For years, we've seen the failure of clinical trials targeting Alzheimer's disease based on a controversial hypothesis. Biogen's (BIIB 2.03%) aducanumab may become the newest addition to the list. Should shareholders be worried about a material decline in the stock price if the U.S. Food and Drug Administration (FDA) rejects the drug's Biological License Application (BLA) filing?
The uphill battle to treat Alzheimer's
The most common drugs in development for treating Alzheimer's disease rely on targeting plaques in the brain called beta amyloids, which are hypothesized to damage neurons and lead to chronic memory loss. The theory, however, is not well supported by experimental data.
Over the past 20 years, billions of dollars have been invested annually in potential therapies, and more than 90 clinical trials involving beta-amyloid targets have been developed. The number of drugs that have made it from clinical trials to FDA approval, however, is exactly zero. Now, Biogen's aducanumab might become another also-ran.
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In short, an original interim analysis in April 2019 of aducanumab's phase 3 trials concluded there was a high possibility the experimental studies were futile and should be closed. Biogen did close them.
Six months later, however, subsequent analysis in cohorts of patients receiving the highest dose (10 mg) of aducanumab for the longest period of study time (18 months) showed statistically significant improvement in patients' cognition against placebo. On release of the news, shares rallied almost 30% despite the trial failing to meet the primary endpoint in other cohorts.
On its surface, the analysis presented by Biogen seems sound. Currently, Biogen is targeting Q3 2020 for the submission of a BLA for aducanumab.
On a deeper level, however, the clinical data described above seems to be yet another example of the post-hoc fallacy. The supposed benefit witnessed by patients in the specific cohorts does not necessarily have to be attributed to the experimental drug. Instead, a variety of variables within the eligibility criteria of the trials themselves, such as age, progression of disease, weight, diet, drug use, etc., might have played a significant part in these results.
Puzzled? Take the case of Eli Lilly's (LLY -2.63%) solanezumab. In 2016, the drug's phase 3 trial failed to meet its primary endpoint of improvement in patients' cognition. After the results were published, however, the company claimed that a subcohort of patients with mild dementia experienced clinically significant response when the experimental drug was administered. Afterward, the company launched a new investigation consisting of only patients experiencing mild dementia with Alzheimer's. That new investigation subsequently failed.
Therefore, I am skeptical the FDA will approve aducanumab's BLA on the basis of two failed clinical trials that showed efficacy only post hoc. At the very minimum, I could see the FDA demanding an additional clinical trial for aducanumab for patients receiving the highest dose to confirm its efficacy. In such a scenario, investors in Biogen will likely be significantly disappointed, because the company will need to wait additional years before definitive results on aducanumab are released.
Takeaways for investors
Although aducanumab will likely not succeed, the company is nonetheless a solid buy. Since the beginning of the last decade, Biogen has seen consistent revenue growth year after year, and it allocates more than 15% of its sales to research and development efforts. The stock is also trading at a great discount.
In terms of multiples, Biogen is valued at just 10 times earnings and 4 times sales. The company is marginally leveraged, possessing roughly $2.5 billion in long-term debt net of cash compared with more than $12 billion in shareholder equity.
Recently, Biogen also prevailed in a patent dispute with Mylan (MYL) regarding the former's multiple sclerosis drug, Tecfidera. As a result of this victory, more than $4 billion, or 30%, of Biogen's revenues will be safeguarded from generic competition until 2028.
Hence, Biogen remains a solid value pick for investors in the biotech sphere. However, it is wise to wait on a decision from the FDA on aducanumab before opening a stake, because the stock price could drop significantly should the filing be rejected. Reducing or eliminating exposure from binary events is a prudent action to take with all portfolios, especially if the event has a high risk of failure.
