Drugbaron Blog

August 19, 2013 comments

Dendreon proves the risk of investing in “Silver Medal” companies

Once upon a time, getting a drug approved by the FDA was an automatic green light for commercial success.  If a drug was good enough to pass muster with the regulators, it was a virtual certainty it would find favour with physicians, payers and patients.  There was no such thing as market risk for an approved drug.

But times have changed.

Today, winning a regulatory approval in any major jurisdiction is as hard as it has ever been – but garnering that approval is no longer the magic golden ticket it used to be.

Early in 2010, just ahead of the approval of Dendreon’s Provenge the industry consensus was for blockbuster impact. Yesterday, David Nierengarten of Wedbush Securities valued Dendreon at precisely zero (although the market still ascribes a value of around $500m to the company).

Nierengarten’s analysis takes into account the disappointing sales of Provenge, as well as the mountain of short-maturity debt that was taken on to support the manufacturing scale-up and launch for Provenge (an eye-watering $620million due by 2016).  Such leverage made perfect sense if the approval of Provenge had augered blockbuster sales – but history has proven that to be over-optimistic.  2012 sales were just over $300m, and 2013 sales will be lower, though there is no official forecast as management heads roll at the company.

According to the Wedbush report, shareholders will be lucky to avoid bankruptcy, or at best massive dilution as the convertible debt is restructured.  It is difficult to argue with their conclusions.

The problem can be traced to over-enthusiasm around the approval.  Did it make sense to bet so large on the basis of the available data?

Several factors suggest that, even at the time, it should have been possible to predict the current state of affairs.  First and foremost, the clinical effect of Provenge therapy was relatively modest, albeit somewhat superior to some other new cancer therapies – a 4.1 month increase in overall survival.  Was that sufficient to justify the very high cost (just under $100k driven in part by the complexity and cost of delivering a cellular therapy, compared to a conventional small molecule or even a biological drug)?

On top of that, doubts about the robustness of the data were quick to emerge.  Although a 2010 NEJM editorial was quick to suggest that Provenge would result in a substantial improvement to the poor prognosis for castration-resistant prostate cancer, within months questions were being asked about the analysis of the IMPACT trial data.  At issue was a pre-defined age cut-off that should have been applied, but which was changed apparently post hoc.  While the details are complex, the bottom-line is simple enough: the change improved the apparent efficacy because older patients (the majority) do substantially less well on Provenge.

Even without questions about the data analysis, the statistical significance of the effect (p=0.03) in 512 patients was marginal, and although a similar effect had been seen in two earlier trials, coded D9901 and D9902a, it only reached significance in one of them.  In reality, therefore, even if the data supported regulatory approval there was a very real chance that even the modest extension of overall survival in the trial data was over-stated, and that as physicians and patients began to use (and pay for) the treatment outside of a clinical trial they would be disappointed by the marginal efficacy.

A third factor that might have served as a warning was the lack of enthusiasm to acquire Dendreon from the global pharmaceutical companies.  They read the data with a good deal more sophistication than the public market analysts and rightly (as it turned out) predicted the dismal commercial end-game for this product.  At the very least, they were prepared to put only a lower valuation on the asset than the public markets.  That should have served as a warning for those who enthusiastically loaded the debt to forge ahead into the marketplace on the basis of equivocal clinical data.

Today, the most negative of those predictions is coming true.  Regulators may have approved the product (most likely rightly so) but payers, physicians and patients are voting in the marketplace right now on the commercial success of the product, and the polls make stark reading.

This salutary tale is a timely reminder to public market players about the complex new world of healthcare.  If, a decade ago, it was hard to predict who would win regulatory approval, its now a whole lot harder to predict who will earn the only kind of approval that matters: market approval.

There is evidence that investors are getting the message: Mannkind saw its shares rise 10% when it released positive Ph3 data for its Afreeza inhaled insulin product candidate – data which suggests the product may now be approvable.  But it quickly gave back those gains as a more considered analysis of the broader data package beyond the headline primary end-point yielded a less encouraging picture.  Primary end-points may drive regulatory approval, but market approval requires broader excitement about the clinical profile of a new drug, if that drug is to garner a price premium over generic alternatives.

With Mannkind, and also with Chelsea Therapeutics’ Northera, investors were already wary because of the history of regulatory challenges these products faced.  Whether they would have looked so carefully behind the clinical headlines for a fresh-faced product candidate is open to debate.

And for Arena and Vivus, even a rocky regulatory path did little to quell investors enthusiasm as the regulatory approval was eventually won for Belviq and Qsymia.  Perhaps the ever-growing importance of obesity as a market sector, coupled with the lack of viable therapeutic alternatives, was right to fan those flames – but the jury is still out as to whether either or both of these therapies will garner major sales.  As with Provenge and Afreeza, the clinical data for both these compounds is a curate’s egg: just how effective is Belviq? Just how safe is Qsymia?  It will be the judgment of the marketplace, and not the regulators, on these questions that will determine the size of the return for the investors in these companies.

The lessons for public market investors considering backing a company to take its drug product into the marketplace – and there are likely a lot of those around at the moment given the heat in the biotech IPO market this summer – are two-fold.

First, remember that a company looking to take its product into the marketplace in its own has almost certainly been rejected as an acquisition target by big pharmaceutical companies throughout the long history of the drug candidate in the road to approval.  DrugBaron has called them “silver medal companies” for precisely that reason.  The gold medal product candidates have been snapped up by pharma before they file an NDA or consider a solo product launch.

Second, remember that it is market acceptance, rather than regulatory acceptance that is the true arbiter of value.  And the ability to predict the behavior of physicians, patients and payors lies in the reading of the clinical data beyond the headlines of the primary end-points.

And this second point ties into the first – the detail of the clinical data that is made public is often a tiny fraction of what the company itself knows.  Quite often it is difficult, if not impossible, to find enough information to make a proper call.  But remember that if the product candidate looks sufficiently exciting you can be pretty certain one of the major pharma companies (at least) at some point in the history of the company took a proper look under the bonnet.  Big pharma may have its detractors, but those guys really understand how to do due diligence.

The million dollar question has to be: if it wasn’t good enough for them, why do you think it will be good enough for the small biotech to make it a commercial success?

Its not to say there are never any surprises out there.  But small public companies launching drugs are, in general, a risky proposition.  Anyone still holding Dendreon stock knows that only too well.  And Dendreon is unlikely to be the last time this story plays out.









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