Will the Feuerstein-Ratain Rule Hold in 2013?

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Although the ranks of extremist biotech investors don't like to admit it, the Feuerstein-Ratain Rule has a perfect record when predicting micro-cap phase 3 oncology trial success. The rule is named after Adam Feuerstein, a senior columnist at, and Dr. Mark Ratain, an oncologist from the University of Chicago, who published a study in JNCI in October 2011 explaining their observations. After looking at the outcomes of 58 phase 3 cancer trials over the past 10 years, the pair found that companies with a market cap less than $300 million several months before the release of trial results were 0-for-21, whereas companies with a market cap exceeding $1 billion were a respectable 21-for-27. Ouch.

The study opened the door for fierce battles every time a micro-cap biotech challenges the rule. Unfortunately for the bandwidth limits of message boards, there is at least one phase 3 trial expected to test the Feuerstein-Ratain Rule in 2013. Does the rule have any validity? Should investors jump ship and take their gains with them or hang on for an even bigger possible gain?

Passing the test
The rule was tested for the first time last year when Keryx Biopharmaceuticals (NASDAQ: KERX  ) and Aeterna Zentaris (NASDAQ: AEZS  ) conducted the X-PECT phase 3 trial for the drug perifosine in colorectal cancer. Despite the company botching the phase 2 trial design (which still got the nod from the Food and Drug Administration) and evaluating results from only 38 patients (of an enrollment target of 381), Keryx faithfuls stood behind the company, hoping to realize huge gains on successful phase 3 results. Those results never came. After months of delays, the companies finally announced a disappointing end to the 468 patient study that failed to meet its primary endpoint.

On April 2, shares of Keryx and Aeterna fell by more than 60%. The Feuerstein-Ratain Rule successfully predicted the outcome of its first post-JNCI trial, and their track record became a perfect 22 for 22.

Nonetheless, Aeterna is determined to forge ahead with plans for a phase 3 trial treating multiple myeloma patients with perifosine, which could challenge the rule again in 2014 or 2015.

Why the rule works
Arguments against the Feuerstein-Ratain Rule try to find fault in its simplicity. Investors often ask, "How does market cap have anything to do with the science behind the therapy?" At first glance, the two are seemingly disconnected. But Feuerstein offers a concrete explanation:

"Ratain and I recognized that one reason micro-cap cancer drugs had a perfectly dismal record with phase III trials is because the drugs being developed had already been vetted by both the market (i.e., investors) and larger, more successful cancer drug companies and found to have a low probability of success.

Cancer drugs are scarce and valuable commodities. Larger drug companies are way more likely to acquire, or at least partner with, a smaller drug company if that smaller company has a cancer drug in development with a strong shot at being successful.

Market cap, therefore, becomes a reliable and accurate proxy for predicting cancer drug trial outcomes."

Let's go through that. Feuerstein maintains that should a cancer drug have a reasonable shot at success, a larger company will acknowledge, acquire, or partner with the owner of the molecule (a micro-cap biotech, in our case) long before the 120-day threshold. It appears that market cap has everything to do with the science behind the drug.

Be blue or be sorry?
The rule is particularly bad news for Celsion (NASDAQ: CLSN  ) , which is due to announce the results from the phase 3 HEAT trial this month. Uh-oh. The company had a market cap of $164.5 million just three months ago. Uh-oh. The trial is designed to significantly delay the regrowth of liver tumors with a combination of ThermoDox and radio frequency ablation, or RFA. Failure to reach the primary endpoint would surely punish the stock, which has gained 320% in the last year on high hopes for success.

Fellow Fool Rich Duprey recently penned that Celsion would yield even bigger gains for investors should positive results be achieved. He correctly noted that RFA has become a popular method for treating cancerous tumors, but the Feuerstein-Ratain Rule suggests Celsion's platform will disappoint investors.

One to watch, just don't get dizzy
Late last year, Peregrine Pharmaceuticals (NASDAQ: PPHM  ) pulled the rug out from under investors after a strange and messy series of events. The company originally announced positive results for a promising phase 2 trial. Or did it? Major labeling errors in the phase 2 trial data seemed to show that the company's leading drug bavituximab did not show statistical significance in treating second-line non-small-cell lung cancer. Or did it?!?

Now, the company claims it has found discrepancies in labeling that support advancing the drug to a phase 3 study. Regardless if that happens -- and it could take years -- it appears that Peregrine could be a prime candidate in challenging the rule down the road. Controversy, mind-blowing pops, and crushing collapses. What else do you need?

My confession
Believe me; I know what it's like to fantasize about hitting a home run with a sleepy, under-the-radar biotech stock. Back in college, before I truly understood how to gauge the health of a balance sheet, I invested in Keryx. Yep, me. Sometime after buying shares and before the trial results were announced, I began to refine my investing principles and couldn't sell out of my position soon enough. 

Now, I'm not saying that those who choose to invest in micro-cap biotech stocks don't understand investing. In fact, I find that some of the most intelligent investors stake positions in the industry. Everyone has a different appetite for risk, and I simply realized it wasn't for me. 

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Read/Post Comments (14) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2013, at 2:45 PM, BSDetector wrote:

    The beginning of wisdom is the realization that Adam Fraudstain is the ultimate hedge fund tool. At the current time he is the ideal Contrarian Indicator for locating a ten bagger.

    The man has bashed ARNA since it was $1 and continues to do so. Most rational writers would acknowledge that they were wrong and move on; but not Adam. In Adam's world fiction becomes reality IF YOU REPEAT IT ENOUGH TIMES.

    ARNA quickly became a ten bagger. PPHM (which he has recently begun to bash) will easily become a ten bagger. Hedge funds realized this at $1.20 and piled on the wagon. They are only using Fraudstain to hold it down to acquire the remaining shares.

    In at 0.80 Best of luck with your next prediction Adam.

  • Report this Comment On January 20, 2013, at 9:37 AM, garypalys wrote:

    Or maybe big pharma can put more money into the FDA's pockets? Just a thought...

  • Report this Comment On January 20, 2013, at 10:32 AM, TMFBlacknGold wrote:


    Conspiracy theories are a dangerous way to view the world. You may want to read the book "Denialism" by Michael Specter. Great chapter on FDA conspiracies and Vioxx, which caused thousands of cardiovascular related deaths. Another on people who incorrectly believe thimerosol in vaccines is linked to autism.


  • Report this Comment On January 20, 2013, at 12:33 PM, Odaat12 wrote:

    One forgets that Celsion does have a major partner already...Philips, partnering with them and already in FDA-approved Phase 1 trial with the same drug of this P3 trial, but using their leading, volumetric-heating-prowessed, superior turn-key MRg-HIFU device, Sonalleve.

    That's a muddy water in regard to this "rule", but worth noting nevertheless. It bears witness to the fact that a large partner has indeed done its dd and endorsed this delivery platform...a platform that has real value regardless of the outcome of this first trial.

    I wouldn't be so quick to decry the Thermodox for HCC partnership, either. Management has said publicly that there are multiple international pharmas at the table or doing diligence on the company, as well as, about 3 years ago, saying in an earnings call that the company was not moving on any of the deals because they felt that the partners at the table at that time were grossly underestimating the value of Thermodox, even for HCC alone (a $1.33B market in its own), let alone the myriad of uses for this platform in oncology and beyond for decades to come. They knew that only resounding P3 data would convince bp of the value of the iLTSSL platform. As such, it was worth the wait, and they have raised the capital needed to make it to this point while still having a small float...55 million fully, at best.

    With no Phase II data to look at, and Mr. Tardugno both knowing the value of this platform and "willing to sell no wine before its time," I am not surprised to see no partner pre-data.

    If Celsion disproves this rather questionable theory, it will disprove it in an historic way. What concerns me most of the theory is how Feuersteinesque it is. Behind the curtain, the theory is based on the premise that big pharma and investment funds and wall street big boys are "mysteriously" somehow able to vet these companies' drugs' success "better" than retail investors, suggesting that they may have access to information in the gray zone of not being insider info, yet somehow more than that available to the everyman.

    To note, none of the other companies to which this retro-statistical house of cards refers was a delivery platform, (nor using a known drug). They were all entirely new drugs.

    Of course, if HEAT is successful, supporters of the theory will use these exact arguments as to why his "theory" wasn't "wrong," but that it really didn't apply in this unique case. That would be par for the course for even the most infamous of self-fulfilling, vacillating senior analysts. :-)

    The "rule" flies in the face of much more qualified entities, such as The Focused Ultrasound Foundation, the NCI, the NIH, Duke University, Oxford University, Philips, Yakult, and Hisun, to name a few.

    Am I long CLSN? Absolutely, 100%, and not shy at all to post this right before data proves my prophet or fool.

    Rules were made to be broken. Celsion is going too shatter this one.



  • Report this Comment On January 20, 2013, at 5:05 PM, TMFBlacknGold wrote:


    Thank you for sharing your views in a constructive and intellectual manner. Although the FR Rule, to my knowledge, does not apply strictly to new drugs but all oncology trials. Not all trials included in the study were new drugs, either.

    But hey, rules are meant to be broken, right?


  • Report this Comment On January 20, 2013, at 10:43 PM, flogonuzim wrote:

    Odaat, I enjoyed the comments you posted and share your enthusiam on the chances of a successful PH3 HEAT Trial.

    It's funny you used the word "Feuersteinesque" and then started the next sentence with "Behind the curtain." Reminds me of the great and powerful Oz. I'll leave it at that......


  • Report this Comment On January 22, 2013, at 8:18 AM, Odaat12 wrote:

    Oh look, this morning, another partnership...millions and millions upfront, the first 5 mill of which is a completely nonrefundable, immediately paid, resoundingly bullish endorsement by HISUN.

    As I said, Celsion is going to shatter the "rule" in grand fashion. Surely the NIH, FUS, Pfizer, Hisun, Yakult, Odaat, Oxofrd, Duke, et al are wrong, and AF is right.


  • Report this Comment On January 22, 2013, at 12:34 PM, TruffelPig wrote:

    This is so dumb one should not even comment on this..........

  • Report this Comment On January 22, 2013, at 2:41 PM, LouPinella wrote:

    First of all, the Feuerstein & Ratain article wasn't a study, it was an editorial expounding upon some of the results of Rothenstein et al. in the same issue (which was an actual research article).

    Second point: this article ignores the potential outcome that Celsion is near the $300 million cap already; there is a chance that they'll crack that before the results hit. Chaos ensues: if the trials were successful, Celsionians cry "Redemption!"; stock price shoots up (probably temporarily); Feuerestein tweets that he wasn't wrong, technically; Celsionians scream for bloody vengeance; yahoo message boards crash; and Ray Lewis cries.

    My personal hope is that, in the end, cancer patients have available to them the best care known to science.

  • Report this Comment On January 22, 2013, at 4:54 PM, TMFBlacknGold wrote:


    There is no date set in stone for the deal announced this morning. Should the trial fail, Zhejiang Hisun will surely drop Celsion. Besides, if the company has the data there is no reason to withhold it from investors for another week. I'm going to hold out final judgement until the results are officially reported.


    Thanks for taking time away from the baseball diamond to take part in TMF! I'm a big fan! Now...

    The rule doesn't care about what a company's market cap is at approval, but at 120 days before approval. Celsion has already been classified as a micro cap and cannot leave the group with a current run-up.

  • Report this Comment On January 22, 2013, at 5:10 PM, CER4040 wrote:

    300M to 1B....that's quite a delta.

  • Report this Comment On January 29, 2013, at 5:25 PM, JerryCheezHuffer wrote:

    the only question is whether feuerstein's anus will hold after all the poundings it has taken.

    jk guys.... sorry that was bad

  • Report this Comment On January 31, 2013, at 10:38 AM, zzlangerhans wrote:

    Still waiting for the first apology ...

  • Report this Comment On January 31, 2013, at 10:53 AM, TMFBlacknGold wrote:
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