence data. While I have low hopes for value creation from this asset, there was biological activity data that was a bit interesting in the initial readout, and it should not take much to get the name moving upward from this depressed valuation.

CyMVectin CMV Vaccine: The company is exploring this asset in the treatment of women of childbearing age as a way to prevent CMV infection in this at-risk group of women and their children. The company has a phase 1 trial design and has an IND that has been allowed by the FDA. It is reviewing options to move forward individually or with a partnership with a partnership providing an interesting catalyst and a method for cash-burn control.

VL-2397: VL-2397 is an anti-fungal compound the company in-licensed from Astellas with Vical completing this deal with stock and $250,000 in cash. The company will be initiating a phase 1 trial in H1 2016 for treatment of invasive aspergillosis. Lack of research in anti-fungals makes this an area of research with a number of financial incentives with the company eligible for certain incentives through the GAIN Act of 2012.

Concluding Thoughts On Vical: While I acknowledge the lack of success on the part of Vical in past years, this is a company with a clean capital structure, a partner in Astellas funding substantial R&D, and minimal cash burn that currently trades well under book value. I believe that there are ample catalysts on deck to drive value creation for shareholders over the next year.

http://seekingalpha.com/article/3779066-biotech-weekly-top-value-biotech-picks-for-2016