Let me first make this clear – biotech/pharma has spanked my butt and had my number. Every investment I’ve made in biotech (PDLI, MNTA, EXEL ten years ago, and others) has not turned out well. Drug discovery itself, is a long, tedious, and expensive journey requiring Phase I, II, and III clinical trials before going to the FDA (Food & Drug Administration) for approval. Even reaching Phase III trials is no guarantee that the drug will be approved (with only 1 in 10 drugs reaching clinical trials succeeding).
This Forbes article actually has some great numbers on how much the large pharmaceuticals have spent on drug research vs. how many drugs they actually have approved with the lowest R&D spend per approved drug at $3.7B – primarily because of including all the failed drugs.
Even if a company were to get approved, they still face a) competition from other drug companies who may be targeting the same disease; and have received FDA approval earlier b) exclusivity for a drug expires in 7 years in which case generic competitors can enter the marketplace, and c) patents on the drug expire 20 years from when it was filed; which is typically well before it is approved. It’s hard to value pharmaceutical companies – its value really hinges on the drug being FDA approved (at least in North America).
Typically, you look at what the drug is trying to address, if there already is a drug out there, does the new drug perform better or result in less side effects? How large is the addressable market – 2M people, 10M people, 20M people? All this provides insight to what are the potential future sales of the company should all things go well. Then we look at clinical trial results to get a sense for if the drug looks like it will be on track for approval – does it address the disease and limit side effects. Perhaps one of the more interesting drug facts that people may not be aware of is that Viagara was initially intended to treat hypertension. In Phase I trials, it was found that it didn’t have a major effect on its intended target but seemed to produce some side effects that Pfizer decided to target the drug for it’s more widely known use, of which now is part of history.
I write this post because if folks want to understand why anyone would want to invest in pharma, I present Exhibit A: little known Intercept Pharmaceutical (ICPT) which was worth just under $1.5B at the beginning of this year. Here is the price chart since the beginning of the year, but take a look at the past week.
Little ICPT went up $203 (281%) in one day, and then followed it up with another $170 (61%) gain for a two day total of $373.44 or 516%!!! The reason – Phase II trials of lead candidate drug, obeticholic acid (OCA), ended early, by meeting its primary endpoint. With still 50% of patients non responsive to the drug only because they hadn’t finished their treatment.
OCA’s main target is nonalcoholic steatohepatitis (NASH) – the leading cause of non-alcohol related liver failure and with no FDA approved drug today. With US numbers of 22M cases (8M severe cases), it’s easy to see why investors got excited over the news. Firms, of course, started raising their target price for the company, with Citi providing a new price target of $600 on estimated sales of $5B and BofA even higher with a price target of $872!
However, the stock has dropped in the following two days as further information comes out – trial participants are seeing side effects of increased levels of cholesterol; and the CEO recently announced the company may need to partner with a larger pharmaceutical company to help market and distribute the drug (basically to share in the costs, which would mean ICPT would not get all the revenues/profits generated). Moreover, it’s important to realize that while this was a Phase II study and OCA did extremely well, there’s still quite a long road ahead (and challengers from other pharma companies). The early price action this year though, has certainly peaked interest in ICPT, and/or drugs in this domain.
A Gamble on an Old Friend (EXEL)
Unfortunately, your truly, does not have any holdings in ICPT (of which I probably would have sold). However, I recently have be reading about an old flame in Exelixis (EXEL). 10 years ago, Exelixis was once a small darling biotech with 7 cancer drugs in the pipeline and was slated to be the next Genentech (Stock Symbol DNA, later bought out by Roche). Genentech was known for having discovered many of the cancer drugs in the early 2000s (Herceptin, Raptiva, Avastin, Tarceva, etc.). Unfortunately, most of Exelxis’ 7 drugs did not pan out (remember the high failure rate?).
There is some hope – the company focused its leading drug on more rare diseases (thyroid cancer) but has slowly shifted to see the drug’s effect on the more significant cancers of the prostate, lung, and elsewhere. Currently, that drug is in two Phase 3 prostate cancer related clinical trials with news expected in Q1 and Q2 of this year. The other ray of hope is that the company has partnered with Genentech (now Roche) on a drug Exelixis discovered for treating melanoma. Roche is taking the lead on this drug, conducting a “Phase 1B” trial – but will move directly to a Phase 3 next year if results are good. If all goes well, Exelixis retains profit sharing rights in the US and royalty rights overseas.
This is strictly a gamble on an old friend – there’s not a lot of money in it, but any good news from the clinical trials should move the stock price up significantly – not as much as ICPT, but enough to make the gamble worthwhile (maybe a two or three times). Seems like others have the same idea with the stock running up 30% since we added it last week. However, that 30% gain could easily become a 90% loss in a day which is why I’d rather invest the majority of my money into companies that aren’t so reliant on binary events.