We often see that a lot of biotech companies announce their clinical trial results and somehow their stock prices get smoked (down significantly) even though the press release and management commentaries all sound positive. Did you ever get frustrated about this? You have done all the work to build conviction that the clinical trial will be positive, put your hard-earned capital into the event, see that the trial result is positive, but alas the stock is down -20% in pre-market or post-market trading sessions. I wanted to take an opportunity to discuss this phenomenon and why it is generally not a good idea to buy this dip. Odonate Therapeutics ($ODT) and stock price reaction (-45%) to their breast cancer trial result as an example.
Odonate had relatively high expectations for its metastatic breast cancer program – a massive market that every biotech company would love to participate.
Breast cancer, lung cancer, and prostate cancer are some of the largest TAM cancer types with very fast growth yet there remains limited therapeutic options. This makes all potential therapeutics for any of those tumor types particularly exciting for investors as strong outcome will largely lead to a big premium takeout by large pharma companies.
In August 2020, Odonate announced positive result from its Phase 3 CONTESSA trial. Odonate’s drug is called tesetaxel, and its key benefit is that it allows oral administration of taxane – a widely used chemotherapy in breast cancer and other cancer times.
CONTESSA trial tested tesetaxel and reduced dose of capecitabine (another heavily used chemotherapy agent in breast cancer) against full dose of capecitabine. The purpose of the trial was to show improvement of PFS through combination of tesetaxel and reduced capecitabine over capecitabine alone – capecitabine is a very tough drug to tolerate for patients and dose reduction of capecitabine should make the regimen much more tolerable, so that 1) patients can stay on longer and hopefully live longer, and 2) patients suffer less while on therapy.
Trial was a success. Tesetaxel plus reduced capecitabine improved PFS (progression free survival) by 2.9 months with statistical significance (p=0.003). Combination arm had 9.8 month PFS while capecitabine monotherapy had 6.9 months of PFS. Hazard ratio was 0.716 – indicating that combination regimen reduced risk of progression by 28%.
The trial was a SUCCESS, but the stock got smoked – IT WENT DOWN -45% IN PRE-MARKET
By all metric, the trial was a success, but stock was smoked. In my view, the sell-off was driven by multiple factors including
- Efficacy data: Drug failed to deliver efficacy data that was good enough for investors (“did not hit the bar”)
- Side effect profile was bad with the combination arm
Essentially investors sold the stock because they thought “this drug will get approved, but the drug is probably not going to sell”
EFFICACY CONCERN: PFS looks good, but what about OS?
Breast cancer is a highly competitive market, and it is a tough sell to break into the market meaningfully with benefits in only PFS. This is because there are drugs out there that doctors have been using for a long time / are familiar with – it is very difficult to get them to switch drugs that have worked so well for them without significantly compelling data.
This market dynamic makes OS (overall survival) SO MUCH more important – OS is the gold standard as it truly measures the magnitude of benefit in terms of how many more months the patients could live. In ODT’s press release on positive outcome, there was no OS data yet and OS data would need to wait until 2022 – likely signifying that curve separation will take much more time.
Therefore, the data update was truly positive when it comes to getting the drug approved (as it was successful on regulatory endpoint), but investors also learned that they would have to wait until 2022 for the data point that they really care about because that is what matters for commercial prospect for the drug – OVERALL SURVIVAL. If you have to wait until 2022 for the relevant data, there is no need to “own the stock” immediately. In the midst of this “catalyst vacuum”, the stock becomes a very easy target for hedge funds who are always looking for funding shorts (shorts that are used to hedge out market exposure in your long positions). It became the same set-up as Biomarin or Galapagos – which I discussed here – stocks with no major value catalyst tend to underperform because of this hedge fund positioning dynamics. Obviously, hedge funds also know this so it creates vicious cycle of trying to “get out of the stock” or “pressing the stock” – stock price gets smoked in this process.
LET’S NOT FORGET DETRIMENTAL SIDE EFFECT PROFILE FOR COMMERCIALIZATION: HAIR LOSS IS NEVER GOOD FOR ANYONE
Side effect profile also revealed new side effect that could be an instant killer for early stage cancer therapy – it is ALOPECIA (HAIR LOSS). This is a commercially challenging side effect for early stage cancers particularly for women. In extreme cases, the programs get shut down in the middle of trials if alopecia is extreme. As an example, Pfizer’s PARP inhibitor, talazoparib, is not being investigated for early stage ovarian cancer – while it has stronger potency than other PARP inhibitors (AZN/MRK’s Lynparza or Clovis’s Rubraca), talazoparib has severe hair loss and therefore it has very poor commercial prospect for early stage ovarian cancer.
At the same time, discontinuation rate in tesetaxel plus capecitabine was much higher than control arm (capecitabine) – it was 23.1% vs. 11.9% – another sign of poor commercial prospect.
Based on clinical trial result, it probably gets approved – but with investor focus now on commercialization, the stock is unlikely to recover to previously level unless OS data becomes available earlier than expected or the commercial launch (mid-2021) surprises investors on the upside.
When you are reading press release about clinical trial outcome, the devil is ALWAYS in the details – make sure to check what the truly important endpoint and the side effect profile are. Positive trial is NOT the end goal – data needs to show that the drug has potential to be a large commercial success.
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