Better Buy: Inovio Pharmaceuticals vs. Incyte Corp.

By Cory Renauer Markets Fool.com

At one point last year, shares of DNA-based vaccine specialist Inovio Pharmaceuticals (NASDAQ: INO) had more than doubled, but development problems cut the biotech stock's gains back to about 26.5% over the past year. Over the same period, shares of Incyte Corp. (NASDAQ: INCY) have risen a healthy 49.6% on the back of several intriguing developments. Both companies have catalysts to look forward to. But which is the better pick right now?

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Image source: Getty Images.

Let's look at the opportunities and challenges these two could face in the quarters ahead. Bear in mind that Incyte is already generating significant revenue, while Inovio won't have a product to launch for perhaps a year at best. With these key differences in mind, let's see how the two biotech stocks measure up.

Arguments for Inovio Pharmaceuticals

This biotech has been around in one form or another since 1983, although it's been pursuing DNA-based vaccine technology for about 16 years with little evidence that its technology can work in the real world. Its lead candidate cleared phase 2 testing in July 2014, but Inovio hasn't begun the phase 3 trial necessary to support a potential FDA application.

Cellectra-3P delivery device image source: Inovio Pharmaceuticals, Inc.

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Last year, the FDA pushedInovio's timeline back further by asking for more data aboutthe Cellectra-3P, which is thespecial delivery device for investigational immunotherapy VGX-3100. On the one hand, it's fortunate that the company hadn't begun dosing patients before the regulator announced a potentially disruptive clinical hold. On the other hand, it's troubling to see its most advanced candidate suffer more than two years of setbacks as the company burns through shareholder equity.

Inovio may not have anything to sell yet, but its early clinical-stage pipeline is bursting with vaccine candidates, including headline-grabbing preventives for the Ebola and Zika viruses. In August, it began a 160-patient study of its Zika virus candidate GLS-5700, and top-line data is expected this June. This is an extremely small number of patients for an infectious-disease vaccine trial, but highly positive results could lift the stock this summer.

In the meantime, investors should watch for news that the FDA might allow Inovio to continue, or begin, a pivotal trial with VGX-3100 as a human papillomavirus (HPV) vaccine. While HPV vaccines currently exist, this one is the first to show a reduction in the abnormal cell growths associated with cervical cancer.

If the FDA allows VGX-3100's pivotal trial to continue and eventually gives it a green light, sales of the vaccine could generate perhaps $500 million annually for Inovio. It would also validate the company's DNA-based vaccine technology in the real world, smoothing the road ahead for the rest of its pipeline.

Arguments for Incyte

Unlike Inovio, Incyte proved it can successfully advance clinical-stage candidates into the commercial setting when the FDA approved Jakafi for treatment of myelofibrosis. It looks like Geron might have a potential competitor for this limited indication in clinical trials at the moment, but that hasn't stopped Incyte from estimating that Jakafi'sannual sales will peak at around $2 billion.

Incyte reported total revenue of about $1.02 billion over the past 12 months, and it estimates that 2016 Jakafi sales reached between $815 million to $830 million. While its lead drug might have enough legs to more than double total revenue, a handful of candidates nearing the finish line could expand it much further.

Perhaps the most exciting candidate in Incyte's clinical-stage lineup is epacadostat. The biotech has partnered with Merck to test this candidate in combination with the big pharma's exciting immunotherapy, Keytruda, as a treatment for several common types of cancer. Perhaps the first application for the combination therapy will be as a first-line treatment of advanced-stage melanoma, if results from an ongoing study fall in line with previous observations.

While the epacadostat tests play out, investors can look forward to an FDA review of its application foranother potential blockbuster, submitted in partnership with Eli LIlly. Baricitinib is a once-daily oral therapy that outperformed the world's best-selling drug, injected Humira, in a head-to-head trial treating rheumatoid arthritis. Peak annual sales of the therapy are expected to pass the $2 billion mark if it earns a widely expected approval.

Focus on true value over valuation

With a recent market cap of just $490.3 million, Inovio stock could rocket upward on news of positive data for its early-stage vaccines, or continuation of VGX-3100's pivotal trial. While the stock has the potential to achieve windfall-level gains, investors will want to keep an eye on its dwindling cash position. The company finished September with about $119.7 million in cash, cash equivalents, and short-term investments. Once it burns through that, it will most likely need to dilute shareholder value with another share offering. The number of outstanding Inovio shares has risen around 5,200% since it began developing DNA-based vaccine technology about 16 years ago.

Image source: Getty Images.

Incyte has a far more solid financial foundation, as well as clear paths to growth in the near term -- and that's why it's not cheap. It recently turned the profitability corner, and the stock is trading at around 147 times trailing earnings. Such a lofty valuation suggests investors are pricing in continued success for Jakafi, plus perhaps a couple wins from its late-stage pipeline.

Despite Incyte's eye-popping price tag, I'd rather take a chance on a biotech with success to boast of and clear growth avenues, rather than the near-certainty of value-diluting equity-raising in Inovio's future. That makes Incyte the better biotech to buy, hands-down.

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Cory Renauer has no position in any stocks mentioned. You can follow Cory on Twitter @coryrenauer or LinkedIn for more biotech investing insight.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.