Investors in drug makers gain clues to future product success by watching the results as drug candidates pass the milestones of clinical trials. When a drug shows no statistically significant benefit in trials, your investment may be in jeopardy. It can mean that new trials are necessary -- or that the drug's development days are through.
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Corixa (Nasdaq: CRXA) and Alexion Pharmaceuticals (Nasdaq: ALXN) have recently reported drug trials results that sent their stocks off wildly in all directions. Corixa fell 20% last Thursday on negative news to $19.44, continuing its slide to yesterday's $17.69 close. Alexion jumped 25% to $71.38 on positive news on Jan. 23, only to lose it all and then some to close yesterday at $31.89, scraping a 52-week low. We've seen drug maker stocks plunge when the FDA disapproves a company's drug candidate, but why all the fuss about trial results? Why investors watch the trials So investors in smaller biotech drug makers scrutinize results as drug candidates pass through the three phases of clinical (human) trials prior to application to the FDA for approval to market. The farther along in the drug development process, the more likely FDA approval and possible marketing success -- provided that the company has correctly analyzed the cost of drug development against a drug candidate's possible future market prospects. To watch the progress, you can almost always find a company's product pipeline on its website, and companies report drug development milestones in their SEC forms 10-K and 10-Q. Corixa's psoriasis setback While the trial news is far from celebratory, the market's reaction is confusing given Corixa's full pipeline, bolstered through last fall's merger with Coulter and its Bexxar non-Hodgkin's Lymphoma treatment (which now awaits FDA action). Bexxar disapproval would certainly merit a 20% chop of the stock price, but it's hard to understand why the PVAC results do. Risk-tolerant investors comfortable with Corixa's long-term prospects might sniff a buying opportunity as a result. Alexion's heart attack treatment But three days later, the company confirmed that the cited data was not for its primary goal, but a secondary one. In other words, the drug did not reduce small heart attacks, neurological deficits, and left ventricle damage in CABG patients as originally intended. The stock has lost 60% since then. CEO Leonard Bell said that the company did not mislead investors, because it disclosed everything on a conference call with analysts the day the press release went out. But what's the big deal? The company went looking mainly for one effect, but found better results for another. Accordingly, the company plans a phase III study in mid-2001 for the drug's successful, secondary goal. It may be a little facile, but drug discovery often involves unintended results. Viagra, anyone? And a day later Alexion announced positive phase II results for its rheumatoid arthritis treatment. This would normally boost an investor's valuation of the company's future profits, because it increases the chance of a drug's future success. Given the confusion over the heart attack CABG treatment, though, Alexion's stock continued downward.
Know your company's pipeline and cash balance
Investors value drug makers on the discounted future value of drug candidates in their development pipeline. This is especially crucial for newer biotech drug makers who may have few or no products on the market and minuscule current revenues. They don't have the cushions of big pharmaceutical companies, such as Pfizer (NYSE: PFE) or Johnson & Johnson (NYSE: JNJ), which have huge diversified revenue bases of both prescription and consumer drugs and other medical products to balance the stumbling of drug candidates in testing.
Corixa reported that its PVAC psoriasis drug candidate "failed to achieve a statistically significant effectiveness in a Phase II trial." Corixa also reported that 15 microgram doses of PVAC seemed to work best, and that it will conduct another trial targeting that dosage level. PVAC targets the 7 million-strong market for moderate to severe psoriasis, a chronic skin disease believed to stem from immune system malfunction leading to skin cells growing faster than the body can shed them, leading to a flaky build up.
Alexion Pharmaceuticals' recent swings are even more curious. Alexion announced positive results from phase II tests of its pexelizumab treatment to reduce heart attack and death among patients undergoing coronary bypass graft surgery (CABG). The company even stated that the phase II trial results were "unanticipated" and that the data "substantially surpasses... pre-trial expectations."
Lesson? Expect extreme stock price volatility as biotech drug candidates progress through trials. Anything other than unqualified success will spook investors, though a second look may reveal that the initial news is not as bad as it seems. To avoid the ups and downs of drug development, investors should look for companies with full pipelines, not those banking on one big hit. Take the time to learn the market potential of drugs in pipelines and evaluate whether companies carry enough cash to fund drug development and survive setbacks. (For more on this subject, visit our Biotechnology and Pharmaceuticals InDepth pages.)
Tom Jacobs runs on caffeine and fear of deadlines. At press time, he owned no shares in companies mentioned in this article. Tom's stock holdings can be viewed on line, as can the Fool's disclosure policy.
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