What Gives With Portola Pharmaceuticals?

A surprising FDA rejection of its most advanced drug candidate caused Portola Pharmaceuticals (PTLA) shares to crater. What derailed Portola Pharmaceuticals' application for approval, and can this company get itself back on track?

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell discuss whether Portola Pharmaceuticals' hiccup means this drug will never see the light of day.

A full transcript follows the video.

This podcast was recorded on Aug. 24, 2016.

Kristine Harjes: Last Wednesday, we started our episode by mentioning Portola because they were expecting an FDA decision that day on its most advanced drug candidate, which is a reversal agent for a popular new class of blood thinners. Unfortunately, Portola did not receive the green light that they were expecting, and I was also expecting. Instead, they received the dreaded complete response letter, which is what it's called when the FDA basically says, "No, we're not going to approve this drug, at least not right now under the current conditions." When we taped last Wednesday morning, the stock was at $27. It's now down to $19, which is a 27% drop. What did you make of the news, Todd?

Todd Campbell: I don't know about you, Kristine, but I was refreshing, refreshing, refreshing all day on Wednesday, waiting to see when an announcement would come out. And I got to 4:00, and I was like, "That's interesting," because you know it's summer and people at the FDA are not sticking around much past that. I don't think Portola came out and actually announced that they had gotten the CRL [complete response letter] until after my bedtime, anyways.

Harjes: Yeah, which was a little bit surprising. This was the first instance I know of that there was such a delay. We were expecting to know this in a very public way on that date, I think it was the 17th of August. We didn't really have full information until the next day, and I'm not sure if that was a delay on the company's part, or if that was the FDA. Either way, there's now a lot of suspicion and tension going on about, did management intentionally delay the release of this information?

Campbell: Right, and you saw the shares sharply sell off around 3:00.

Harjes: On Wednesday.

Campbell: Right, on Wednesday. I tend to think the CRL had been received, rumor was maybe getting around the company. And this goes to show how surprising this is. The drug in question was a drug called Indexa, and Indexa was going to be, if approved, the first reversal agent that could be used against a class of anticoagulant drugs called factor Xa inhibitors. Factor Xa inhibitors are huge-selling drugs, more than $5 billion a year in sales. But there is no FDA-approved way to reverse their effects. If they're being taken by an elderly person, that person slips and falls and maybe has a bleeding event, they have to use things that aren't necessarily the best things out there to stop the bleeding. And that has a lot of people, including myself, thinking, "This drug has a really good chance of approval, because it showed in clinical trials that it works, it can stop the activity of these drugs."

Harjes: Right. It had very strong clinical results, as you mentioned. Then, what did the FDA have to say? Why did they say no?

Campbell: There were three things that were highlighted by the company in the conference call that the FDA cited for the reasons for issuing the CRL, or the rejection. One was that they had, we'll call it concerns, about the manufacturing process, the research facility that was going to be manufacturing Indexa, in the pre-approval meetings that the company had had with the FDA. They had walked away from those thinking that any issues that were raised were minor and would not require derailing the application or fixing ahead of the approval date. Obviously, that's not the case, because it was the first and the most major thing cited by the company as the reasons for rejecting it --

Harjes: I'll point out, before moving on to the other reasons, that this manufacturing, that's something the FDA is cracking down on more and more. We saw this with Valeant last month, there is another case for AstraZeneca in May for a cholesterol drug, Opko has had some bad news regarding manufacturing from the FDA. And Portola would be a first-time manufacturer, too. So, in that regard, maybe it's not entirely surprising that they didn't have the manufacturing capabilities 100% ready to go.

But the reason that it actually is pretty shocking is because they had been so pointed at the management of Portola, saying, "Yes, the messaging that we've received from the FDA is that there are only minor issues, which are fixable, which were all over, we're on top of this and it shouldn't be a concern."

Campbell: It certainly raises some questions about, do we have the right captain at the ship? Even if we do have the right captain of the ship, there's been some stumbles at Portola this year that have been...falls, trips, rolling downhills. These were pretty big stumbles. And this is obviously a big one. You've got the manufacturing issue. There are a lot of different controls that go into producing drugs, and there were some things that maybe they could have resolved ahead of time. This is not a deal breaker. The manufacturing stuff can get resolved, just like they did with Opko, with Rayaldee when the FDA issued a CRL because of their manufacturing, and later went on to approve it. So this is not a deal breaker by any means. 

The FDA also came out and said, "Listen, we want more information, because you've said that you want this drug approved for use with Johnson & Johnson's Xarelto and Pfizer and Bristol-Myers' Eliquis, but you also listed two other drugs, and frankly, we don't have enough data supporting approval for those two other drugs."

Harjes: And that alone wouldn't have caused the rejection -- at least, I don't think so, and Will Lis, the CEO of Portola, doesn't think so. But this was supposedly in the contents of the letter. I say supposedly because you never actually really know the contents of these CRLs, your complete response letters. You kind of have to take the company's word for it.

Campbell: Exactly. And the last thing they had said is that the FDA had requested some information about some various cohorts in the studies for the data that was submitted. Portola submitted that information over the course of the past few weeks, and frankly the FDA just didn't have enough time to review that information. So you had three different things that caused the CRL. All of them were unexpected by Portola's management. None of them, ultimately, should be a deal breaker for eventual approval. However, now the timeline for such an approval is up in the air, and it's anyone's guess.

Harjes: Exactly. The company is hoping to resubmit by the end of the year, but this is a setback, definitely, in terms of timeline, if not so much in terms of whether the drug actually works. I think it's clear this point that the drug does work. These are other issues aside from that.

Campbell: Right. And then it comes down to the question, Kristine, what do you do if you're an investor? The market cap of that company is now only $1.2 billion. That's arguably pretty small, given the market opportunity that would be available to eventual approval of Indexa. The company estimates about 100,000 patients a year could benefit from Indexa's use. Price tag of $3,500 to $5,000, somewhere in that range, wouldn't be out of the ballpark. So, you've got a drug that could do a few hundred million dollars in sales. Maybe $1.2 billion is kind of light based on that opportunity.

Harjes: Right. I personally remain pretty bullish on this one. There's definitely a risk of dilution. That's probably the biggest negative to come out of this, that they're now going to take even more time before they start to turn a profit. In the meantime, they have to keep their research efforts going, they have to keep the lights on.

Campbell: Yeah, they're spending trailing-12-month expenses of about $264 million. They have enough money to get them into 2017, but God forbid any more setbacks, because at that point, they'd have to go out to the market and start raising money.

Harjes: Exactly. The other big risk to keep in mind here is that, this has become a fairly emotional stock. Without actual earnings, people are trading based on their emotions. To me, that's just a reminder that if you're into a company, whether it's Portola or another company, be interested in it for the long term. I have had this thesis about Portola, and it is a long-term thesis, it's three- to five-year, maybe even more than that. And it's only been a year, a year and a half, of following this company. For me, I personally just need to hang tight. It's tough to watch this kind of swing in the price, especially not going in the right direction.

Campbell: Yeah. I'm long the stock as well. I didn't sell it. There's an opportunity out there, and the opportunity is greater than the $1.2 billion market cap. It's part of a diversified portfolio. It's also a good reminder for people especially in biotech to make sure they're spreading their money and their investments around rather than putting all their eggs in one basket.