After delivering solid results in mid-stage studies, Ophthotech's (NASDAQ:OPHT) Fovista has flunked its phase 3 trials. Fovista's inability to improve vision in wet age-related macular degeneration patients derails a multibillion dollar opportunity for Ophthotech and casts doubt on the company's future. Can the biotech survive a rout that's caused its shares to collapse 85%?

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss Fovista's failure and Ophthotech's future.

A full transcript follows the video.

This podcast was recorded on Dec. 14, 2016.

Todd Campbell: We tried to bring some positive news to biotech land, but we're back again this week with some negative news. Can you believe, Kristine, we're talking about yet another, we'll call it a high-profile flop?

Kristine Harjes: Yeah, biotech is having a rough go of it lately.

Campbell: It is. There's almost an investor's crisis of confidence that's building, especially in the clinical stage biotechnology companies. You have some pretty high-profile disappointments recently. We had Juno, obviously. Eli Lilly stumbled with an Alzheimer's disease drug earlier in the year. There were some setbacks to some stuff that was going on at Portola Pharmaceuticals, which we discussed on the show. The latest incarnation of this crisis of confidence is Ophthotech and its failure of its age-related macular degeneration drug, Fovista.

Harjes: Right. They were testing Fovista in combination with Lucentis, in wet AMD, which is the age-related macular degeneration that you mentioned. This was being tested in two phase 3 trials across a total of 1,248 people. And it just flopped. They reported that it just didn't improve anything, more or less. They were testing Lucentis alone versus the combination of Fovista and Lucentis, and the two groups were essentially the same, which is a humongous disappointment. This was a drug that a lot of people were very excited about. Novartis (NYSE:NVS) was partnered on the drug. And phase 2 data from the drug looked really fantastic, so I think this caught a lot of people off guard.

Campbell: Yeah, Kristine, I think that's one of the reasons this was...it's not a surprise when clinical drugs fail. Even in ophthalmology alone, only 58% of phase 3 trials succeed. Slightly better than a coin flip. So, it's not a complete surprise that they came up short. But, if you look at the press release from the phase 2b results and you read through it, it's hard to come away not feeling pretty good about it. And then you look at the fact that Novartis, after that phase 2b data came out -- and Novartis, just to give a little background, markets Lucentis, which is one of the largest or most commonly used drugs to treat this indication. And, the fact that they were willing to give essentially $330 million early on, plus promises up to another $670 million, just to get the outside U.S. rights to this drug --

Harjes: Right, that's important. That was just the ex-U.S. rights.

Campbell: Right. So, you have the company and industry people saying, "Wow, those phase 2b results were really good." You have Novartis, which markets one of the most-used drugs in the indication, saying, "We think this is good enough that we're going to license the ex-U.S. rights to it." There were a lot of reasons for investors to feel pretty confident, more confident, maybe, than they would normally with coin-flip success rate in phase 3 for ophthalmology indications.

Harjes: And the way that you test this is how many letters of vision the patient improves. It's on something called the Early Treatment of Diabetic Retinopathy Study standardized chart. We'll just called them letters. When you looked at the phase 2 trial, the Lucentis-alone group, those patients improved an average of 6.5 letters after 24 weeks, as opposed to the combination group, which improved 10.6. So, 6.5 letters versus 10.6 letters, that was definitely significant. That was a really favorable improvement. And then you look at the phase 3, and this was measured after 12 months, the combination group improved 10.24 letters, which is pretty consistent with what we saw after 24 weeks in the phase 2 trial. But the Lucentis group alone, the control group, improved 10.01 letters.

Campbell: Right. And you just brought up a great point, Kristine.

Harjes: Yeah. There's two ways to look at this. You could say, was Lucentis just weirdly ineffective in that phase 2 trial? Or is the phase 3 trial flukey in how effective the Lucentis-alone group was?

Campbell: Or, does Lucentis' efficacy improve over time? 

Harjes: Exactly, because you have two very different time frames.

Campbell: Right. Not long ago, Regeneron (NASDAQ:REGN), which is another big player in this space, they make a drug called Eylea, which, by the way, does more than $5 billion in sales targeting ophthalmology indications, they tried a drug that worked similarly to Fovista, alongside their own Eylea, and that trial failed in mid-stage studies. But what was interesting to me about that wasn't just that it failed and it worked similarly to Fovista, which is interesting in and of itself, but the fact that the letter improvement in the monotherapy arm for Eylea wasn't that great, either. It was mid- to high-single-digit letter improvements. So, it could be that the efficacy of this class of anti-VEGF -- Lucentis, Avistan, which is widely used as well, and Eylea -- the efficacy just improves over time, and eventually closed the gap between the Fovista plus and the monotherapy arms.

Harjes: And I do think the Regeneron data should have been a little bit of a warning sign for investors with this one. After that happened, on Ophthotech's next conference call, they were actually asked, "Hey, are you bothered by this data? What do you think? Does this affect you guys going forward?" And they were essentially like, "No, we think our drug is really good," and they just kind of moved on. But you had Regeneron doing essentially the same thing that Ophthotech was trying to do in this trial, taking two drugs that each worked in a parallel way and putting them together, and it failed back in September.

Campbell: Yeah, that was very prescient. Obviously, I imagine that all the results were blinded in the phase 3 trials, so it's not like management had anything other to go on than their phase 2b results, which were very good. They could have been looking at it and being like, "This was a phase 2 trial that stunk, and our phase 2 trial was awesome," and maybe that was influencing their positivity on the conference call. In the end, you're left with a clinical-stage company that once again shows investors the risk, the hit-and-miss risk, of investing in biotech.

Harjes: Yeah, I don't think we stated yet, but this company fell 85%.

Campbell: 85%. This was an $80 stock at one point, and I think it's trading at like $5 now. Just an absolute bloodbath for the company. And again, hit and miss. When you're investing in clinical-stage companies, they're usually focusing on one indication, or one mechanism of action -- and that's very different than, say, a Lilly failure, where they're fairly diversified across a lot of indications. When something goes wrong in these clinical-stage companies, it goes wrong in a bad way.

Harjes: And that's what makes them so exciting to watch. But there are also definitely lessons to learn every time you see this. I need to go on record here saying I was flat-out wrong on this one. I'm a shareholder, I still am. I will probably sell my shares some time soon, as soon as Fool trading rules allow me to do so after talking about it on this show. Honestly, I was beating myself up over this one when I first heard the news on Monday. But, I was reminded of some really good lessons for investing. You're not going to be right every single time. The best investors in the world only get it right 60% of the time. But, the advantage here of being in it for the long haul, taking the truly Foolish approach, is that you can afford to be wrong every once in a while. Your biggest winners will often more than offset your biggest losers. We talk a lot about diversification on this show, particularly the Healthcare show. That's really important here, it's important as ever. You take one loss like this, and hopefully it's only a very small portion of your portfolio, and you can move on, learn your lessons, and hopefully have many more winners make up for it.

Campbell: Amen. That's the way to approach it. If there's one thing that you and I have said over the course of the last few months especially, every week's show, when it comes to biotech, diversify, diversify, diversify. I got stung on this one, too. Again, it just reminds you to make sure that you do spread those eggs around.

Kristine Harjes owns shares of Juno Therapeutics and Portola Pharmaceuticals. Todd Campbell owns shares of Ophthotech and Portola Pharmaceuticals. The Motley Fool recommends Juno Therapeutics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.