Biotechs And Their Trials By Fire

by: Michael J. Ray

The term "Trial By Fire" is a common phrase in today's society. The meaning can vary but the basic essence of the phrase is a state of pain or anguish that tests patience, endurance, or belief. Nowhere does that term hold true better than investing in speculative biotech. Nowhere else will you find the twists and turn, the ups and downs, and the wholesale drama play out like in this sector. Needless to say, it is not for the faint of heart and one will need an iron will to invest here. But it is not just the investors that are put through the trials; it is the companies that are also being tested in this manner. Obviously some make it through and go on to be very successful while others just can't take the heat and burn into cinders along with their share price. Today we find several companies (and their investors) that are going through the fire so to speak. The question is if they will emerge from the fire hardened and ready for battle, or will they be thrown on the scrap heap with so many other failed companies. Let's see who is currently experiencing the pain and anguish hoping to pass the tests and join the big-time.

Arena Pharmaceuticals, Inc. (ARNA)

ARNA is a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing oral drugs that target four major therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. ARNA is currently going through its trial by fire in a big way. Lorcaserin is their most advanced investigational drug candidate and is intended for weight management. After completing a pivotal Phase 3 clinical trial program for Lorcaserin, they submitted a New Drug Application to the FDA, for regulatory approval in December 2009. The FDA in turn issued a Complete Response Letter in October 2010, and the advisory committee voted negatively on the drug as they were concerned about the drug's safety. Needless to say, a thumb down from the FDA based on safety issues is viewed very negatively by the marketplace. In turn, the stock’s price plummeted and investors bolted from exposure to the company. Before the bad news, the stock traded around $7 in September of 2010 but after the FDA decision the stock fell to less than $2 where it trades today. Any investors left holding shares are certainly going through their own trial by fire as they wait for ARNA to answer the FDA’s safety questions and reapply for the drug's approval by the end of 2011. The question is will ARNA emerge from the fire victorious or just another toasted ember.

Keryx (KERX) and AEterna Zentaris (AEZS)

KERX and AEZS are the next two companies that are going through a trial by fire. Unlike ARNA though, these two companies and their investors are feeling the heat from external sources that are outside the companies control or dealings. Before dwelling into this though, we need to make sure that investors understand the relationship between these two companies. Both of these companies are counting on the drug Perifosine. This product is an oral anti-cancer drug that is designed to treat advanced colorectal cancer, but also is being tested on other forms of cancer. If ultimately proved successful, this drug will have far reaching effects and be a game-changer in some respects. KERX has the rights to Perifosine for North America and the drug was derived from a commercial license agreement in 2002 with Zentaris AG, which is a wholly owned subsidiary of AEterna Zentaris Inc.

A view from inside the company seems to paint a pretty picture. In late August to early September 2011, the news for the drug and both companies was positive. KERX receiving word from the independent Data Safety Monitoring Board that the company should carry on through the Phase 3 study that will cover 465 patients with advanced colorectal cancer. To add to this, KERX released Phase 1 / 2 clinical trial results of Perifosine in patients with multiple myeloma where they stated that the drug was well-tolerated and the survival data in this study was encouraging. Along this same time frame, AEZS also release positive press to further tout the drug and their great expectations. But it was at this point that both of the companies and their investors were going to be thrown a curve ball. It happened in early October 2011 when KERX shares started to trade with unusually high volume for no reason. At the time there was no negative news afoot but the shares sold off steady. When the dust settled, it was determined that the mutual fund Fidelity Management (who was the largest institutional holder at that time) reduced its holdings by a substantial amount. Obviously, no reason was given but the trial by fire had begun for those left holding shares. Needless to the say, the message boards for both stocks filled with endless comments and rumor as to the reason for the sell-off. Just as the events were being digested by investors, a stream of negative articles from a popular financial website hit the Internet. As the swirl of negativity increased, the fire burned hotter and hotter and many investors jumped ship driving the price down even further. Since then, the price seems to have stabilized at $3 as investors try to sort out all the news. As the tests for the drug are nowhere near being complete, it seems that the trial by fire will continue for both KERZ and AEZS until more definitive answers are found much later in 2012.

Advanced Cell Technology (ACTC)

If you want a great example of a company under a heavy trial by fire situation, then look no further than Advanced Cell Technology. The fate of ACTC still hangs in the balance as epic forces pull investors this way and that while the story unfolds. The positives for the company are outstanding if not truly earth shattering. Sitting in ACTC's possession is their proprietary "single-cell blastomere" technique where human embryonic stem cell lines are derived without destroying embryos. This gives the company a distinct advantage as recently the European Court of Justice ruled that that an invention must be regarded as “unpatentable” if it requires the destruction of human embryos. To this positive note, one must consider ACTC's Phase 1/2 clinical trials for Stargardt's macular dystrophy and dry age-related macular degeneration being conducted here in the U.S. as well as the clearance from the U.K. Medicines and Healthcare products Regulatory Agency to begin similar Phase 1/2 clinical trials in Europe. To be able to bring an end to macular degeneration is in itself an outstanding feet. But when one considers that the actual treatment can be used to address over 200 other eye aliments, then you really got something in the making. Behind that is the Phase II-approved Myoblast autologous adult stem cell therapy for the treatment of chronic heart failure, advanced cardiac disease, myocardial infarction, and ischemia; as well as the Hemangioblast program for the treatment of blood and cardiovascular diseases which is currently in preclinical development. With patents across the U.S., Europe, and China you have more than enough for investors to cling to during this trying time. And a trying time it is at ACTC. The mishandling of past financial dealing, at a time when the company was near bankruptcy, has resurfaced to challenge the faith of even the most diehard investor.

Several lawsuits have recently been files against the company. In an SEC filing, ACTC estimates that the number of shares of common stock such holders of convertible notes could demand would be approximately 8 million, and the number of additional warrants convertible into shares of common stock such holders of warrants could demand would be approximately 380 million. Boil it down and you get dilution on a massive scale, and that is enough to scare just about any investor. This trial by fire the company and investors are going through is intense to say the least. Those investors still holding onto shares will find salvation in just one thing and that is if the science is found to work. If the science fails then ACTC will fold like a house of cards. If it works, then ACTC will be the tip of the spear for regenerative medicine and take its place next to the largest pharmaceutical companies on the planet.

MannKind Corporation (MNKD)

MannKind is another interesting company going through its own challenging time. The company is a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diabetes, cancer and inflammatory and autoimmune diseases. Though the company has other products in the pipeline, it will be the drug Afrezza that will be the driver. The complete package is a drug-device combination product, consisting of AFREZZA inhalation powder pre-metered into single use dose cartridges and the AFREZZA inhaler. MNKD has invested quite a large sum of money trying to get this product to market, and the company as well as investors believes it to be a game changer. The trial by fire for both started when the company received two rejected applications from the FDA to sell the product. MNKD received two response letters regarding its insulin platform from the FDA, in March 2010, as well as January 2011. It seems that the FDA wanted more information before it was going to make any final determination. Investors held their breath as a stock that traded close to $10 a share in January 2011 fell to the $3 range where it trades now. The issue is that gathering new data is an expensive proposition and Mannkind was bleeding cash at a pretty good rate.

To keep the dream alive, MannKind slashed its work force by over 40% and implemented cost cutting measures. Then in late September 2011 MNKD announced that it planned to sell senior secured discount notes due 2017 to raise about $370 million. The proceeds were to be used for development and operating capital, including clinical trials of Afrezza. Some of the funds were also going to be set aside to prepare for commercialization of Afrezza by continuing the expansion of the manufacturing facility and general corporate purposes.

So the trial by fire for MNKD and their investors is coming to a conclusion. It will come down to Afrezza and how the FDA will judge it. The final FDA decision will set the stage for the company for many years to come. A nod from the FDA would allow the company to move forward and give them the potential to start generating meaningful revenue. A thumb down vote would be devastating as MannKind's other product candidates are still in the early stages and won't be ready anytime soon.

BioCryst Pharmaceuticals, Inc. (BCRX)

BioCryst is another company who is currently undergoing a trial by fire and has been for some time. BCRX designs, optimizes and develops novel small-molecule pharmaceuticals that block key enzymes involved in infectious diseases, cancer and inflammatory diseases. BCRX currently has three novel late-stage compounds: Peramivir, a neuraminidase inhibitor for the treatment of influenza, BCX4208, a purine nucleoside phosphorylase (PNP) inhibitor for the treatment of gout, and forodesine, an orally-available PNP inhibitor for hematological malignancies. Unlike our other companies, BCRX trial by fire resulted from a media frenzy and outright fear that revolved round their drug Peramivir. The drug and BCRX was thrust into the limelight during the influenza scare back in 2009. At that time the media conjured up images of past pandemics like the Spanish Flu that ravaged the planet in the early 1900's. In an attempt to combat the deadly disease, Peramivir was approved for emergency and as a result the stock price appreciated at a rapid pace. The good news was that influenza epidemic never materialized but as the hype faded, so did the stock price. The drug seemed to work but was destined to go back to testing.

Still today there are steadfast investors who are invested in BCRX as the make their way through the approval process. At this time, Peramivir is available in the U.S. only through participation in the ongoing Phase 3 studies. The drug is approved in Japan and Korea, and will address unmet needs in the treatment of influenza as needed. BioCryst has activated approximately 50 additional clinical sites to support enrollment in the ongoing Phase 3 efficacy study. Sites in Europe, North America and India are prepared to enroll patients during the upcoming Northern Hemisphere flu season. A planned interim analysis to confirm or revise the study’s current enrollment target of 160 patients for the primary efficacy analysis population is expected to be conducted no later than mid-2012.

If that was not enough, BCRX also has in early October 2011 issued news about its other product BCX4208. The company stated that BCX4208 met its main goal in a clinical trial that tested the drug in patients who have not been helped by an older gout treatment. The mid-stage trial compared four different doses of BCX4208 to placebo. Patients received one dose of the drug or the placebo every day for 12 weeks, and all patients were treated with allopurinol, the standard treatment for gout. However, those patients had not reached treatment goals on allopurinol in the past. In the test three of the four doses were significantly more likely to reach a treatment goal than patients who took the placebo.

It will be interesting to see how BCRX emerges from its trial by fire. It has a nice clinical pipeline of desirable products that will valuable if the company can just get them to market.

Dendreon (DNDN)

Not all companies come through their trials intact. DNDN is a great example of a company who seemed to have conquered the hazardous biomedical gauntlet, only to meet with disappointment thus far. After FDA acceptance DNDN went on a building spree and touted their Provenge, an immune therapy intended to treat prostate cancer, as a big money maker. The company once expected as much as $400 million in Provenge sales in 2011. Investors reveled in the glory as the stock price hovered in the $40s with the promise of much bigger payouts to come. Little did they know that the trial by fire was not even done yet, not even close. In August of 20111 DNDN stated that it would not reach the expected $400 million and that the growth in the third and fourth quarters would be tepid at best. As they pulled their guidance, the shares sank at an alarming rate in afterhours trading and settled in the teens for a time.

Fast forward to the present and we find DNDN still in the fire. In the first three quarters of 2011, Dendreon has reported $145.6 million in gross sales of Provenge. Analysts once expected sales in the $372 million in 2011, but on average, they now expect $213 million. For 2012, analysts are now forecasting around $373 million in sales of the drug, down from more than $870 million. DNDN price per share dropped even more to around the $6.50 range. Needless to say, DNDN's trials and tribulations are not over yet and they still have much to prove to regain the respect of their investors.

Disclosure: I am long KERX, BCRX, ACTC.OB.

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