Inovio Pharmaceuticals (NASDAQ: INO) has been around for nearly 40 years. It's probably fair to say, though, that the small biotech has never enjoyed as much attention as it's received so far in 2020.
COVID-19 caused major problems for many companies. The pandemic turned out to be a huge catalyst for Inovio, however, after the biotech began developing a vaccine candidate for potential immunization against SARS-CoV-2, the novel coronavirus that causes COVID-19.
But Inovio does face some problems. In particular, the biotech now faces high-profile legal disputes. Should investors be worried about Inovio's lawsuits?
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Inovio stated in its annual report for 2019 that it wasn't involved in any material legal proceedings. The company added that it wasn't "aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition." Those statements are no longer true.
The company's 2019 annual report was submitted on March 12, 2020. That same day, a shareholder class-action complaint was filed against Inovio and its CEO, J. Joseph Kim, in the U.S. District Court for the Eastern District of Pennsylvania. This lawsuit alleged that Inovio made "materially false and misleading statements" about its development of a vaccine for the novel coronavirus.
What were those allegedly false and misleading statements? On Feb. 14, 2020, J. Joseph Kim claimed in a TV interview that Inovio had developed a COVID-19 vaccine and was even "able to rapidly construct our vaccine in a matter of about three hours once we had the DNA sequence from the virus available." Inovio's shares jumped on the next trading day.
On March 2, Kim met with President Donald Trump at the White House, along with several other CEOs of drugmakers that are developing COVID-19 vaccine candidates. Kim again repeated his claim that Inovio was able to construct its COVID-19 vaccine in around three hours.
Another lawsuit was filed against Inovio's board of directors on April 20 in the same U.S. district court as the earlier case. This lawsuit alleged that the company's directors didn't exercise a reasonable level of supervision over Inovio's "management, policies, practices, and internal controls." These claims related to the same alleged false and misleading statements referenced in the class-action lawsuit.
Inovio's lawyers soon became even busier. On June 4, the biotech filed its own lawsuit against VGXI, a Texas contract development and manufacturing organization (CDMO). Inovio had contracted with VGXI to help in the development of a COVID-19 vaccine. However, the biotech's lawsuit accused VGXI of "wrongfully blocking the path to development" of this vaccine, by not transferring critical technology needed for its manufacture.
This litigation didn't go well for Inovio. In late June, a judge ruled in favor of VGXI. However, Inovio indicated that it plans to appeal the decision.
Worth worrying about?
Lawsuits can distract companies' executives from running their businesses. Losing in court can also cost companies a lot of money. Inovio's legal disputes, however, don't appear to be anything for investors to worry much about.
Inovio says that it plans to defend itself "vigorously" against the class-action lawsuit filed in March and the complaint filed against its board of directors in April. Most lawsuits of this nature are ultimately settled out of court. My hunch is that Inovio will follow this path and pay a relatively modest amount to settle, simply to rid itself of a couple of legal headaches.
As for the lawsuit against VGXI, there's no reason to think that Inovio will be adversely impacted in a significant way. Inovio is already moving forward with the development and manufacturing of its COVID-19 vaccine candidate. I suspect that the company will only move forward with appealing the decision in June if management is convinced there's a good chance of winning.
Putting the legal skirmishes aside, there are some legitimate reasons for investors to be concerned about Inovio. In particular, critics said the company didn't provide any details about the number of neutralizing antibodies produced by COVID-19 vaccine candidate INO-4800 in its preliminary phase 1 clinical data. This lack of details raised questions about how effective INO-4800 might be.
In a sense, Inovio set itself up for the skepticism; the company is known for loudly trumpeting its successes. Some might have even viewed its CEO's comments about developing a COVID-19 vaccine in around three hours as bragging. The thinking along these lines is that J. Joseph Kim would have played up the neutralizing antibody responses for INO-4800 with anyone who would listen -- if they were good. Since he didn't do so, some observers suspect that the vaccine candidate could have efficacy problems.
This leads to the biggest concern of all about Inovio. The biotech stock has skyrocketed in 2020 based on expectations of success for its COVID-19 vaccine candidate. If INO-4800 doesn't live up to its hype, Inovio's gains won't last long. And there could be even more lawsuits on the way.
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