Small-cap Isis Pharmaceuticals
Isis' cancer drug Affinitak is in the final stages of human clinical trials, results of which are due within days and will dictate whether or not Isis files Affinitak for market approval. For a company with a market value of only $215 million (at $3.90 per share), this drug's approval is of enormous importance.
Affinitak is in trials for various cancers, but the current phase III trial targets non-small cell lung cancer (NSCLC), an especially deadly disease without a cure. With strong phase II results in 2001, Isis signed Affinitak into a licensing deal with Eli Lilly
Lilly agreed to invest in Isis and fund Affinitak's later trials in exchange for exclusive worldwide commercialization rights for NSCLC. If the drug sells, sales are expected to reach $550 million to $800 million annually, and Isis will receive milestone and royalties payments. With approval, Isis will manufacture Affinitak for Lilly for additional revenue of about $120 million over the next three years.
This potential revenue is significant, but even more important in the next few days is the potential validation of Isis' business. Recently, its science and Affinitak have been called into question.
Isis falls from $9 to $4 on speculation
In November 2002, Isis was trading at $9. Here's where the story gets kind of strange.
On Dec. 6, 2002, UBS Warburg analyst Andrew Gitkin issued a press release suggesting Affinitak's trial results would be unsatisfactory. He reportedly garnered the information by speaking with clinical investigators conducting the phase III trials. On his report, the stock's volume soared and the price, predictably, began to plummet.
By afternoon, Isis issued a public response to Gitkin, claiming it was impossible for anyone to gather meaningful information about the 600-patient study taking place across the country.
Isis wrote that nobody had access to all the clinical data, or even a sizeable portion of it. The trial design prevented early insights since no single location had more than 5% of the enrolled patients. Additionally, the trial database was secure and no one had accessed it. Finally, Isis said analysis of the data would not take place until March.
Given how clinical trials are performed and how uncertain results are until 100% of the data is collected and analyzed, odds are poor that Gitkin's information was complete. If he is proved right -- that the trial is unsatisfactory -- luck and favorable odds will have played a larger role in his success than fact.
Mr. Gitkin would have needed to call at least 10 trial locations and speak to enough willing investigators (pushing the bounds of what's legal) to have at least 50% of the trial results (300 patients) personally told to him. Without having at least half of the "results" (actually, he'd just get personal opinions from people involved), he could not have made a meaningful statistical judgment -- at least not one strong enough to take public.
That hasn't stopped the stock from falling almost endlessly since his report, however. A phone call to UBS Warburg's equity analysis department found Gitkin unavailable.
I wanted to ask him: "If you flip a coin 10 times and it lands tails every time, does that mean it has a greater chance of coming up tails all the time?" Perhaps he spoke to 10 people and got 10 negative comments. Then I wanted to ask: "Do you think a person with negative insight or positive insight would be more interested in breaking protocol and spilling the beans to you?"
Let's move away from Mr. Gitkin for today.
A simple sounding science
Affinitak and the other 12 compounds in the Isis pipeline are based on a controversial science called antisense, which Isis leads. Antisense is meant to block the production of a disease-causing protein before it occurs, as opposed to attacking a harmful protein that has already been produced, which is how most drugs work.
Messenger RNA (mRNA) delivers a sequence of nucleotides (called a sense sequence) within a cell, telling the cell which protein to produce. Antisense essentially binds a complementary strand of mRNA to the original mRNA, thereby cancelling out the command and blocking the production of the undesired protein.
Affinitak is designed to inhibit the production of protein kinase C-Alpha (PKC-Alpha), which is believed to play a role in the production of cancer cells. Taken with chemotherapy, Affinitak increased patients' median survival time by 38% in phase II trials. For unqualified success in phase III, it must show at least a 33% increase in median survival time.
One concern is that there are several versions of PKC-Alpha, so the cancer-causing protein could adapt and "outwit" the antisense solution provided by Affinitak. Although the science of antisense sounds simple (you simply target genes that produce harmful proteins and turn them off), the body isn't that simple. The body's adaptability cuts both ways.
Doubters of antisense
Isis has the only antisense drug on the market -- Vitravene for CMV Retinitis in AIDS patients, which gained approval in 1998. Skeptics say Vitravene is an anomaly, and point to past antisense failures.
The last time Isis got a major drug close to the market was in 1999. The target was Crohn's disease. Despite early positive results, late-stage trials showed a surprising disappointment. Isis reviewed results further and the drug is now in phase III trials again, and performing well, but the setback has cost it four years. The setback also crushed Isis' stock in 1999. It recovered to new highs by 2001, only to tank again.
Conclusion
Discussion about Isis has heated up on the Fool's discussion board, along with speculation about the coming results. Within a few weeks, we'll know whether Affinitak performed well, had mixed results, or bombed. Only wholly positive results are likely to help the stock -- and they would probably help it a great deal from the current share price below $4 (a nine-year low).
Isis is one of the most heavily shorted stocks on the Nasdaq when measured by shares shorted against its average daily volume. By every indication, the stock market is saying that trial results will be unsatisfactory. It'll be especially instructive if the stock market is proved wrong. However, if the market is right, it could be viewed as another blow to nondisclosure and market fairness. The stock's three-month descent points to a possible information leak that I'm hoping won't be backed by trial results.
In last week's column (Investing Lessons vs. Stock Picks), I mentioned the search for small companies that could significantly improve one's returns. I view Isis as one such company. If Affinitak's results are positive, the company -- with its deep pipeline and ample cash -- is much closer to an excellent future, and the stock is bound to rise. If Affinitak's results are poor, however -- despite the pipeline having another phase III drug -- only questions will arise.
All eyes are on Isis.
[The Motley Fool wrote about Isis in-depth in the January issue of Motley Fool Select.]
Jeff Fischer doesn't own Isis shares, but has sold puts on it, which means he's willing to buy shares at a certain price. The Fool has a full disclosure policy.
