Biotech Stock Mailbag: Vical, Sangamo, Spectrum Pharma

BOSTON ( TheStreet) -- This week's Biotech Stock Mailbag:

I'm not optimistic about Vical ( VICL) or its skin cancer immunotherapy Allovectin. I believe failure will be the most likely outcome of the phase III study when results are announced in the third quarter.

Before I explain the fundamental bear thesis on Allovectin, let's look at what the Feuerstein-Ratain Rule says about Vical's future. Remember, the F-R Rule says phase III studies of cancer drugs have a zero percent chance of success (100% failure rate) if the company sponsoring the study has a market cap of $300 million or less, measured four months before the study results are announced.

Vical is guiding to Allovectin results in the third quarter, so I'm going to use August 15 -- the midpoint of the third quarter -- as the announcement date. Dial back four months to April 15 and Vical's market value was $380 million. Looking more broadly, Vical's average market cap for April was approximately $340 million.

$340-$380 million is greater than $300 million, therefore Vical's Allovectin study is outside the dead zone as defined by the F-R Rule. That's a positive, but...

Ziopharm's ( ZIOP) F-R Rule market cap was $350 million heading into its phase III study of palifosfamide. That study failed, so if Vical is like Ziopharm (and the two are similar, market cap-wise and both companies went into phase III trials without a partner) then Vical bulls shouldn't be too optimistic. The F-R Rule states companies with market caps in the $300 million to $1 billion range had a 17% success rate with phase III cancer drug trials.

I was conversing with some Vical bulls on Twitter last night, during which @GaltGhost tweeted this:

I understand optimism and betting to win on a major stock-moving catalyst like phase III trial results, but this is too much. Somebody explain risk management to @GaltGhost and quickly!

Alright, why will the Allovectin study fail? Here's the bottom line: Vical enrolled the healthiest melanoma patients ever into the Allovectin study. I know that sounds weird. How can you be healthy with skin cancer? What I mean is that on the melanoma severity scale, the patients in the Allovectin study are much less sick than patients enrolled in other melanoma studies and should be expected to live a long time with their disease.

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