More Ugly Lessons From Biotech: Vanda and Titan
In 6/08, Titan Pharmaceuticals looked to me like a good buy. After a couple of years of steady share price deterioration as they advanced their pipeline, three major binary events loomed in the near future. The biggest was the PDUFA for the antipsychotic iloperidone, predominantly a Vanda drug but also a significant royalty prospect for Titan. Next most important was phase III data for the opioid addiction drug probuphine. Finally the company was expecting data from the phase IIb trial of the Parkinson's treatment spheramine.
I saw iloperidone approval in particular as a long shot. I was also skeptical about spheramine in the long-term, as it was based on what I saw as very unproven technology. However I was optimistic the company had found a way to squeeze out a positive enough result to justify a phase III trial, a possible partnership, and most importantly an increase in share price. Finally I saw a positive outcome of the probuphine trial as a reasonably likely outcome. I bought at 1.4, off recent lows of 1, and saw the rebound from the bottom as a positive sign.The market cap here was only about 80M, and I felt that even if only one of the three outcomes was positive then 150M would be justified. I was hoping for a double.
Well, I got my one of three but the final result wasn't what I had hoped. Complete failure of the spheramine trial came first, with a 50% price cut (larger than I would have expected). A few weeks afterward the company made the dubious decision to announce positive phase III data for probuphine and FDA rejection of iloperidone simultaneously. Perhaps they hoped the net effect woudl be positive, but in fact the opposite was the case. The probuphine news seemed to be completely lost in the negative fallout from iloperidone, whose failure I had hoped was already priced into the stock. The fat lady hasn't sung on Titan and probuphine yet, but the cap is under 10M and there's only enough cash for a few quarters. Clearly the street doesn't see probuphine as likely to attract a favorable partnership or much commercial success.
Apparently three shots on goal wasn't enough for Titan. The lesson I learned from this failed investment is my Rule #4 of Biotech Investing. Don't invest in companies with no track record of success, no matter how favorable the odds seem. Titan had never accomplished anything of significance in all their many years of existence, except for hitting a share price of 60 in the blind biotech optimism at the turn of the millenium. And that sweet entry point of 1.4? Rule #2, cheap biotechs get cheaper. Instead of gambling on a cheapie, try to invest in companies that have achieved an FDA approval, acquired and successfully marketed an approved drug, or sold a developmental program for a significant sum. Collaborations and partnerships? Not so much.
As a side note, Titan's partner in the iloperidone debacle was another Ugly Biotech, Vanda. Vanda enjoyed an even more spectacular fall from grace than Titan, declining from an 800M cap at the beginning of 2007 to the current 20M. However. most of this decline occurred long before the FDA rejection of iloperidone. Looking back on the intervening year and a half, there were plenty of warning signs. Vanda's ascent in 2006 came on the back of phase III data showing substantial effect compared with placebo. In 2007 came journalistic criticism of iloperidone as a me-too antipsychotic without significant advantages over similar approved drugs. Iloperidone was never compared to one of these drugs. In the recent tightened regulatory environment, this strongly impacted Vanda's risk reward profile. Once again, Biotech Rule #1 raises its head. Be fearul when others are greedy, and be fearful when others are fearful. Never dig in your heels against reasoned criticism.