Why Your Last Investment Blew Up


"There are tightly designed, highly predictive Phase 2 studies, and then there are Hail Mary studies aimed at moving into pivotal trials, fingers crossed, as quickly as possible. You can't tell where a given program may lie on the spectrum based on headlines. . ."


Last month I discussed nine yellow, orange and red flags that should make you cautious about (or run screaming from) a potential investment in a biotech company. The last one suggested that you exercise extra caution when investing in a company on the basis of a Phase 2 success—not because that's necessarily a bad strategy, but because it is often where biotech's wheat is separated from so much chaff. It is, if you will, the great moment of uncertainty in the clinical development process that can lead to the greatest opportunity.

Why this point in particular? Simple statistics tell you that success in preclinical development and Phase 1 aren't great indicators of a program's ultimate chance of approval. A clinical program gets massively derisked after Phase 2—from roughly a 16% chance of eventual approval going in to 50% or more if it comes out successfully. But some programs get more derisked than others. There are tightly designed, highly predictive Phase 2 studies, and then there are Hail Mary studies aimed at moving into pivotal trials, fingers crossed, as quickly as possible. You can't tell where a given program may lie on the spectrum based on headlines, and many investors—even many pros—don't properly dig in. Start with the obvious—was the study randomized? Blinded or open-labeled? Were the results statistically significant in the primary and secondary endpoints? But then look further. Here are a few points to get you started:

Step 1: Is this biotech?

Or, more specifically, are you looking at a small molecule or a biologic? Because one underappreciated distinction in clinical development is that large molecules (antibodies, enzyme replacements, etc.) have a higher chance of success than small molecule. According to research by Joseph DiMasi et al. from Tufts University, the chance of a small molecule drug entering Phase I reaching approval is about 13%. For a large molecule? More like 32%. Yahtzee!

Step 2: Is it a cancer drug?

In a different study, Michael Hay et al. also found that the likelihood of approval changes pretty drastically depending on the therapeutic area. Cancer drugs were the worst of the lot. An oncology drug that is advanced to Phase 3 has about a 45% chance of success in that study, they found. That's considerably lower than the overall rate across all diseases (60%). Areas like infectious disease (65%), autoimmune disease (68%) and endocrine (67%) were much better bets. Likelihood of approval from Phase 1 was over 10% for all diseases in the study; for cancer, less than 7%.

Step 3: Where was the trial conducted?

Was it done in the U.S. and/or Europe? Or somewhere else? Outsourcing clinical trials to developing countries can save money and time, but you should view the results carefully. Back in 2009, for instance, Targacept produced some truly outstanding results for its major depression drug TC-5214—almost too good to be true. And it turns out it was too good to be true. The Phase 2 study was conducted entirely in India and led quickly to a series of Phase 3 studies that uniformly found the drug had no benefit. There's a corollary here: The more subjective the endpoint (improvements on a self-assessment scale vs. changes in a biomarker for instance), the more skeptical you should be—that goes for trials conducted anywhere in the world.

Step 4: How wide was the therapeutic window?

In other words, was there a fairly small dosing range between robust activity and dose-limiting toxicity? You'd like to see a nice dose-response relationship, with measurable efficacy at relatively low doses and lots of room for clinicians to increase the dose before running into trouble. Of course, you don't always get what you want, but beware situations where there is very little wiggle room. ImmunoGen, for instance, has acknowledged that some compounds using its antibody-drug conjugate platform have run into ocular toxicities at higher doses. They have made adjustments to dosing schedules to try to find the sweet spot of maximum efficacy without safety issues. Hopefully this will work, but they are certainly working in a tight window—something to consider after the problems that caused the discontinuation of their last lead compound, IMGN901.

Step 5: Have similar drugs been successful?

Nudging around a mere atom or two on a molecule can make a big difference to how they fare as drugs. But you should pay close attention to how drugs in the same class have done. To pick just one of many examples, Pfizer's Alzheimer's drug bapineuzumab was advanced into Phase 3 trials despite mixed-at-best Phase 2 results. It failed. So when Eli Lilly's structurally similar solanezumab came out of Phase II, there was good reason to be skeptical. And you'd be right: It also flamed out in Phase 3 trials.

Step 6: Is the company counting on a subgroup analysis?

If a Phase 2 study failed its primary endpoint but showed efficacy in a smaller subgroup, that may be justification for another small-scale study. But if management is using this to justify a Phase 3 trial, you should be very wary. Subgroup analyses are often used to justify new clinical strategies, particularly in cancer trials. To pick one example, Oncothyreon believed its cancer vaccine tecemotide (Stimuvax) would be successful based on a subgroup analysis from a Phase 2 trial of patients with non small-cell lung cancer. Despite an initial Phase 2 failure back in 2004, the company spent years pursuing a subgroup—patients with localized stage IIIB cancer—only to fail in Phase III. The program wasn't finally killed off until 2014.

Step 7: Is the company experienced?

Getting a drug through clinical development isn't easy, and designing a rigorous Phase 2 program that sets a compound up for success in pivotal trials is perhaps the trickiest part. One good sign that a company can do it? If they've done it before. And that leads to a final point. . .

Step 8: How badly do they need a win?

Drug companies often get a bad rap for profiteering on the backs of the sick, but the truth is that companies, and the individuals that work for them, desperately want to create new medicines that work. They want to do it for business reasons, and they want to do it for personal reasons. Even major pharma companies are susceptible—just see the above examples of bapineuzumab and solanezumab, two drugs that should have been discontinued after Phase 2 but were pushed forward because management desperately hoped to find an efficacy signal in a larger population. For smaller biotechs, the problem can be especially pernicious. Companies with only one or a handful of programs, or those that need progress to justify funding or their very existence—you can bet they are going to put results in the best possible light and move forward if at all possible. The more existential the circumstances, the less you should rely on management's judgment.

Karl Theil
BioPharm Executive

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