Ugly lessons in Biotech: Pay attention to interim data from phase III trials
One of the fascinating things about baby biotech blow-ups is that they so often seem obvious in hindsight. The ability of these stocks to remain afloat despite seemingly ominous news is testimony to the tenaciousness of investors clinging to their beloved companies. Unfortunately the market awards no credit for loyalty. To avoid losing money in biotech, it is critical to have the objectivity to realize when you have made an investing error as well as the self-discipline to sell at a loss when the risk/reward ratio becomes unfavorable.
A critical indicator that a blow-up may be coming is when a company releases unfavorable interim or preliminary data from a phase III trial. While intuitively it might seem that this would engender a 90% haircut, more often than not the stock is minimally affected or recovers quickly from a moderate dip. Baby biotechs are expert in cloaking negativity in a fuzzy haze of optimism, and analysts are all too happy to play along. One of the ugliest examples of this occurred in 12/06 when Northfield released preliminary phase III data showing an higher death rate in patients in the treatment group for their blood sustitute Polyheme than in the placebo group. Despite a 70% price decline the company maintained a market cap of 150M, still way overvalued given the complete absence of a pipeline outside of Polyheme. Northfield's spin was that the data were contaminated with protocol violations and the data would have to be reanalyzed, as though the company would be allowed to simply pick and choose their data points to achieve a significant result. Needless to say, the promised re-analysis never came and the market cap is now closer to 20M. A nasty surprise in 12/06 may not have been avoidable, but a smart investor could have skipped the decline from 150M to 20M.
An even better example might be what happened to Favrille in 11/06. When a planned interim analysis of the phase III trial of their cancer vaccine showed no statistical difference between the treatment and control arms, the CEO's comment was as follows: "It is important to remember that the unmet medical need in the treatment of indolent B-cell NHL is the durability of a response. This analysis shows we will have a large number of patients in both partial and complete remission to follow for our primary endpoint of time to disease progression." I'm not sure how this mitigates the lack of efficacy noted, but the stock shed only 22% on this ominous news. The rest of the Ugliness is history - complete failure at conclusion of the trial in 5/08 and a recent share price of 0.04.
Two other hideously ugly biotechs, Genitope and Alfacell, have similar histories and now trade in pennies. In conclusion, Biotech rule #6: Bad interim data is a selling opportunity, not a buying opportunity.