Is Provention Bio a Bad News Buy?

Sometimes the market overreacts to a negative development. Shares of Provention Bio (PRVB) recently plunged after the FDA issued a Complete Response Letter for its diabetes drug teplizumab. In this Motley Fool Live video recorded on July 7, Motley Fool contributors Keith Speights and Brian Orelli discuss whether or not Provention Bio is now a bad news buy.

Keith Speights: Provention Bio shared some bad news from the FDA this week, shares plunged 26% or so on Monday. Is this a stock that might be a bad news buy, in your opinion?

Brian Orelli: Yes. The company is trying to get its diabetes drug, teplizumab, approved for patients at risk for type 1 diabetes. The clinical trial is a success. It delayed insulin dependence by a median of at least two years compared to placebo.

But the FDA issued a complete response letter which is a euphemism for rejection, basically. The FDA apparently doesn't have any problems with the efficacy or safety. But this was due to manufacturing issues.

Smaller companies sometimes use small-scale manufacturing batches in their clinical trial, but then they want to use large-scale for commercial production. The FDA requires them to study the two independent productions to show that they're equivalent. This is called a bridging study.

They did it in healthy volunteers but apparently it failed to show comparability when measuring pharmacokinetics. That's the time course of how the drug moves through the body. This is a problem with investing in biotechs.

Investors have a lot of insight into clinical trial data, but they don't have a lot of insight into manufacturing of the drugs. I think this is a reason why you have to factor in this possibility, especially with small biotechs, into your valuation of the companies because you don't have any insight into the manufacturing of the drugs and that can cause problems for approvals.

Provention thinks that it can use the data from the ongoing study of patients in newly diagnosed type 1 diabetes. The data will be available later this year. Hopefully, it'll be sufficient although the company isn't 100% sure because they haven't seen the data yet.

There were a few other manufacturing issues. But the company thinks that they've either addressed them already with the FDA or can fairly quickly.

Then there's finally one more issue, which is the company has a contractor that does the fill and finish that's basically putting the drug into the vials and slapping a label on them. That contractor, I don't think they named the contractor, but they are having issues with the FDA. They've got to wait for them to -- that's unrelated to Provention's drug -- but those issues need to be addressed before the prevention can get an approval.

I think it's really hard to handicap the valuation given all the unknowns. But Provention isn't all that expensive. It's under a $400 million market cap. I think it's probably undervalued here. But given all the unknowns, I don't think this is a back-up-the-truck event.

If you're risk-tolerant, maybe a small position might be appropriate. But I think given all the unknowns, I think it's really hard to value the company and say whether it's a good deal or not at this price.

Speights: This is not a biotech stock that I personally follow. However, you mentioned something, Brian, that the FDA will give a complete response letter for one of three reasons basically: safety problems, efficacy problems, or manufacturing issues. By far, the best out of those three is if a company has a rejection for manufacturing issues because those tend to be a lot more fixable than safety or efficacy issues.

Orelli: Generally a lot quicker because you can deal with manufacturing issues a heck of a lot faster than you can run an entire new clinical trial.