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Understanding the Impact of Clinical Trials on Shareholder Value

Clinical trial data can move a stock price like virtually nothing else on Wall Street. Given the proclivity for volatility, investing in small- and mid-cap biotech is definitely not for the faint
Andrew Klips became enraptured with the markets as a teenager and has been an active trader on a daily basis for more than a decade. Specializing in technical analysis, he is an avid player of stock charts making technical bottoms mixed with a particular affinity for the fundamentals of biotechnology companies.
Andrew Klips became enraptured with the markets as a teenager and has been an active trader on a daily basis for more than a decade. Specializing in technical analysis, he is an avid player of stock charts making technical bottoms mixed with a particular affinity for the fundamentals of biotechnology companies.

Clinical trial data can move a stock price like virtually nothing else on Wall Street. Given the proclivity for volatility, investing in small- and mid-cap biotech is definitely not for the faint of heart.

There can be a jaw-dropping rises, such as with Intercept Pharmaceuticals, Inc. (ICPT) in January when the biotech’s liver drug obeticholic acid met its primary endpoint way ahead of schedule in a Phase 2 trial for people with nonalcoholic steatohepatitis, or NASH as its more frequently called. Shares of ICPT blistered ahead from around $75 to as high at $497 in two days, representing an increase of more than six times the value of the company.

Conversely, it’s not uncommon for disappointing clinical data to cause a company’s valuation to crumble in the blink of an eye. Take a look at what happened on Wednesday to Orexigen Therapeutics (OREX) or in the past few months as Prana Biotechnology (PRAN) shares were scalped by about 75 percent in two days late in March or the valuation of Athersys (ATHX) getting halved late in April on disappointing trial data.

With moves either direction, there are going to be debates sparked about whether or not the severity of the move is justified. Intercept rocketed on the investor momentum from the trial results, but have since come back to earth with shares currently in area of $285, representing a market capitalization of approximately $6.04 billion, which is probably a little more fair than the peak of the news run.

Major Drops of Biotech Stocks

Shares of Orexigen Therapeutics were lumped up on Wednesday, losing as much as 20 percent when the FDA delayed making a decision on Contrave, Orexigen’s weight loss drug. The FDA didn’t even reject the application, as it did in 2011, requiring additional clinical research to define associated heart risks. According to Orexigen, the FDA needs three more months to come to an agreement on packaging and post-marketing obligations for Contrave.

Most analysts seem to believe that the Contrave will make it to market, including Wallachbeth Capital’s Bob Ai who estimated sales as high as $850 million by 2020. Still, the news of the extension until September sent shareholders exiting stage left. Shares will probably start to climb as the new PDUFA date approaches.

Prana shares have continued to trickle lower since the original nosedive on news that a Phase 2b trial of PBT2, the company’s flagship Metal-Protein Attenuating Compound (MPAC), missed its primary endpoint of reducing levels of beta-amyloid plaques in the brains of Alzheimer’s disease patients. The price of a share sinking to $1.47 (from a high of $13.29 in January) seemed a bit excessive as Prana tries to win back investor confidence with the only other clinical trial it has ongoing. PBT2 is also in a Phase 2a trial for Huntington’s disease, with data reported in February that the therapy hit its primary endpoint of safety and showed a statistically significant improvement in cognition. Investors seem to be coming back in with shares now trading in the area of $2.

Trading at around $1.65 now, shares of Athersys have rebounded from the $1.08 low that was hit on the day that the company reported interim results from a Phase 2 trial being conducted by Pfizer, Inc. (PFE) evaluating Athersys’ MultiStem cell therapy as a treatment for refractory ulcerative colitis patients. While the data showed MultiStem, an off-the-shelf, allogeneic stem cell product, to be safe and tolerable, investors focused on patients not demonstrating a meaningful benefit eight weeks after receiving a single-dose of treatment.

However, the fact that a single dose did not provide meaningful relief for patients that have already failed multiple other forms of treatment, and that had been suffering from the disease for an average of 10 years, may only tell us that one dose is insufficient and a different dosing regimen needs to be explored. As analysts have noted, for these types of chronic conditions, the norm is to administer a series of doses over time, then put patients on some form of maintenance therapy. For all of the therapies currently in widespread clinical use, this is the approach typically taken.

The takeaway here is that Athersys and Pfizer now know that a single dose of MultiStem does not provide a durable response in this hard-to-treat patient population. However, the trial does not tell anyone if a different, more aggressive dosing strategy could provide a meaningful therapeutic benefit. Clinical studies by other groups, such as Mesoblast and their ongoing work in Crohn’s Disease, will provide more information about the effect of cell therapies and the impact of different dosing strategies.

Further information about the direction, protocol and potential effectiveness of MultiStem for inflammatory bowel disease (IBD) is anticipated to come once the complete data set is analyzed later this year and should provide a bit more insight as to effect on clinical biomarkers and other information. So, to treat this single Phase 2 study as an outright programmatic failure is perhaps an oversimplification and a bit unjustified at this point.

Is Athersys Oversold?

In hindsight, the immediate 50-percent reduction in share price also seems to have been a bit harsh. Although it was the most advanced trial for Athersys, and one that also represents a program with a high profile partner in Pfizer, it would be a stretch to say that the value of the one trial represents half of the entire worth of the company.  Careful analysis suggests that just isn’t the case, and there are several reasons for this. 

First, let’s consider the financial ramifications of the IBD trial results. Pfizer shouldered the costs of the trial, but in exchange for that, the arrangement was structured as an upfront licensing fee, researching funding support and then various milestone payments to Athersys. How revenue for Athersys would be derived should the product garner and FDA approval would be dependent upon whether Athersys covered part of Phase 3 trial costs or elected to take a tiered royalty structure. All told, it’s safe to say that either way Pfizer would retain the majority of the value generated in the event of successful commercialization, which is not the case for the other programs that Athersys has maintained outright ownership of.

Second, and perhaps most importantly, the company has a portfolio of several other clinical stage programs that are being conducted in some pretty exciting areas. These include an ongoing international Phase 2 clinical trial for stroke that will produce initial results sometime in the next few months, as well as additional clinical programs in heart disease (the company expects to launch another Phase 2 trial for heart attack patients later this year, and has received grant funding from the NIH to support the trial), prevention of Graft versus Host Disease in leukemia patients, and for solid organ transplant support. The company has also established additional preclinical programs which could be moved into clinical trials pretty efficiently, so it appears to be in a position to run quickly when resources and circumstance warrant. 

Third, just examining the market for stroke, it appears to be a much larger commercial opportunity than the one for treatment resistant IBD. This is based on current degree of unmet medical need, number of patients, demographics, and treatment economics. While there are several million patients suffering from chronic IBD, there are probably only several hundred thousand that fall into the relevant disease spectrum for a therapy like MultiStem, and the annual number of new cases diagnosed each year is only a small percentage of the overall number of patients. 

A Bigger Market to Target

In contrast, according to the World Health Organization there are 15 million people that suffer a stroke each year and more than two million first time stroke victims annually in the U.S., European Union, and Japan combined. With aging demographics and the increasing trends in obesity and diabetes, these numbers are expected to rise meaningfully in the years ahead. The company has estimated that even with some fairly conservative assumptions, the stroke opportunity represents a market opportunity of more than $20 to $30 billion annually.

Presently, tissue plasminogen activator (tPA) is the only therapy approved to treat ischemic stroke, which is caused by an obstruction in a blood vessel supplying blood to the brain. Ischemic strokes are the most common type of stroke, accounting for about 87 percent of all instances.

The window for administering tPA is tiny, with use of tPA to break down the clot discouraged after three hours from the time of the stroke due to potentially deadly side effects.  In the Athersys trial, patients are being treated up to two days after the time of the stroke. Previous published research showed robust therapeutic benefits, such as neurological, inflammatory and tissue healing, in animal models treated with MultiStem up to a week after treatment.

Given that stroke is a leading cause of death and disability, with limited treatment options available, it’s hard to argue against it representing one of the most substantial areas of unmet need in clinical medicine. It seems reasonable that any safe and effective treatment could likely see rapid clinical and commercial adoption. In contrast to the IBD program partnered with Pfizer, where it would be reasonable to assume that Pfizer would maintain the lion’s share of the commercial value for any success in IBD, Athersys maintains complete ownership of the stroke program, which means that the company would enjoy the benefits from a meaningful de-risking of the program if results from the current Phase 2 study are positive. 

Some investors may be wondering, if Intercept is worth $6 billion in valuation based on a successful Phase 2 trial in liver fibrosis, what would a success in the stroke trial be worth to Athersys shareholders given that the company currently has a market capitalization of about $125 million? 

Moreover, Athersys has made no bones about announcing their intentions to aggressively pursue advancement of MultiStem through Japanese channels ever since the Japanese Parliament changed its regulatory framework to promote accelerated development of regenerative medicines through a new conditional approval system. Stroke is taking top position for Athersys’ initiatives in Japan, since it has long been a leading cause of death and disability and poses a significant burden on the healthcare system there. If the company were able to successfully use the new system, it could mean a dramatically shorter path to commercialization in an area that has immense upside potential. Furthermore, it seems reasonable that the company would be well positioned to advance other opportunities using the new accelerated regulatory framework. 

For me, MultiStem’s greatest value proposition is (and has been) in the area of stroke, not ulcerative colitis. The aggregate impact of the high costs associated with stroke and co-morbidities coupled with the dramatic change in the standard of care MultiStem could present, adds up to a phenomenal market opportunity, as there is essentially no competition and a great medical need.

The potential impact of future trials or the value of MultiStem for other conditions should also not be ignored – especially the Phase 2 trial for heart attack patients which is planned for launch late this year. This program may also have tremendous potential, and represents an area where the company has already generated and published some pretty interesting clinical data, as is the case for prevention of GVHD, where the company has orphan designation in Europe and the U.S. and is working toward a Phase 2/3 trial designed to enable approval if results are positive. 

Assessing Catalysts for Athersys

In short, investors should always do the analysis on what clinical success in an area could mean, and what such success might be worth in economic terms. They should also evaluate the potential for failure, and what that might mean. While the ulcerative colitis trial results were clearly disappointing for Athersys, it doesn’t necessarily mean that the treatment has no potential for IBD. It may just mean additional clinical work is required in order to establish an effective dosing strategy, which is often the case for Phase 2 clinical programs following initial results. Furthermore the company has a portfolio of other programs. 

One other thing seems clear: the results don’t justify the loss of $100 million in market capitalization for a company with tremendous leadership, $45 million in the bank (at the end of Q1) and a therapy that carries so much potential, which is why there appears to be a steady recovery in share value. As results from the stroke clinical trial get closer, people may begin to analyze the upside potential of that program, and think differently about what success in the area might be worth.

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