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VBI Vaccines: Hidden hep B opportunity

February 27, 2017

VBI Vaccines traded mostly under the radar over the last couple of years.

The recent developments in the drug pipeline provide catalysts for the stock.

A hepatitis B vaccine candidate for non-responders to current standard care provides an unmet need opportunity for a vaccine already licensed in 15 countries.

Like most small biotechs, VBI Vaccines (NASDAQ:VBIV) has seen the stock struggle in the last couple of years. The focus on drug pricing amongst leading political leaders in the U.S. has pushed investors away from the sector.

My investment thesis in this stock has long held that an attractive drug pipeline combined with strong executives and venture funds backing the firm made for a compelling investment case. Typical of a small biotech, patience is required and the recent bump in the stock highlights some promising catalysts in the drug pipeline.

Drug Pipeline

Most of the focus with VBI Vaccines remains on the vaccine pipeline for CMV, Zika or some of the immuno-oncology drug candidates. The Phase 1 clinical trials for its preventative CMV candidate is a good catalyst for the stock when preliminary results are reported in the 1H of this year.

Source: VBI Vaccines presentation

VBI Vaccines has plenty of development candidates going through pre-clinical studies or collaborations with major partners. What a biotech stock needs though is a major catalyst beyond pre-clinical studies.

What was mostly overlooked with the stock sliding down in 2016 was the Sci-B-Vac hepatitis B vaccine already approved and licensed in 15 countries. The merger with SciVac Therapeutics last year brought along this drug candidate though most probably didn’t see much opportunity in this drug despite the approval due to limited revenue generation where Sci-B-Vac is approved.

Hep B Drug Promises Hidden Opportunity

The World Health Organization or WHO defines Hepatitis B as a potentially life-threatening liver infection caused by the hepatitis B virus. The health organization lists these general facts about the virus.

  • Hepatitis B is a viral infection that attacks the liver and can cause both acute and chronic disease.
  • The virus is transmitted through contract with the blood or other body fluids of an infected person.
  • An estimated 240 million people are chronically infected with hepatitis B.
  • More than 686,000 people die every year due to complications of hepatitis B, including cirrhosis and liver cancer.
  • Hepatitis B can be prevented by currently available safe and effective vaccine.

Vaccines for Hep B have existed since 1982 and were generally effective in preventing infection and the development of chronic disease and liver cancer. Due to the availability of vaccines in the Western world, the chronic infection has typically been relatively small.

The major problem with the current second generation hepatitis B vaccines is that people with weak immune systems are the ones that typically encounter vaccine failure. The failure group includes the old and those with diabetes, two groups growing in the Western world where the HBV was mostly under control.

Over 30 million people in the U.S. have diabetes mellitus. People with diabetes are more susceptible to infections, kidney failure, and a whole host of medical issues leading to the seventh leading cause of death.

One of the growing diabetes problems is higher rates of hepatitis B than the general population. In fact, the infection rate is 60% higher than those without diabetes. According to the CDC, adults with diabetes are twice as likely to have acute HBV infection and hence develop chronic hepatitis B in comparison to healthy adults. The chronic infection is even worse in older adults with diabetes.

CDC’s Advisory Committee on Immunization Practices recommends immediate vaccination of previously unvaccinated adults with diabetes up to the age of 60 and consideration placed on those over 60. The current coverage rate is low in this group and the response rates are low leading to a crucial unmet need amongst other listed high-risk groups.

Source: VBI Vaccines presentation

Dynavax Technologies (NASDAQ:DVAX) previously had promising Phase 3 data for Hepsilav-B, but the small biotech has never been able to get the hepatitis B vaccine approved by the FDA. The company recently had to restructure and cut the workforce while working through the CRL.

Dynavax traded above $30 in 2015 and has dropped all the way down to $4. At a market cap just above $150 million, the stock is now worth a similar amount to VBI Vaccines. Both stocks aren’t entirely valued based on the hepatitis B vaccines so the valuation potentials aren’t completely comparable, but the example does provide a rough approximation of what a hepatitis B vaccine could mean to the stock of VBI.

Both companies provided estimated market opportunities in excess of $400 million.

Phase 3 Trials

Enter Sci-B-Vac into the picture. The 3rd-generation HBV as already been used with 300,000 patients and tested via several Phase 2 and 3 studies. The vaccine has shown a high seroprotection with the previous non-responder population similar to Hepsilav-B where Engerix B has not show adequate seroprotection.

Source: VBI Vaccines presentation

VBI Vaccines has recently gotten positive nods for Phase 3 trials from the Committee for Medicinal Products for Human Use in Europe and the Biologics and Generic Therapies Directorate of Health Canada.

The company is currently working with the U.S. FDA for evaluation and approval of the Phase 3 trial. Ultimately, this trial has the goal of using Sci-B-Vac to fill the significant gap in the unmet medical need to protect against hepatitis B in old individuals and those with diabetes that may not be protected with currently licensed HBV vaccines.

As the recent jump in the stock price, the market doesn’t appear aware that VBI Vaccines has a potential solution already approved and used in 15 countries.

Solid Financials

As with any small biotech, an ideal time to purchase the stock is after a recent funding event. In the case of VBI Vaccines, the company raised $23.6 million via a stock-and-debt transaction with Perceptive Advisors in December.

The deal involves gross proceeds of $10.6 million from selling 3.5 million shares and $13 million in an increased credit agreement. As well, Perceptive Advisors was issued warrants for 1.3 million shares at an exercise price of $3.36 per share that will eventually provide another $4 million for the coffers.

The financing provides VBI Vaccines with the cash needed to reach key milestones in 2018. The company ended Q3 with $16.7 million in cash on the balance sheet and loss $7.3 million during the quarter. The cash burn was further reduced by the non-cash, stock-based compensation charges.

The December funding and cash on the balance sheet gave VBI Vaccines access to about $40 million in liquidity before the Q4 cash burn.

Elevated Risks

The biotech sector is highly dependent on rapidly developing technologies and drug therapies. A small biotech is susceptible to development of competing drugs and the amount of money that larger biotechs can commit to funding advanced clinical trials. Despite all of the big venture funds and key executives at VBI Vaccines, the cash committed is still minor in the big picture.

Ultimately, any failure of the prime CMV and Hep B drug candidates now entering trials would crush the stock even if the company retains key executives and repeals competition. The failure to obtain FDA approvals similar to Dynavax are always a primary risk and even so much more for a small biotech without the cash and strong balance sheet to survive a drug failure and more forward on other drug candidates.

Even with positive progress on the drugs, no assurance exists that the market will prefer vaccines from VBI Vaccines. The Hepatitis B Foundation lists a rather lengthy amount of drugs in the testing phase. The list includes some of the biggest biotechs with deep pockets.

Takeaway

The key investor takeaway is VBI Vaccines continues making progress towards advancing drug candidates. The small biotech is now funded for at least the next year providing an ideal time to invest.

As with any small biotech, an investment is only recommended for a small portion of a diversified portfolio.

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