Ugly lessons from Biotech: Failed phase III trials
The phase III trial is where many small biotechs finally meet their maker. Phase I safety trials are easily passed as long as the healthy test subjects don't curl up and die, and phase II data can be manipulated and spun positive especially when not placebo controlled. But phase III is a lot more difficult to fudge, which seems to lead some drug developers to hang out in the security of phase I and II as long as humanly possible. A time-honored tactic once the phase III trial is completed and that pre-established endpoint isn't met, is the secondary endpoint or post hoc subset analysis. This is basically a salvage maneuver that attempts to mitigate the trial failure and set up a new phase III trial that will ensure the salaries of the management and board for another two or three years.
In the spring of 2007 Novacea jumped from the 10 range up to 15 on news of a partnership with Schering-Plough on their developmental prostate cancer drug Asentar, with a market cap in the 350M range. This occurred despite the fact that in May 2005, data from the phase III ASCENT trial showed that Asentar failed to achieve the primary endpoint of 50% reduction in PSA levels.Of course, Novacea glossed over what was essentially a trial failure and focused on a secondary endpoint of overall survival.This allowed them to initiatea second phase III trial, ASCENT-2, which was abruptly terminated in November 2007 due to an increased incidence of deaths noted in the treatment arm. Novacea has since gone through various "strategic alternative" type contortions but the street value has continued to degrade, most recently to a market cap of 30M.
In the winter of 2007 Biomira was valued at 150M, despite the fact that the phase II trial of their Stimuvax lung cancer vaccine failed its primary endpoint in 2005. The company performed a post hoc subset analysis showing a significant result for the subset of patients who had stage IIIB disease, and initiated a phase III trial based on this result. Enrollment in this START trial has been a non-starter, and after 20 months there’s no end in sight. Meanwhile the company’s valuation has declined to 19M and their cash position has deteriorated, despite the fig leaf of a name change to Oncothyreon. Similar fates have befallen Introgen, Antigenics, and several other small biotechs.
Biotech Rule #5 is as follows: The only successful phase III trial is where the pre-specified primary endpoint is achieved with statistical significance. No close calls. No secondary endpoints. No post hoc subset analysis. There’s just too much motivation for management to put lipstick on their phase III pig, prolong the course of failure, and preserve their million dollar salaries and options for a couple more years. Empirically, the results of follow-up phase III trials have been disastrous. The best strategy is to avoid the binary event of a phase III result completely. If you can’t bear to miss the gap up from a positive trial but guess wrong, it’s probably best to hold waiting for management to spin the result and garner a partial rebound. Whether or not there’s a bounce after a month, get rid of the stock and never look back. The long term outlook is bleak.