Navigating the three-phase trial process of biotech companies

As biotechnology experts, we are cautious about how certain companies in the sector are communicating. Recent high-profile examples have shown clinical data and the interpretation of regulatory interactions are often presented through a somewhat bias press release with an emphasis on positive news rather than a balanced perspective of positive and negatives.

In this monthly blog, we will highlight what typically occurs behind the scenes at companies and regulatory agencies, exploring what is disclosed and how industry experts, like our team at IBT, navigate this environment. We will also explain why IBT often takes a risk-averse approach to binary events due to be publicised, and why we always scrutinise the management of potential holdings before we invest.

Investing in biotech can be very exciting, but often the journey to success can be complicated. Navigating the path from lab bench to marketed therapy is a complex process that requires industry-specific skills, in addition to the brains behind the original scientific ideas.

There are many ways a biotech company can succeed, but there are many more ways it can fail. A biotech investor knows most early-stage projects will unfortunately fail. The key to success is spotting the poor ones and, most importantly, avoiding the mediocre ones that linger on to become costly lessons. It is also crucial to accept that many outcomes are unpredictable, especially given the lack of reliable, publicly available information on clinical trials which makes a full evaluation tricky. We think of these situations as ‘known unknowns’ and we address them accordingly.

Figure 1: Probability of success by clinical trial phase and therapeutic area

Data extracted from: Chui Heem Wong, Kien Wei Siah, Andrew W Lo. “Estimation of clinical trail success rates and related parameters.” Biostatistics 10(2): April 2019, Pages 273-286. Published online: 31 January 2018. DOI: 10.1093/biostatistics/kxx069

Once a new concept passes the pre-clinical stage, it is subject to a series of human clinical trials, including Phase 1 (safety), Phase 2 (efficacy and dose finding) and, ultimately, Phase 3 (confirmation and comparison to existing treatments). At each stage – unless the results are undeniably negative – the outcome is disseminated by the company in a glossy, optimistic press release, fuelling the excitement of unsophisticated investors and adding to company specific rather than sector specific hype.

When the data from each clinical trial is announced, attention shifts to the balance of risk and benefit – or safety and efficacy. If the balance is considered successful and backed up by statistics, the company’s share price can rise substantially.

Following a Phase 3 success, the company usually files the drug with the US regulator, the Food and Drug Administration (FDA). This means another binary event, as the FDA either approves the drug or rejects it. Through the notoriously opaque FDA process, all communication between the company and the FDA becomes confidential – even the wording of the ultimate decision and the date of the final outcome. This enables companies to present their journey through the process in the most positive light.

As managers of a biotech portfolio, our role is to accurately predict when these events will occur, closely monitor all communications and analyse the publicly available information, to judge whether the stock represents a good investment opportunity.

An important aspect of this analysis is to understand the nuances of the disclosures – particularly who, why and what has been stated. For example, companies write their own press releases about interactions with the FDA without including the FDA’s statements, resulting in a one-sided perspective.

If the clinical data released to the public lacks detail, it is possible that uncomfortable inconsistencies in the data and/or stipulations from the regulatory agencies may have been brushed aside. It takes years of expertise and experience to spot what is not said, rather than being distracted by the optimism in what has.

We tend to take a neutral position on upcoming binary events. After all, clinical trial outcomes are largely unpredictable and priced in, with investors and the public struggling to comprehend the results and read between the lines.

The beginning of 2021 has been littered with high-profile stock ‘blow-ups’ that may have been more widely anticipated if full agency disclosure had been publicly available – including Acadia that, unfortunately, it appears, had not been in total agreement with the FDA on clinical data requirements for their dementia related psychosis (DRP) which rendered them a Complete Response Letter (CRL) from the FDA with delays for approval as a best case scenario. Fibrogen, on the other hand, were forced to retract some of the previously publicly presented statistical data on their phase 3 data for Roxadustat; the information presented to the FDA is still unknown to us and the rest of the investment community. In both instances, the credibility of management and the share prices plummeted accordingly.

Figure 2: Acadia share price (USD) – 1 year to 31 March 2021

Source: Bloomberg

Figure 3: Fibrogen share price (USD) – 1 year to 31 March 2021

Source: Bloomberg

Probably the largest binary event coming up this year is Biogen’s Aducanumab approval date, set for June 2021. Analysts believe the stock could surge should the drug receive approval, as can be seen from the spike when investors mistakenly understood the approval to have been given in November 2020 and fall considerably if it fails (as exemplified in the fall that immediately followed when it became clear that approval had not been granted).

Figure 4: Biogen share price (USD) – 2 years to 31 March 2021

Source: Bloomberg

This case bears all the hallmarks of the hype that arises when discussions between the company and regulator take place behind closed doors. However, we do not attempt to second guess how the discussions may play out and how potentially undisclosed data has been weighted by the FDA. We are therefore holding Biogen at a neutral weighting versus the NASDAQ Biotechnology Index (NBI) going into this binary event.

At SV Health Investors, we are a team of over 50 highly experienced and knowledgeable investors. Many of our team have medical training and healthcare industry backgrounds, and many have taken venture companies through clinical trials, conducting numerous clinical and financial evaluations of projects and companies, as well as scrutinising the communications between companies and regulatory agencies.

It is impossible to accurately predict the outcome of this event at Biogen, or of any similar event. Should the drug Adacumumab receive approval, a huge population of Alzheimer’s patients in desperate need of new disease modifying therapies could finally have another treatment for their condition. However, if it fails to gain approval, Biogen will have invested vast amounts of money into a failed programme.

The event in June will be watched closely by the whole industry and there are many controversies surrounding the quality of the publicly available data and the way it has been communicated to the public. The optimism fuelled by the societal need for a therapy to treat such a devastating disease is tangible, and pressure on the FDA to give an approval is immense, but the outcome remains a known unknown.