Investors often look for a magic weapon to identify biotech companies on the cusp of success or failure in binary events, but in many cases this is difficult if not impossible. However, the analysis is getting increasingly transparent in one sector: oncology.
Phase III cancer drugs owned by micro-cap companies are almost assured of failure and thus will see a collapse in their share prices, according to an analysis published in the Journal of the National Cancer Institute. This is likely not a reflection on the scientific expertise or the capabilities of the company, but rather a sign of how rare and sought-after good oncology assets are, leaving only the probable failures in the hands of small drug developers. With this in mind, EP Vantage has analysed data and identified nine companies whose approaching data readouts are not promising, along with a tenth that has recently failed to make the grade (see table).
Waiting for validation
The Feuerstein-Ratain rule – known for the analysis’s authors, The Street columnist Adam Feuerstein and the University of Chicago oncology professor Mark Ratain – holds that companies with a market capitalisation of less than $300m four months before data readout will ultimately fail to produce positive trial results. At the time their article was published in JNCI, 21 micro-cap companies had failed the test; by comparison, 21 of 27 trials reported by companies of greater than $1bn market cap had been successful.
The explanation is rather simple: based on earlier-stage data, investors have simply not had the belief in the company to drive prices any higher. Furthermore, big pharma companies have not had the confidence to either in-license the drug or buy the company outright; either move would help validate the drug’s promise.
This was most recently seen with the failure of Celsion’s ThermoDox. At $5.37 on October 3, 2012, 120 days before it reported data, the New Jersey group was valued at $188m, well below the $300m threshold. Its share price fell 81% after the announcement of data from the Heat trial, and has shown little signs of recovery (Celsion bereft after ThermoDox failure, February 1, 2013).
On the other hand, Ziopharm Oncology represents a bit more of a judgement call. Earlier this week, the New York-based group announced that the Picasso 3 trial of palifosfamide, also known as Zymafos, had reached its target number of progression-free survival events in sarcoma, and said it would disclose the data in the last week of March. Shares rocketed 18% on Tuesday after the announcement.
Based on the Feuerstein-Ratain rule, is Ziopharm assured to be a failure? On November 30, 2012, the last trading day before the 120-day threshold, shares closed at $4.38, valuing the company at $349m. That is above the threshold, to be sure, but clearly on the bubble. And as Mr Feuerstein recently explained, the success rate for companies between $300m and $1bn is 17% – not a confidence-inspiring figure.
Thus it is interesting to note that nearly a fifth of Ziopharm’s free-floating shares are held in short positions, meaning that a relatively high number of investors are expecting to make a profit from a drop in the stock price.
Another interesting case is Oncolytics Biotech, which pleased the market with the release of interim data from its partially enrolled single-arm phase II trial of oncolytic virus Reolysin in lung cancer (Cash call could follow Oncolytics’ latest surprise, February 11, 2013). At market close yesterday, the company was valued at $327m – another case of a business on the bubble – but before announcing that interim data it was below the threshold, valued at $274m.
And it does not help that oncolytic viruses have yet to prove themselves (Therapeutic focus – Oncolytic viruses enter pivotal year, January 26, 2011). Oncolytics remains a long way from reporting pivotal data in the only indication in which Reolysin is in phase III; the company should be closely watched for either big pharma partnership or significant share price rise before its chances of success can be assessed.
The analysis of EvaluatePharma data includes companies with other unproven technologies such as three vaccines and a gene therapy. It is interesting to note that analysts have pencilled in forecasts for all of these drugs, although sell-siders covering biotech tend to be extremely bullish.
One company with an unproven technology, and yet worth keeping a close eye on, is Threshold Pharmaceuticals. The California group has snagged a global licensing partner in Merck KGaA for TH-302, which as a tumour-hypoxia agent is part of a class that has not produced many successes (Threshold's hypoxia success is notable for field that has disappointed, February 22, 2012).
Its market capitalisation stands at $250m. Given that it probably will be more than a year before its phase III trials in soft-tissue sarcoma and pancreatic adenocarcinoma report, there is time for bio run-up traders to take it over $300m; in early September, it was valued at more than $500m.
However, current market valuation lends little confidence about the chances that Threshold, or indeed any of these 10 companies, will succeed. They are not investments for the faint of heart.
To contact the writers of this story email Jonathan Gardner or Joanne Fagg in London at firstname.lastname@example.org or follow @JonEPVantage or @JoEPVantage on Twitter