One Biotech Crashes, the Other Skyrockets -- Here's Why

In a tale of two biotechs, Novavax (NVAX 1.03%) and Sarepta Therapeutics (SRPT -1.23%) shares couldn't have taken more divergent paths recently. As billions of dollars in projected sales evaporated because of a key trial failure at Novavax, optimism for sales growth skyrocketed because of an early approval at Sarepta Therapeutics.

In this week's episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell dive into these two stories to help investors decide what to do next.

A full transcript follows the video.

This podcast was recorded on Sept. 21, 2016.

Kristine Harjes: Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. It's Sept. 21. I'm your Healthcare show host, Kristine Harjes, and joining me via phone is Todd Campbell, one of The Motley Fool's premier healthcare writers. Todd, how are you today?

Todd Campbell: Hi, Kristine! I'm excited to talk today about a lot of interesting things.

Harjes: Me, too. Today's show is a tale of two cities, or, rather, a tale of two stocks which met very different fates in the past week. One of them, Novavax, lost 84% of its market cap last Friday. The other, Sarepta Therapeutics, gained 74% on Monday. Let's start with Novavax.

Campbell: Novavax was an intriguing -- well, it's still intriguing, but it's much less intriguing after they reported phase 3 data from a study that was evaluating a vaccine targeting something called RSV, a very common viral infection that can be dangerous in elderly patients and very young patients. So, patients that you could argue are immunocompromised.

Harjes: Right. RSV is actually the second leading cause of death in children under 1 year old. It affects about 4 to 5 million children just in the U.S. alone. There are about 2.4 million adults over 65 that are affected. Novavax was looking to make a vaccine for this very common virus. You would think, if it was that prevalent, it was probably going to make a lot of money. So people were very excited about Novavax, and ultimately really disappointed, as we mentioned. They were down 84% when it was reported that, pretty much, the vaccine does not work.

Campbell: Yeah. Investors were very hopeful. Developing vaccines is hard and expensive. It involves trials that include thousands of patients, and multiple years. So people had really a lot at stake for this company, and they had bid the market cap on this company up into the multiple billions of dollars, with the view that basically, they were doing a study that theoretically would allow for vaccinations of every elderly person over the age of 70. There are 76 million baby boomers out there. Novavax was estimating that if this study had panned out, its vaccine could be used in up to 100 million seniors per year. That's an astounding figure. They were throwing around numbers as high as $6 billion per year in peak annual sales. So the fact that this trial failed, obviously, was a devastating blow to the company.

Harjes: I think it's also a pretty good reminder about the statistics that happen in the background behind these studies. If you look at their initial smaller trial, it was 1,600 people, and half of them got the vaccine, half of them got a placebo, and the results were just barely statistically significant. So they reported that there was a P value of 0.041. What that means is there is a 4.1% chance that the difference between the two groups of patients occurred just by chance, and there's not actually something meaningful going on with the vaccine. It turns out, that was the case. When you get to the bigger trial, you have pretty much even results between people who showed signs of infection who had been taking the vaccine, and those who just got the placebo. It's a good reminder for investors that when you see studies that are just barely passing the mark of statistical significance, that's a little bit of a reason to be nervous.

Campbell: Right, and it's also a good reminder to investors to look at -- last August, this company's management came out and said, "Hey, look what we've done in phase 2, the 1,600-person study. We've successfully met our endpoint." And without doing the due diligence and digging a little bit deeper like you're suggesting, people were taking that at face value and thinking, "OK, great! You expand this out to more patients and prove that this thing works in more patients. It's a no-brainer. Get this thing on the market, and let's make some money." You need to take smaller phase 1 and phase 2 trial results with a very big grain of salt, recognizing that phase 3 trials still have a very high failure rate. I think I've seen in the past studies showing that failure rates in phase 3 can run from 30% to 40%. That's a significant failure rate. So you may have succeeded in phase 1 and succeeded in phase 2, but that does not guarantee you will succeed in phase 3.

Harjes: Exactly. Now, Novavax, looking forward, they're trying the vaccine in healthy pregnant women to prevent the virus in the infants that are then born. They also have a flu vaccine and an Ebola vaccine that are both very early stage. There's really not much left with this stock.

Campbell: The value, potentially, in this stock now, in my view, is that study that's being done in pregnant women. But I think the completion data on clinicaltrials.gov for that trail is something like 2020. I don't know if we get interim results before then, but theoretically, we're talking a while before we know whether or not this vaccine can be saved and still have an application that's worthwhile. Even though the stock is trading at only $1-something per share, investors have to realize that it still has a $444 million market cap. This is not a company that is valued at $50 million or something. It's still carrying a $444 million market cap, and it doesn't have a drug that's likely to make it out to market now for at least a couple more years.

Harjes: Yeah. Neither of us is trying to catch this falling knife. Before we move on to the tale of Sarepta Therapeutics, I mentioned a few months ago some options resources that the Fool has available, and a bunch of you wrote in saying you were interested. So I figured I should mention that the Fool just released our Ultimate Income Report, which is written by one of the lead advisors for our Options newsletter service. The report itself is totally free. If you're interested in learning about some of our best options strategies, shoot me an email at [email protected], and I can send you some more information about how to get that report.

So if Novavax investors were going through the worst of times, then Sarepta investors went through the best of times earlier this week. Listeners will remember this company name from our May 4 episode. This is the company that was developing a treatment for a rare but devastating disease known as Duchenne muscular dystrophy, or DMD. On Monday, we found out that they got approval from the FDA for their drug, which was known as Eteplirsen, and will now go by the trade name Exondys 51.

Campbell: What an amazing and intriguing story for investors and for those who like soap-opera back stories. There was so much involved in the review of this drug leading up to the application. You almost have to look at it and say there's two stories here. There's the story of, "Wow, this is the first FDA-approved drug that actually targets the cause of DMD." And then, there's the second story, which is, "Did the FDA stretch the bar too far, lower the bar too low, in approving this drug?"

Harjes: Right. The story involves a pretty heated internal conflict in the FDA. You had some people in the agency really pushing for approval of this drug, saying, "Look at the stories that the patients who are taking this can tell. Look how amazing this is, that this drug must be working." And then you had people on the other side, saying, "Wait a second, that's not what we're here to do. We're not here to be pulled by emotions. We're here to look at the clinical evidence, which was, admittedly, a little bit lacking."

Campbell: Right. How much do you weight the science at the FDA, versus the unmet need of DMD patients? I think that was a core debate within the agency. On the one hand, in support of this drug, you had the head of drug evaluation, Dr. Janet Woodcock. And on the other side, you had the head of the group within the FDA that was tasked with reviewing the data on this drug. The director of that group was a Dr. Unger. The two, Woodcock and Unger, had very different views on the subject of the science versus the unmet-need issue.

Harjes: Exactly. So what they were really disagreeing about was whether an increase in this protein known as dystrophin, which was a surrogate endpoint in the trial, whether that necessarily implied clinical benefit. Dr. Woodcock said, "Yes, it does. If we can show that they have increased levels of dystrophin, then there is a very good chance that the patients will have a clinical benefit." Whereas Dr. Unger worried about this, and aside from the worry over the data not being there, he also worried about whether approving this drug just based on this limited data set would be a bad signal, would send a message that the FDA can be pressured by things like politics and intimidation, as opposed to strict science.

Campbell: Yeah. Let's go back in time for a second. Maybe we should spend a little bit of time talking about DMD, and what dystrophin is. DMD is a muscle-wasting disease. What ends up happening is, in patients that can't produce adequate levels of functional dystrophin, which is a protein used to produce and maintain muscle fiber, over time, their muscles weaken, and they lose the ability to walk by the time the reach their teens, and sadly, they lose heart muscle function typically when they get into their 20s. Unfortunately, they tend to succumb to their disease some time between their 30s and 40s. So this is an extremely progressive, life-shortening disease. And up until now, there has been nothing other than corticosteroids that have been approved by the FDA to try and offer some hope to this patient population. 

Because of that, and because of the history with muscular dystrophy fundraising and awareness, there was advocacy for the approval of this drug on a level that is unprecedented. I don't think I've ever seen anything like this. You had people within the FDA saying they were receiving communications from Congress, letters and communications from patient advocates, from patients, from other interested parties. And sometimes those letters weren't so nice.

Harjes: Right. There was an advisory-committee meeting -- how these approvals work with the FDA is that first, you have an advisory committee that convenes, and they review the evidence and make a recommendation for or against approval. When the team was considering the evidence, they heard testimonial from patients. I think was actually one of the longest ever patient testimonial periods, where these young boys that are suffering from this disease, and their parents, and their caregivers, were essentially pleading with the people from the FDA, "Please, approve this drug, there's no other option for these boys." As rare as the disease is, when you're looking it in the face, that pulls at you. I can understand that.

Campbell: Yeah. So, investors and everybody who's interested to know, what ended up happening is that Woodcock had wanted to approve the drug all along. Unger and some of the other people on the review committee were not convinced that the drug provided enough of a boost in dystrophin production to determine that it would produce a clinical benefit. Eventually, they went to an appeals board. One of the things that's interesting about this story is that in May, the FDA was supposed to issue its final determination, go or no go. The advisory committee meeting, after hearing all of that testimony, still concluded on a 7-to-6 vote not to recommend early approval. Yet, walking out of that meeting, Woodcock, within days, was already saying, "I'm going to approve this drug." So Unger went to an appeals board. The appeals process went through and looked at the science, evaluated the stories from both ends, and eventually submitted a memo on this entire subject to the commissioner of the Food and Drug Administration. So this went all the way up to the top. 

Throughout the entire process, Unger maintains, and Woodcock doesn't dispute the fact that she was involved very heavily, right from the get-go. And that process included various meetings with patients and advocates during a period of time where the committee was reviewing the science. So all along, there was this push and pull between the science and the very big unmet need. And I think what Woodcock was arguing was, "Listen, we can't just operate only on the science, because there's nothing that can be done to help these patients and prolong their lives as it stands today. If we have something that even offers them minimal chance of offering a benefit, that's safe and in trials," that was the one thing that everyone agreed on, this drug was safe, "then we should approve it." And I think others at the agency took a different view, worrying that if they approved a drug that wasn't scientifically proven to have the clinical benefit, what kind of recommendations would they have to give in the future?

Harjes: Exactly. It definitely did show that the FDA has more flexibility than maybe you would have thought. One thing that Woodcock had mentioned that I definitely can't get behind is, apparently she was talking about Sarepta's need for capitalization. She noted that their stock price has reacted to different FDA actions. That, this is my own opinion here, I would say definitively should not be considered when you look at something like this. I mean, she's right, if Sarepta didn't get approval, they probably would have run out of money and wouldn't be able to deliver this drug. But that can't be considered. And indeed, an FDA spokeswoman did say that the FDA did not consider those factors in their final decision. But I think that does highlight that Woodcock was willing to go to some unprecedented levels to push for this drug's approval.

Campbell: Yeah. Kristine, I believe those comments were actually made during the review-board hearings. I don't think those comments were made during the evaluation of the science behind this drug. I think the point that Woodcock was trying to make, in fairness, was that we have to recognize that Sarepta is working on all sorts of other medicines that can treat these diseases that could work better, and if they were to go out of business, what would that mean for that science? It could end that science, and basically prohibit the development of a second-generation drug that conceivably works better. 

If we just look at it from what could have gone differently, obviously, the drug could have worked better. If it was a slam-dunk approval, none of this would have happened. But the reality is, you had a 12-person trial that had all sorts of gaps in it as far as the validity of the trial results.

Harjes: For example, there was no control group.

Campbell: Yeah. Both Woodcock and Unger basically looked at it and said, "We don't know what we can trust out of this data." That's why, this past summer, they requested additional information from Sarepta, intro analysis of another trial that's going on right now and took a look at another 12 boys, trying to determine just how much dystrophin is being produced by taking this drug. They determined, after doing their own analysis, that is was a 0.3% improvement in dystrophin production. By any measures, that's tiny. I think the argument from Woodcock was, "Yeah, but it's an improvement." And the argument from Unger was, "We don't know without a shadow of a doubt that that level of improvement would result in a clinical benefit."

Harjes: Exactly. So, technically, what happened to you was an accelerated approval. What that means is that Sarepta is not off the hook just yet. They did get their green light, but they'll still have to provide more proof of efficacy as it becomes available. I would say that's a pretty good middle ground. They're not getting a go-ahead with no strings attached. But yet, this drug will become available, which is really important.

Campbell: Yeah. This is a very small treatment population. We're talking about 1 in 3,500 male births. I did the math on that, DMD therefore is occurring about 580 times new patients diagnosed per year. And of that, this drug only works in about 13% of them. So, every year, we're talking about 60 or so kids that this drug might be able to benefit. It's great that they're going to continue their research and the study. But as we just talked about previously, once you open these studies up to more and more patients, that does not necessarily mean that you're going to get the outcome you want.

Harjes: Exactly. So it's definitely still a case to watch going forward. Interestingly, Sarepta's other drugs could potentially work on a much broader portion of the DMD population. We're talking about up to 80% of these patients. So hopefully, for the sake of the patients and their families, Sarepta can continue to prove that their drugs do work, and validate their entire platform. 

So I want to wrap up today's episode with a Tale of Two Cities quote. It is the one you're thinking of, but you might be surprised to learn the lines that come right after it. From Dickens: "It was the best of times, it was the worst of times. It was the age of wisdom, it was the age of foolishness."

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!