The dumb way to invest in this market…
It was all going well for shareholders of Immupharma until April 17th…
The share price of this drug developer had been rising nicely in anticipation of the results of a final Phase III trial of its Lupuzor drug for Lupus…
With five million patients worldwide suffering from this autoimmune disease (when the body’s immune system attacks healthy tissues), and no new treatment since the introduction of Glaxo’s Benlysta drug fifty years ago, the stage was set and the prospect was appetizing.
Assuming Lupuzor could command a price similar to Benlysta’s annual $30,000 per patient tag, Immupharma was touting the ‘potential for multi-billion dollar sales.’
Patients in this fateful trial were either given Lupuzor or a placebo alongside the standard treatment. But it turned out that the Lupuzor group had fared little better than the placebo group.
Immediately Immupharma’s shares lost three-quarters of their value. Ouch!
I write the Breakthrough Biotech Alert, a fortnightly newsletter that describes the advancing world of biotechnology and makes occasional and very selective share tips.
Since financial commentators and PR agents in their ignorance conflate biotechnology with early innovative drug research, I can forgive you if you expect my newsletter to tip the likes of Immupharma.
But I don’t.
If you really understand what it is all about you will realize that there are far smarter ways of investing in biotechnology, ways that don’t involve punting the likes of Immupharma.
Most drug trials fail. But for investors following the story of Immupharma the possibility of failure was never mentioned.
Instead, since Immupharma received permission for its Phase III trial of Lupuzor in 2012, they have been tantalized by its potential success…
They have been reminded of the successful outcome of the Phase II trial of Lupuzor (which finished as long ago as 2009)…
They have been awestruck by medals and distinctions showered upon Lupuzor’s inventor Dr Sylviane Muller…
They have seen the pot of gold at the end of the rainbow implied by management’s prognostications of global licensing deals, distribution partnerships, or an outright sale of Lupuzor – ‘whatever is best to maximise shareholder return’…
And they have dutifully stumped up the money to finance the trial which, as is the normal way with these things, overran its timetable.
Only for it to all end in tears when the balloon pops.
This is not a one-off…
In 2016 Circassia, a self-styled ‘world-class specialty biopharmaceutical business’ sent its lead candidate, a drug for people allergic to cats, into its final trial.
Leading up to the result, there was not much evidence of doubt. Powered by a £275m share placing Circassia built a commercial operation to sell its cat and other allergy treatments. Like Immupharma, its treatments were ‘next-generation’ and based upon ‘innovative modes of action’.
So it came as a nasty shock when, it announced that its cat allergy treatment performed little better than the placebo. Result? A 65% collapse of the share price.
Both Immupharma and Circassia tried to salvage some crumbs of comfort. The placebo group had done unexpectedly well. A particular sub-set of patients had responded well to the new treatment. The trial results would be a valuable basis for further investigation.
But the damage to shareholders is done. Both Immupharma and Circassia are losing money hand over fist and despite some progress in some of its other research programs the share price of Circassia has not recovered at all.
Investing in ‘biotechs’ is high risk/high reward. We are told that it is exciting and that the rewards can be huge. But losing three-quarters of my money in the blink of an eye is excitement I can do without.
As I said, most drug trials fail. A recent study tracked 21,143 new drug compounds that entered trials between 2000 and 2015. It actually recorded a higher success rate than previous studies. Even so, it found that only 13.8% of new drugs make it all the way through clinical trials.
It is true that most failures come in Phase I. It also true that the average is brought down by the particularly poor record of cancer drug trials, and that the success rate is better when drugs are given to patients who exhibit particular biomarkers.
All the same, if you are betting on the results of a drug trial the odds are not in your favour.
Perhaps you should leave it to the professionals… and who better than ‘Star Fund Manager’ and IFA’s darling Neil Woodford. With the help of his team of experts and much ‘due diligence’ he invested in Circassia, with catastrophic results.
He also invested heavily in the US drug developer Prothena, whose lead drug NEOD001 aimed to treat AL amyloidosis, a rare disease caused by the accumulation of amyloid, an abnormal protein produced by bone marrow.
Here is what Woodford said in April 2017 at which time Prothena accounted for 14% of the valuation of his Patient Capital Trust:
‘One stock I wish to highlight to demonstrate my conviction and investment strategy is Prothena – a company I have known for many years….News from the company has significantly reinforced our positive view on the stock and we took advantage of temporary share price weakness to add to the Company’s position…..My increasing conviction is due to the progress that Prothena has made with its leading drug development candidate, which is for AL amyloidosis….There are currently no approved drugs for AL amyloidosis and in 2018 we will learn the results of two late-stage trials, which, if positive, would result in a significant revaluation of the company…..As with any therapy in clinical trials, there is a risk that one or more of them fails to deliver the positive outcome that we hope for and expect…… However, I am convinced that this business is poised to deliver incredibly attractive long-term returns to its shareholders and to improve the lives of patients suffering from these awful, debilitating diseases.’
So what happened?
A year later Prothena said that it was ‘discontinuing development of NEOD001. The Phase 2b PRONTO study did not meet its primary or secondary endpoints.’ Once again patients on the drug did no better than patients on placebo. Prothena’s shares fell by 70%.
‘Disappointing,’ said Woodford. Indeed.
These disasters reveal that even those closest to the action cannot predict the outcome of drug trials.
That’s because they are conducted by third parties and in great secrecy. Ultimately the sponsoring company will receive a brown envelope from the contracted trial manager, which it will open with the haste of a student unveiling his exam results.
If it is a public company, the results will immediately be relayed to the stock market. But the drug developer simply does not know the results in advance, so don’t be deceived by its expressions of optimism, necessary as they likely are to attract vital funding.
The key to successful investment in biotechnology is to avoid blind shots like Immupharma, Circassia and Prothena.
You need to understand what biotechnology really is. When financial commentators talk about ‘biotechs’ they are either referring to drug developers or sometimes to producers of drugs produced by biological processes rather than chemical synthesis. But biotechnology is a much broader subject than this…
It is all about harnessing the forces of nature and altering these forces to suit human needs. For sure it is about human medicine and exciting new frontiers like immuno-oncology and gene therapy. But it also about plant science and animal breeding.
Since I started my biotechnology newsletter six years ago I have been amazed to learn the extent to which we already tamper with the natural world. And as we learn more about genes and the mechanisms of living organisms, and refine our ability to direct these processes the pace is accelerating.
There are some great investment opportunities in this field, in areas like diagnostics and scientific equipment. But you are very unlikely to get rich by betting on new drugs. Consider this. In the year 2000 there were about 5,000 drugs in clinical trials. Today the number is over 250,000.
How many these will be routinely prescribed by doctors a decade from now? I should be surprised if it were even one thousand.
But that’s where the Edge of the Markets team – myself included – aim to help. By helping you to invest where the odds are a great deal better.
Editors Note: Another great insight in to a thought-provoking area of technology and the pit-falls of investing in such a complex industry.
Tom is right when he says we are here to help you not only learn about these interesting but complex technologies but also how to invest in them well.
It’s not just in biotech where we can help…
We’re honoured to have James Altucher on the Edge of the Markets team too. He’s a prolific figure in the crypto investing space, with connections in all the right places.
And the good news is, he’s happy to share everything he knows with you. In fact, he’s created a ‘Crypto Masterclass Package’ – perfect for those new to crypto investing. And there’s a way you can get hold of this for FREE.