Aside from an acquisition, earning marketing approval for a drug candidate is the single biggest event that can happen for a development-stage pharmaceutical company. It marks the beginning of the transition to commercial operations and tends to spark a celebration among investors. But sometimes the celebration is premature.

Puma Biotechnology (NASDAQ:PBYI) offers a particularly painful case study of what can go wrong after a promising drug product launches. The company's breast cancer drug, Nerlynx, was once widely expected to become a blockbuster (a drug that generates over $1 billion in annual sales), but severe side effects have led to high discontinuation rates among patients. Growth virtually stalled in 2019. The pharma stock has fallen over 90% since its peak in late 2017.

While the precipitous fall in the stock price has been terrible for shareholders, Puma Biotechnology has a realistic plan to get Nerlynx back to growth. What do investors need to watch to gauge progress in 2020?

Chalk drawing of a fish jumping from a small fish bowl to a larger fish bowl.

Image source: Getty Images.

Despite the headwinds, the company had a respectable 2019

Nerlynx is approved as an adjuvant treatment for individuals with early-stage HER2-positive breast cancer who have completed treatment with Herceptin. It disrupts cell signalling processes involved in tumor growth that are enabled by proteins in the HER family. 

While Nerlynx is only approved for 12 months of use, most of the first patients to receive the drug discontinued treatment significantly sooner (usually in the first month) due to severe diarrhea. That curtailed year-over-year growth figures beginning in the fifth quarter after launch. Case in point: Full-year 2019 revenue grew just 5% compared to 2018, the drug's first full year on the market. 

Investors and Wall Street analysts have been less than forgiving -- and for good reason. But investors would also have to acknowledge that Puma Biotechnology managed the setback for Nerlynx relatively well. 

Last year, the business focused on growing product sales (albeit slowly), reducing operating expenses, advancing international partnerships, funding several studies to potentially expand the drug's use, and developing clinically validated regimens for reducing side effects. All of those efforts led to a respectable year of operations in 2019. 

Metric

2019

2018

Change (YOY)

Product revenue

$211.6 million

$200.5 million

5%

Total revenue

$272.3 million

$251.0 million

8%

Operating expenses

$311.4 million

$345.7 million

(10%)

Operating income

($39.1 million)

($94.7 million)

N/A

Data source: Company press release. YOY = year over year.

Wall Street isn't looking for respectable operations. Analysts want to see a return to growth before reconsidering the company's $450 million market valuation. What can Puma Biotechnology do to deliver on those demands?

A successful 2020 hinges on these developments

Investors will be watching two areas in 2020 to gauge progress:

  1. whether Nerlynx dosing changes lower discontinuation rates, and
  2. outcomes from ongoing clinical trials and regulatory submissions.

In late 2019, Puma Biotechnology released data from a study evaluating what antidiarrheal combinations could effectively reduce the severity of diarrhea. Whereas a combination of Nerlynx and loperamide resulted in 20.4% of individuals stopping treatment due to diarrhea and 44.5% discontinuing treatment for any reason (including diarrhea), a combination of Nerlynx, loperamide, and budesonide lowered those discontinuation rates to just 10.9% and 20.3%, respectively. 

More promising, doctors found that combining a dose escalation regimen of Nerlynx with loperamide led to just 3.3% of individuals stopping treatment due to diarrhea and 20% discontinuing for any reason. 

Puma Biotechnology was quick to put the knowledge into action. In the fourth quarter of 2019, nearly 29% of new patients were started at a reduced dose with the goal of increasing it over the course of treatment. That compares to only 6.6% of patients starting at the reduced dose in the prior-year period. 

Investors cannot celebrate yet. During the fourth-quarter 2019 earnings conference call, Puma Biotechnology said it expected the escalating dosing regimen will lower the number of bottles sold initially with an "increase in the potential revenue per patient" in future quarters. In other words, it will take time to know if the new dosing schedule will have the intended effect.

Puma Biotechnology is also eager to expand the use of Nerlynx, which is the only asset in its portfolio and pipeline. There are a number of international regulatory decisions expected soon. Most markets are small, although partner Pierre Fabre launched Nerlynx in select European countries at the end of 2019, while regulators in China are expected to approve the drug in the first half of 2020. 

While international sales could create a decent royalty revenue stream for Puma Biotechnology, the company is forging ahead with expanded use in the U.S., where it owns full rights to the drug. 

Event

Significance

Decision on supplemental New Drug Application (sNDA) for Nerlynx and Xeloda (a chemotherapy) as third-line treatment for HER2-positive metastatic breast cancer

The U.S. Food and Drug Administration (FDA) is expected to hand down a decision by April 2020. Analysts expect the indication could achieve peak annual sales of $300 million.

Phase 2 results for Control

Positive results over a longer duration could bolster confidence in the new dose escalation regimen. Results expected by the end of 2020.

Phase 2 results for Summit

Exploring the use of Nerlynx in HER2-mutated solid tumor cancers, including breast cancer and cervical cancer. Results expected by the end of 2020.

Data source: Company presentation.

Puma Biotechnology expects to explore additional expansions in HER2-positive breast cancer and HER2-mutated solid tumor cancers, but earning marketing approval for the Nerlynx and Xeloda combination therapy is the nearest and most important potential milestone.

A path to growth, but too early to tell

It has certainly been easy to write off Puma Biotechnology in recent years. Nerlynx stumbled in the second full year of its launch due to high discontinuation rates and, considering it's the only asset owned by the company, investors headed for the exits for good reason.

While investors should remain skeptical of the company's ability to pull itself out of its rut, there does appear to be a path forward. The question is whether success is defined by Nerlynx returning to its former blockbuster potential or something far less than that. Unfortunately, investors won't really have enough data points for a few more quarters, although getting the sNDA approved in April could provide a significant boost for the beaten-down stock.