Is This Biotech Company an Underdog Or Just Another Dog?

Infinity Pharmaceuticals (INFI) is a classic example of how fast a pre-revenue biotech company can fall. Shares of the company, which specializes in treatments for blood disorders, inflammatory diseases, and cancers, have fallen more than 60% over the past six months.

What went wrong at Infinity, and are there any silver linings on the clouds that are gathering around this company?

Source: YCharts.

A streak of failures
First, we should understand the bear case against Infinity. The company went public in 2000, and shares soared as high as $100 before crashing to Earth due to the dot-com bust. Thirteen years passed, and the company has yet to gain approval for a single product. That's not to say Infinity didn't try -- it just met with failure at every single turn.

Here are three of the company's biggest failures.

Source: Press releases.

Saridegib was the company's former lead drug candidate, and its failure caused Infinity shares to crash 40% in January 2012. The drug was a hedgehog inhibitor, a new class of drugs that target the hedgehog signaling pathway -- which cancer cells can use to survive and proliferate.

To date, only one hedgehog inhibitor, Curis (CRIS -0.51%) and Roche/Genentech's skin cancer treatment Erivedge, has been approved. Erivedge is marketed worldwide by Roche, and Curis earns 5% to 10% in royalties on total sales. Demand for Erivedge has been high, fueling Curis' 24% year-over-year increase in revenue to $5.4 billion last quarter.

After saridegib's failure, retaspimycin HCI was Infinity's second best hope. The treatment was being tested in combination with two chemotherapy treatments (Sanofi's Taxotere and Novartis' Afinitor) for the treatment of non-small-cell lung cancer. When that trial failed last month as well, Infinity shares tumbled another 14%.

Widening losses and reduced guidance
Last quarter, Infinity's loss widened to $0.68 per share, down from a loss of $0.61 per share in the prior year quarter. It didn't generate any revenue during the quarter -- although in the previous year it reported $21.9 million in collaborative research and development revenue. Infinity currently has $277 million in cash and a clean balance sheet.

For the full fiscal year, the company's expects a net loss between $135 million to $145 million, wider than its prior forecast of $115 million to $125 million. It also increased its operating expenses guidance to $135 million to $145 million, up from its prior guidance of $115 million to $125 million.

An all-in bet on the future
Infinity currently has license agreements with Novartis' Institutes for Biomedical Research and Takeda Pharmaceutical's Millennium oncology subsidiary. With Takeda, Infinity is developing IPI-145, a blood disorder and inflammation treatment which the company is waging its entire future on.

IPI-145 is a treatment being tested on chronic lymphocytic lymphoma (CLL) and indolent non-Hodgkin lymphoma (iNHL). It is also being tested for asthma and rheumatoid arthritis in separate trials. Infinity also believes that IPI-145 could be expanded to treat treatment-naive CLL and mantle cell lymphoma.

However, IPI-145 faces two major challenges in this space.

The first one is Gilead Sciences (GILD -1.81%), which is creating idelalisib, another treatment for CLL and iHNL. Idelalisib also works in the same way as IPI-145, by targeting the PI3K signalling pathway. When the PI3K signalling pathway is overactive, cell death is reduced and cancer cells can proliferate more easily. Last month, Gilead submitted a new drug application for idelasilib as a new treatment for iNHL, while Infinity has just started its phase 2 trial for IPI-145.

The second major challenge is ibrutinib, Pharmacyclics (NASDAQ: PCYC) and Johnson & Johnson's (JNJ -1.19%) potential blockbuster treatment for CLL and MCL. During clinical trials, patients dosed with ibrutinib showed respective response rates of 71% and 68% for CLL and MCL. Those efficacy results -- the highest ever recorded -- earned ibrutinib a breakthrough therapy classification from the FDA, which puts it on the fast track for an approval by early next year. Wall Street is also enamored with ibrutinib, with analysts at William Blair pegging peak sales of the drug at $9.2 billion -- which would make it the fourth best selling drug of all time.

Therefore, even if IPI-145 were eventually approved, it could far too late without any noticeable benefits over these treatments.

The Foolish takeaway
Everyone loves a good turnaround story. Unfortunately, Infinity Pharmaceuticals just doesn't look like one.

The company's streak of failures indicates that its R&D department needs a major overhaul, and its all-in bet on IPI-145 looks like it will be crushed by Pharmacyclics' idelasilib and Gilead's ibrutinib. Therefore, this biotech underdog could just be another dog, and investors should steer clear unless they want to get bitten.