Never Will I Ever Buy Preclinical Biotech Stocks. No Way!

It's "Never Will I Ever" week on Industry Focus, and we're explaining what we'll never invest in and why.

It's incredibly difficult to develop new, game-changing medicine. How difficult? Over 90% of drugs that enter phase 1 human trials end up in the dustbin, rather than pharmacy shelves. Clearly, investing in biotechnology stocks is a hit-or-miss proposition.

Looking for some examples of how risky it can be to buy early-stage biotech stocks? Look no further than Juno Therapeutics' (JUNO) stumble last year. The company was forced to sideline its once-promising CAR-T medicine, JCAR015, because of unexpected patient deaths, and as a result, its share price is more than 50% below where it was in 2015. 

What companies could be too early-stage to buy now? In this episode of The Motley Fool's Industry Focus: Healthcare, Kristine Harjes is joined by Todd Campbell to explain why patience makes sense when it comes to investing in the gene-editing companies Editas Medicine Inc. (EDIT 1.07%) and CRISPR Therapeutics AG (CRSP 2.12%)

A full transcript follows the video.

This video was recorded on July 12, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's July 12, and I'm your Healthcare show host, Kristine Harjes. Calling in to Fool HQ in the rather swampy Alexandria, Va., is Todd Campbell, a Fool.com healthcare specialist. Welcome to the show, Todd! Anything new and exciting?

Todd Campbell: Hi, Kristine! Is it raining there? Why is it swampy?

Harjes: No, it's just really humid.

Campbell: Oh. They say it's not the heat, it's the humidity, right?

Harjes: It is. I have a friend from Georgia who says it's about 10 degrees hotter there, but you can't stand it here just because of the way the humidity sucks you in.

Campbell: And it's so oppressive. You walk outside and you start sweating immediately. It's no fun. It's a great day to be inside filming a podcast.

Harjes: It sure is. The studio is freezing as usual. Anyway, this is the Wednesday show, so you guys, our listeners, hopefully have been listening for the Monday and Tuesday show. Just in case this is the first Industry Focus show you're listening to this week, it is "Never Will I Ever" week, where we're talking about some interesting choices that we personally will never make. Todd, do you want to do the introduction for our healthcare "Never Will I Ever"?

Campbell: Never will I ever buy a preclinical biotech stock solely based on the hype. Just not going to do it. Won't do it.

Harjes: Of course, this is just you and me. There are probably investors out there that are interested in doing this kind of thing, and they have extremely high appetite for risk. But we, the two of us, decided that we're just not interested in getting in on companies that are that early. We'll walk through exactly why that is.

Campbell: Kristine, I want all of our listeners out there to grab a Sharpie and a Post-it note, and I want them to write on that Post-it note "90%," and put it on their monitor, and we'll explain why in a minute.

Harjes: Sure. That 90% is a warning that over 90% of drugs entering phase 1 trials do not make it to approval.

Campbell: That's right. The failure rate is incredibly high. Think about it -- if it was easy to develop these medicines, we would have cured all of these diseases now. It simply isn't. There's a tremendous amount of trial and failure. And like a lot of things in life, you learn from those failures. But failures tend to occur more commonly than successes. I think it's very important for everyone who traffics in biotechnology stocks.

Take that Post-it and keep it on your monitor. Any time you see some company that came out of nowhere issue a press release saying, "In preclinical studies, our drug did X," look at that 90% and say, "Yeah, call me back when you get through phase 2."

Harjes: Right. The thing about not even being in phase 1 yet is that your drug is completely unproven in humans, which is kind of worrying, because it's very easy to paint a story about a small mouse trial having stunning efficacy in some disease that, in humans, has no treatment options, and this could potentially be a billion-dollar drug down the road, which, down the road at that point would be at least four years, probably more. So it's very easy to get caught up in the storytelling there. It's very attractive. But for your money, it's just too soon.

Campbell: Yeah. Think about it from the perspective of the biotech company that's putting it out there. They know that all of this research that they're going to have to do to get their drug through the clinic, through the FDA and to market, is going to cost them a lot of money. So they're going to obviously be looking for funding to help do their research. And you can't blame them for maybe being a little bit too optimistic at times in their press releases regarding some of their early-stage stuff. I think it might be helpful, Kristine, to remind investors very quickly how a drug proceeds through clinic, the phases, to the market.

Harjes: Sure, go ahead and walk us through.

Campbell: Great. Phase 1 trials would be your first human trials. Typically, those are your dosing trials. You're trying to figure out what dose of this drug will I want to pursue in later-stage trials. Phase 2 trials are larger, and those trials are typically trying to determine whether or not a drug at that dose is safe in patients. Efficacy, or how well the drug works, is usually a secondary endpoint within phase 2 studies. Then, phase 3 studies are much larger studies that involve a broad swath of patients. Those studies are designed to show that the drug works and is safe.

Once phase 3 results are in hand, if they're good, those can be put together in a package and sent off to the FDA. The regulators will then take a look at that package. Maybe they'll have an advisory-committee meeting to discuss the findings. Then, eventually, they'll come up with a yes or no, either allowing or not allowing the drug to reach the market. That's the quick and dirty of how a drug proceeds from that preclinical work on mice to post-approval commercialization.

Harjes: Something that's really important to consider there is that the data from phase 1 and phase 2, while there will be press releases about the efficacy of the drug in the studies, that's not really the point of those studies. In fact, they're so small that you can't quite rely on those numbers to actually hold up when you get to phase 3. We see this all the time. Our "Never Will I Ever" is about preclinical, but I'll even say that we both go in with a healthy amount of skepticism investing in companies that are just in phase 1, or even just in phase 2, because from that point all the way through FDA approval is still a long road. At that point, all you really have is safety data. It's safety data in a pretty limited number of patients.

Campbell: Right. Those trials are not being statistically designed to show significance and efficacy. You really do, like you said, have to view these very skeptically. You might say to yourself, "This is really intriguing and I want to watch it and pay attention to it." But remember, with that 90% failure rate, drugs going from phase 1 to commercialization, the odds are stacked against you. If you break it down by phase, you still have extremely high levels of failure rates. A drug may succeed from moving from phase 1 to phase 2, but that certainly doesn't mean it's going to go from phase 2 to phase 3.

Harjes: Right. Let's talk about one example of a drug that had that particular issue. This is a company that we've talked about on the show a good bit, and this is Juno Therapeutics. Juno is developing CAR-T therapies, and they had a drug called JCAR015. It was, at one point, its lead drug candidate. They had to halt their phase 2 trial back in July of 2016, after two patients suffered from cerebral edemas. Juno changed the drugs that were used in the preconditioning for the trial, thinking that would solve the problem, only to have another patient die, so they had to scrap the entire program in March.

Campbell: Right. It was shocking to investors, because the data from phase 1 looked, quote-unquote, so good, right?

Harjes: Yeah, I think the efficacy data was something people were getting very excited about.

Campbell: Right. This was a stock that was $65 a share in early 2015. This was a stock that was a highflier based upon what still may be the ability of these CAR-T drugs to help T-cells better spot and destroy cancer cells in the body. We actually have some interesting news this week that we're not talking about on this show, but stay tuned. Look on The Motley Fool for other articles on it.

Harjes: I'm so excited for this.

Campbell: Novartis has their CAR-T drugs under consideration at the FDA, and there's a big committee meeting going on this week about it. So these are important drugs, right, Kristine? But that doesn't guarantee that each individual drug that's being studied by each individual company will be the one that actually makes it across the finish line.

Harjes: Exactly. So Juno spent $46.4 on this million drug, and it wound up in the trash bin. That doesn't mean that all is for naught. With Juno, they have other drugs that are under development. We've certainly covered them before on the show. If any listeners are looking for more information there, shoot us an email, [email protected]. I'll happily send you some links. At this point, for Juno, it's like, they really ended up getting too overhyped about this early-stage efficacy and ended up having that main drug wind up in the clinical trash bin.

Campbell: Yeah. You thought you were going to be able to get this drug potentially in the marketplace around 2018, and with a 90%-plus response rates in phase 1 trials, people were thinking, "I guess the safety profile will be manageable." But at the same time, if you really dug into that phase 1 data, you saw there was a lot of cytokine response storms, which can be life-threatening and cause problems. Then, if you look back to what happened in mid-2016, with the first cases of brain swelling, warning bells have to be going off. As these trials get increasingly bigger, and patients have been on these medications for longer periods of time, you learn new things about them. So it's very hard to say, in a very small trial involving a dozen or a couple dozen people that have been evaluated for six or 12 months, that you know this drug is going to be both efficacious and safe over a longer period of time. It's really "buyer beware."

Harjes: Yeah. And that's the thing with a lot of these really compelling new types of therapies like CAR-T. It has a really good story behind it, but because there aren't any approved drugs in the category on the market, you don't really have any long-term safety data, or even safety data with really large amounts of people. You mentioned the Novartis advisory-committee meeting. That's one of the biggest things they're going to be talking about today -- are these drugs in general, CAR-T treatments and also Novartis' specific drug, which is called CTL019 -- are these drugs safe? Another thing they need to consider is, can you duplicate the drugs over and over again, such that the drug that the patient ends up getting is actually the same thing that went through trials and was approved by the FDA?

Campbell: Right. And how do you ensure that you're going to be able to maintain that level of quality as you try to decrease the amount of time vein to vein? Remember, with CAR-Ts, you're removing the T-cells from a patient body, sending them off to a facility to have them re-engineered, and then sending them back to be reinserted back into the patient. So the shorter the time, the better. However, as you're shortening that time, how do you guarantee that you're going to be able to maintain the same level of quality and consistency as you were during the clinical-stage trials, where vein to vein was a longer period of time?

Harjes: This episode was supposed to be about "Never Will I Ever," right? So I invested in Juno, so maybe that's not the best example. But I do have another example that I want to talk about of something that actually is way too early stage for me to invest in. This is even more highly hyped, I think, than CAR-T type of medical development, and it's also even earlier-stage. This is CRISPR, which is a gene-editing technology. Most medicines today are designed to manage diseases or their symptoms; CRISPR acts further upstream by editing the genes themselves that lead to the disease. But this is a space that is really, really in its infancy.

Campbell: This is a fascinating science, and I recommend everybody who's interested in biotechnology, research CRISPR Cas9 and learn more about it, because it could potentially be very, very intriguing and an entirely new approach to treating genetic disease. I also would recommend, after you've done that research, that you sit on your hands and don't buy or sell any stocks within this class that are working on CRISPR yet.

Harjes: And look back at that Post-it note on your monitor.

Campbell: Yeah, 90% failure rate. As a refresher, CRISPR, what we're talking about here is leveraging a really cool thing that bacteria does for use in humans. Bacteria, the way that they battle back against invaders, is they memorize a piece of the DNA of the invader, and their own genetic code, and then they attach it to some genetic scissors. And when that invader returns again, the bacteria is smart enough to go out, find it, cut it in the place responsible for replicating so that it can't replicate in the future. Scientists determined, "Why can't we use that same approach to go in and edit specific portions of our own genetic code to resolve problems with, say, malformed genes, or proteins that aren't getting built correctly by those genes?" And while it's really fascinating, the potential could be very big for these, as you mentioned, this is all pre-clinical stuff. This has not been tried in humans yet. I think one of the first companies considering putting this into humans will be CRISPR Therapeutics -- symbol there is CRSP. They're looking at trying to do something beta-thalassemia. I do not think that this is at any point near a point where you should say, "Yes, you should be investing in this area." It's just too early stage.

Harjes: Right. They're looking to file their initial new drug application, their IND, in late 2017. That's extremely early. It hasn't even hit human trials.

There's another company called Editas Medicine. Their ticker is EDIT, edit, which I actually find rather fitting for a gene-editing company. They're also waiting on their IND for their drug, which is LCA10. That now won't be ready to be filed until mid-2018.

Campbell: The CRISPR story, Kristine, is also interesting because it brings up an entirely different risk than we were talking about previously with our example with Juno, and that's with the intellectual-property rights.

Harjes: Right. That is all over the place with CRISPR technology. There are a lot of people who are trying to lay claim to the patents, because it does have so much promise.

Campbell: Essentially, you have research that was done at UCLA versus research that was done at MIT, and the founders of these respective companies have licensed the research that was done at those different universities. Of course, whoever owns the first patent is the one that will get the spoils. So they're suing each other, trying to figure out whose patent is valid and whose patent isn't valid, and that's not resolved yet. Right now, it's leaning toward Editas. However, appeals are getting filed, and things could change. Of course, if things change on the patent front, again, that throws your entire reason for buying each one of these individual stocks up in the air. It could be good or bad. Who knows. And with a 90% failure rate, do you really want to take on the intellectual-property risk as well?

Harjes: Absolutely. Given that there's that risk, there are also risks about the safety of this technology. In May, Nature Methods published an article criticizing CRISPR Cas9 for causing a whole host of unintended or off-target mutations in animal trials. That's really not good for a technology whose promise is precision. This caused Editas and CRISPR Therapeutics both to fall on the news. But it turns out, when you reviewed that study, it itself was pretty flawed. Regardless of what the data behind that particular article says, I think it's a good warning signal that these are going to be extremely volatile stocks. They're extremely pricey stocks. Editas, for example, has a market cap of almost $700 million. I'll remind you, their most advanced drug candidate is still waiting to have its IND filed. That's pretty insane. And yes, on one hand it does speak to the promise behind this technology. But on the other hand, that is just way too rich and early-stage for my blood.

Campbell: Mine, too. If you want to back up for one more second here, Kristine, just on talking about the safety, that study on safety, it may be helpful for listeners to think of it this way: If you go to mail a letter, do you just send it to 123 Main St.? No, you tell a town, a state, a ZIP code. The problem, potentially, with using CRISPR Cas9 is that right now they can only get it to 123 Main St. And you could actually get this letter delivered to 123 Main St. in New Hampshire or Virginia, in Georgia. There are off-target places that CRISPR Cas9 could end up snipping. And you don't want to cleave in the wrong place in genes. That can create all sorts of havoc, including other cancers, crazy things. So yes, there's a lot of work that still needs to get done here. These are already, like you said, worth hundreds of millions of dollars in market cap, even though they're not even in clinical trials yet. Too risky for my blood.

Harjes: Right. When it comes down to it, this is something that we will be watching. I remember at Fool Fest a couple of months ago, we were talking healthcare at a panel, and somebody in the audience asked us a question about CRISPR, and I'll say now the same thing I said then, which is that it's fascinating, and we're watching it, and as soon as it becomes investable, we'll start covering it more deeply and giving our thoughts about where we think money is best placed in this industry.

Campbell: That's fantastic. That's the takeaway -- that and, of course, the 90% Post-it that's on your screen.

Harjes: Yeah. So this word of caution about not investing in new technologies when they're too early-stage probably appears in all sectors, but I kind of like how we're applying it to healthcare, because it's pretty easy to set definitive lines, where you can say, "I'm not going to invest in something until I've seen phase 1 data or phase 2 data." So it's up to you to decide, what is your level of tolerance for risk? It might change from different technologies, given your level of understanding them, and also the position size that you're going to create. It's also about what helps you sleep at night. 

If you guys are enjoying this theme week, "Never Will I Ever," please let us know at [email protected], or on Twitter, @MFIndustryFocus, where I believe we've tweeted asking you guys, our Twitter followers, what you will never invest in. And if you have anything you'd like us to hit on future shows, we would love to hear it. We're also always exceedingly grateful for reviews. If you like Industry Focus, please leave us a review on iTunes. It is so helpful for getting our podcasts in front of new listeners, and it's also good karma points for you.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Shout-out to our man behind the glass, Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!