A lot of everyday investors recently lost a bundle betting that the Food and Drug Administration would approve an experimental drug from Orphazyme (ORPH). There were reasons to suspect arimoclomol might earn approval to treat a rare life-threatening disease. There were also plenty of reasons to keep your portfolio far away from Orphazyme's attempt to earn approval for its first drug.

On June 18, Orphazyme told investors that instead of approving arimoclomol, the FDA sent the company a complete response letter asking for more information. Crusty old biopharmaceutical industry analysts who have seen dozens of companies like Orphazyme follow similar paths weren't surprised, but a lot of investors were shocked.

Upset investor with head in hands.

Image source: Getty Images.

If you're one of the investors who recently lost big betting on Orphazyme, don't beat yourself up. To an untrained eye, drugmaker press releases often look important when they mean nothing. At the same time, the most important details are easy to miss if you don't know what to look for.

What looked important 

Last year, the FDA appeared to encourage Orphazyme to file a new drug application for arimoclomol as a treatment for Niemann-Pick disease type-C (NPC). In September, the agency began a priority review of Orphazyme's application with an expected action date in March.

Last December, the FDA pushed arimoclomol's action date forward by three months to June 17, 2021. The agency communicated some potential speed bumps in Orphazyme's application package that prompted the delay, but the company assured investors not to worry.

What you might have missed

Arimoclomol is a novel promoter of heat-shock protein (HSP) activity, which should help patients with NPC. Patients with this rare but severe lysosomal storage disorder can't clear lipids properly. There is an association between heat-shock proteins and lysosomes that act as cellular delivery vehicles. Unfortunately, evidence that pulling this lever produces a benefit for NPC patients is very thin.

During the 50-patient pivotal study that Orphazyme used to support its ill-fated application, NPC patients treated with arimoclomol showed a 63% relative reduction in disease progression compared to the placebo group.

Unfortunately, there were some problems with Orphazyme's results. First, the difference measured wasn't strong enough to be considered statistically significant. It was close enough, though, that excluding a few patients with the most severe form of NPC led to a 77% relative risk reduction that was significant.

Also, 39 out of 50 of the NPC patients in the study were taking Zavesca off-label while the others were using other standard treatments. Zavesca's a treatment from Johnson & Johnson (JNJ 0.23%) that is approved by the FDA to treat some lysosomal storage disorders. In a placebo-controlled study with just 50 patients, it wouldn't take much for Zavesca to skew the results.

Lastly, arimoclomol failed to show a significant improvement on the clinical global impression improvement (CGI-I) test. This is an overall assessment of a patient's response to a new medication. The FDA requested CGI-I measurements specifically, so missing this goal should have been viewed as a bright red light.

Scientist in the laboratory.

Image source: Getty Images.

What's next for Orphazyme?

The FDA doesn't necessarily reject applications for potential new drugs. Instead, the agency asks for more information in the form of a complete response letter. According to Orphazyme, the FDA wants additional data to confirm the evidence of efficacy that the company submitted in its application package.

Additional data means Orphazyme will need to pay and wait for another long clinical trial. Without any products to sell, the company burned through $101 million in 2020. It began 2021 with just $116 million in cash, so investors can expect a secondary offering soon that significantly dilutes the value of any shares they're holding now.

Arimoclomol is the only product candidate in Orphazyme's clinical-stage development pipeline. Normally, market values for companies in this much distress get completely flattened. At recent prices, though, Orphazyme's market cap is still up around $560 million. That's probably more than this company should be worth if the FDA had actually approved arimoclomol, a treatment for a tiny population of fewer than 2,000 Americans.

Frenzied investors stuck inside their social media echo chambers could keep this troubled biotech stock elevated, but it's probably about to sink much further.