One thing investors should remember about the biotech sector is that no treatment is a guaranteed success, regardless of what Wall Street's talking heads claim. Recently, three biotech companies that were completely dependent on single products fell off a cliff, illustrating the dangers of investing too heavily in these non-diversified companies.
Let's analyze the trouble that befell Ariad Pharmaceuticals (NASDAQ: ARIA), Achillion Pharmaceuticals (ACHN), and Amarin (AMRN -0.53%) over the past few weeks.
Ariad's top drug is more dangerous than previously thought
Ariad's top drug is its leukemia drug Iclusig, which was approved by the Food and Drug Administration last December to treat two rare forms of blood cancer. Iclusig was also granted orphan drug status due to the rarity of both diseases, which protects the drug from competition for seven years. However, that good news was offset by an FDA-required warning that the drug could cause blood clots and liver toxicity.
Although investors were not satisfied with the FDA approval, Iclusig was at least a viable source of revenue for the company. Last quarter, Iclusig sales generated $14 million in revenue, a big jump from the revenue of $0.32 million it reported in the prior-year quarter.
Unfortunately, any hope for Ariad's future faded when the FDA put a temporary hold on Iclusig on Oct. 9 due to a number of patients experiencing blood clots and heart damage. Ariad stated that after two years of follow-up tests on patients given Iclusig, the company discovered that 11.8% suffered blood clots, 6.2% had cardiovascular problems, 4% had brain vascular issues, and 3.6% had peripheral vascular trouble. To make matters worse, 20% experienced various types of artery and vein problems and 2.9% experienced vein blockages.
Source: YCharts.
Instead of diversifying its pipeline by creating new treatments, Ariad had expected Iclusig to be approved for even more indications, including lung cancer, thyroid cancer, and another type of blood cancer, among others. It is currently in phase 2 studies for most of the other indications. Interestingly enough, the company is moving ahead with these studies, despite the drug's obvious problems. The only other treatment Ariad has in its pipeline is a non-small-cell lung cancer treatment currently in phase 2 studies.
As a result, investors lost faith in Ariad's pipeline and growth potential, and shares plummeted more than 75% over the past week.
Achillion sidelined as competitors race toward the finish line
Achillion Pharmaceuticals was another company repeatedly crushed by the FDA.
The company's lead drug candidate -- hepatitis C, or HCV, drug sovaprevir -- was put on hold by the FDA more than three months ago due to concerns that it could cause liver damage. Investors had hoped that the hold would be removed at the end of September, but the FDA maintained it, putting the drug even further behind competing treatments from Gilead Sciences (GILD 0.07%) and AbbVie.
Source: YCharts.
Gilead, AbbVie, and Achillion are all in race to bring next-generation hep-C treatments to market. All three companies are producing orally administered treatments, which are much more convenient than older injected ones. In addition, all three do not use interferon, an older treatment known to cause flu-like symptoms.
By all accounts, Gilead's treatment, sofosbuvir, which is undergoing a priority review by the FDA, could hit the market first in 2014. However, AbbVie's treatment, along with similar, competing treatments from Johnson & Johnson and Bristol-Myers Squibb, are not that far behind.
Therefore, Achillion is forced to watch the HCV race with its top drug candidate sitting on the sidelines. Even if sovaprevir were ever released from the FDA hold, it could arrive years behind the competition. On the bright side, Achillion still has three other HCV treatments that are currently in pre-clinical, phase 1, and phase 2 trials.
At this point, Achillion's best move is probably to fall back on these treatments, and forget about sovaprevir for now. However, it's clear that there aren't any positive catalysts on the horizon for the company, causing the stock to fall 75% over the past 12 months.
A fishy biotech goes belly up
Last but not least, we have Amarin, a stock that has lost more than 50% of its value over the past 12 months.
Amarin's only marketed product, Vascepa, is a fish oil treatment for patients with very high (greater than 500 mg/dL) levels of triglycerides. Vascepa is considered a safer treatment than its main competitor, GlaxoSmithKline's (GSK -0.92%) Lovaza, since it does not increase the production of LDL ("bad") cholesterol while reducing triglycerides.
However, the lack of a larger marketing partner and the threat of competition from upcoming generic versions of Lovaza have weighed heavily on Vascepa sales, which only came in at $5.5 million last quarter -- a far cry from the annual peak sales of $2.6 billion projected by Citi Investment Research.
Citi's peak sales estimate calls for both a larger marketing partner and the FDA approval of Vascepa as a treatment for lower levels of triglycerides (between 200 to 500 mg/dL), which will allow it to reach 36 million additional patients not treated by Lovaza. Unfortunately, the FDA stepped in on Oct. 11 with a report that it needed more time to evaluate Vascepa's safety risks, pushing a possible approval date back to 2016. The stock crashed 20% as a result.
Source: YCharts.
Therefore, without a partner and without an approval to set it apart from Lovaza, which may soon be threatened by generic competition from Teva Pharmaceutical and Par Pharmaceutical, Amarin may be destined to go belly up before getting a chance to prove itself. Tomorrow, the FDA's advisory committee will discuss whether or not Amarin's Vascepa merits approval in a wider indication, and this will be a major catalyst for the stock. Last Friday, Amarin dropped 20% after investors reacted to the briefing documents released by the advisory committee, and tomorrow's meeting is another crucial day for the company.
The Foolish bottom line
The world of young biotechs is a merciless industry, and the FDA is the unblinking judge, jury, and executioner.
Going back a few years, it's easy to find articles from analysts gushing over the blockbuster potential of Iclusig, sovaprevir, and Vascepa. Unfortunately, the failures of these drugs illustrate the danger of investing in companies that are heavily dependent on the success of a single product. Investors interested in these higher-risk biotech companies should do their due diligence before committing to these types of stocks.
Editor's Note: A previous version of this article did not discuss the upcoming FDA advisory committee meeting for Amarin's Vascepa. The Fool regrets the error.
