Wednesday, November 7, 2012

Why Phase 3 Trials Fail: What Investors Need to Know

As readers of Seeking Alpha and investors in biotech know, investing in development stage biotechnology / biopharmaceutical companies is fraught with risk. Early-stage companies burn cash funding R&D and clinical trials, with no guarantee of approval (or even revenues in the future given successful approval!). As clinical trials progress, they become more expensive due to increases in both duration and patient size. Click here for a background on clinical trials.

Sometimes this development risk is mitigated by licensing deals with big pharma in which clinical trial costs are shared and upfront / milestone payments are made in exchange for future revenues. However, when these products do not live up to expectations it negatively impacts share prices, sometimes dramatically (19/20 small molecule candidates that commence clinical trials will fail; 4/5 biologics will fail as well). Let us look at some studies of clinical trials and delve into the numbers more globally.

According to a McKinsey study analyzing phase 3 trial failures reported from 1990-2002, the results had numerous implications for pharma. Focusing on small-molecules (656 Phase 3 compounds), 58% were successful. This of course implies a 42% failure rate; a staggering sum given that both safety and efficacy should have already been demonstrated. The analysts were able to evaluate in depth 73 of the 212 failures. Shockingly, the results indicated that a full 50% of these compounds failed for a lack of efficacy compared to placebo! Another 30% were for safety concerns and the final 20% could not be proven safer or more effective than the drugs already on the market. Phase 2 is designed to establish efficacy in patients, and clearly there are shortcomings at this stage. The efficacy failures could be attributed to two main causes: mechanistic novelty and endpoint definition. Qualitative endpoints failed more often than defined endpoints. Interestingly, according to the study:

“An even more significant predictor of failure was novel mechanism. Even after the patient evaluation process in Phase 2, drugs that used novel mechanisms of action failure more than twice as often in Phase 3 as those that used known mechanisms. And if drugs had both novel mechanisms and less objective endpoints, they failed 70% of the time.”

According to another recent article, oncology candidates are particularly risky, with only 8% of candidates achieving approval that completed phase 1. Along the same lines as the McKinsey study, the author cites the Investigational Drug Steering Committee (IDSC). In general, the IDSC:

“encourage[s] the use of progression-free survival as the primary endpoint, randomization, inclusion of biomarkers, and incorporation of newer designs,” while acknowledging that “objective response as an endpoint and single-arm designs remain relevant in certain situations.” “There is a lack of predictability in the way Phase II trials are conducted in cancer because few are done in a comparative fashion.”

Similarly, the experts interviewed for the article point out that the key rests in powerful, well-designed phase 2 studies. A great piece (from the author’s Alma Mater) addresses the lack of efficacy in Phase 2, and suggests a remedy.

While companies will never be able to eliminate all of the risk in large-scale clinical trials (e.g. some long-term side effects are not foreseeable), hopefully the field as a whole can become more efficient, helping patients and investors alike. While the above data is not perfect or exhaustive and definitely not indicative of future success / failure, it is a good place to begin for any investor interested in development stage firms. In particular, all sources consulted agreed on one thing: phase 2 results are paramount. The implication appears to be that management cannot always be trusted to make the correct decision (possibly because of loss of objectivity about compounds, pressure to deliver on announcements, pipeline incentives, etc.).

Below, I’ve compiled a list of companies that are currently in phase 3 trials, with a brief description. While by no means passing judgment or assigning odds of success, I am simply trying to give investors a more complete picture. For the rewards of successfully owning stocks in the right companies, look no further than Amgen (AMGN), Genentech, Genzyme (GENZ), etc.

5 Companies Currently in Phase III Trials

Medivation (MDVN): enrollment was completed in a CONCERT study, a 12-month, Phase 3 clinical trial in patients with mild-to-moderate Alzheimer's disease (AD) evaluating the potential efficacy of dimebon (latrepirdine*) when added to ongoing treatment with donepezil. Medivation is conducting this study under its collaboration agreement with Pfizer Inc. (PFE). Data expected in the first half of 2012.

Raptor Pharmaceutical Corp. (RPTP): announced it has reopened enrollment in its Phase 3 clinical trial of its proprietary delayed-release oral formulation of cysteamine bitartrate (DR Cysteamine) in patients with nephropathic cystinosis. The pivotal Phase 3 clinical trial is designed as a study of the safety, tolerability, pharmacokinetics and pharmacodynamics of DR Cysteamine compared with immediate-release cysteamine bitartrate. Data expected sometime in Q2 2011.

Amarin Corp. (AMRN): reported the completion of patient randomization for its ANCHOR trial, a pivotal Phase 3 trial of AMR101. The ANCHOR trial is a multi-center, placebo-controlled, randomized, double-blind, 12-week pivotal study to evaluate the efficacy and safety of 2 grams and 4 grams of AMR101 (ethyl-EPA) in patients with high triglyceride levels from 200 mg/dL to less than 500 mg/dL who are also on statin therapy. Patients in this trial are characterized as having high triglyceride levels with mixed dyslipidemia (two or more lipid disorders) and are at significant risk of cardiovascular disease. No omega-3 based therapy is approved by the FDA for treating this patient population. This is being conducted under a Special Protocol Assessment (SPA) agreement with the FDA. Data expected sometime in Q2 2011.

Omeros Corp. (OMER): expected to announce data from our Phase 3 program evaluating OMS103HP in ACL reconstruction in the first quarter of 2011. OMS103HP is added to standard arthroscopic irrigation solutions and perfused through the joint during surgery. Each active ingredient in OMS103HP was selected for its anti-inflammatory action, and each agent interacts with discrete molecular targets involved in the acute inflammatory response.

Oncolytics Biotech, Inch (ONCY): announced in October 2009 that it had reached an agreement with the FDA under the Special Protocol Assessment (SPA) process for the design of a Phase 3 trial (randomized, two-arm, double-blind, multicentre, two-stage, adaptive Phase 3 trial) examining REOLYSIN in combination with paclitaxel and carboplatin in patients with platinum-refractory head and neck cancers. The primary endpoint for the trial is overall survival (OS); secondary endpoints include progression free survival (PFS), objective response rate (complete response (CR) + partial response (PR)) and duration of response, and safety and tolerability of REOLYSIN when administered in combination with paclitaxel and carboplatin.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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