Passage to prosperity

• Article 2 of 7
• iSight, July 2003
• View a PDF of the original article ~ 207K

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For many biotechnology companies, reaching clinical trials, or being ‘in the clinic’, is almost an end in itself. Gone are the days when platform companies were heralded as ‘hot’ because they could “mitigate against product risk” – a quote from only four years ago. These days, note company directors and many investors, it is all about products – ‘therapeutic’ products and nothing else.

Therapeutic blockbusters, or at least profitable niche compounds, represent big revenue opportunities. It is, therefore, not surprising that many biotechnology companies are pursuing that course.

But not all the answers provided in the course of conducting clinical trials are black and white – and those companies that pin their hopes on certain trials at a certain point in time producing exactly the results they were looking for are bound to end up disappointed. What is important is that companies learn to communicate their results effectively, says Sabine Kaiser, investment director, Healthcare, 3i Germany. There is a real art to communicating ‘grey’ results at the right time, she says: “Companies need to learn how best to make their results presentable and how to time their communication.”

Most companies have now moved towards a product-driven business model and have focused on getting their own products to the market – or only partnering after phase II clinical trials when their products have shown their effectiveness and have created substantial value.

Arakis, a drug developer based in Saffron Walden in the UK, for instance, prides itself on the fact that it has, so far, not had to partner with any big pharmaceuticals to get its products to phase II trials. “That’s where the most value is,” says CEO Ken Cunningham. “We don’t want to dilute it for our shareholders.”

With the same goal of maximising value in mind, Vienna-based cancer immunotherapy company, Igeneon, has been pushing its lead project into phase III without a partner. “With sufficient focus, a smart clinical strategy and the commitment of key investors, reaching phase III is doable even for a small biotech company,” says CEO Hans Loibner.

CLINICAL NECESSITY
Just getting to clinical trials is an achievement in itself. Those venture capitalists that are still investing in early-stage biotechnology opportunities look at ‘time to clinic’ as a crucial factor in their investment decisions. As a result, reaching the ‘clinic’ often triggers milestone payments from existing investors. And for those companies that want to be able to attract new investors, it is almost a prerequisite.

However, reaching the clinical stage brings new challenges to biotechnology companies, their corporate partners, their investors and the financial community as a whole.

Many of these challenges relate to the internal capabilities of the company. “What made the company successful until now is different from the skills, organisation, resources and experience needed for the clinic,” says Thomas Pollare, investment director, 3i Sweden.

“Research-driven organisations must become development-driven ones and they have to manage a large network of external partners and service providers,” he says. “All of this must also be done to strict industrial standards, and brilliant research must be channelled into a standard pharmaceutical product development process.”

Companies can take different approaches to this, either buying in expertise or outsourcing it. In any case, internal expertise must be built – in order to stay on top of the projects when they are being outsourced or partnered.

Of course, finding the right partner or partners for outsourcing is also key. Companies such as Covidence, based in Eschborn, Germany, manage clinical trials on behalf of other companies. What are the benefits of going to a smaller supplier? “We know exactly what the customer wants and we know all the problems that one can have as a customer,” says CEO Luc Opsomer. “Our motto is ‘evidence with confidence’.”

THE COMMUNICATION PROBLEM
But while the capability-related challenges of executing clinical trials are now broadly accepted, and managers of biotechnology companies, as well as their investors, are pushing to actively confront them, there is one challenge that is not often anticipated – communication.

Because so much emphasis is now being placed on the status and the advances of a company’s clinical development programme, the communication challenges have been compounded.

As Arakis director Andy Richards admits, one of the key components to any biotechnology company’s success is image. If a company gets its communication wrong, says Richards, it can expect “bad things” to happen.

Many of those ‘bad things’ are counterintuitive. For instance, the value attributed to a company by market analysts or investors can actually drop once compounds have moved into the clinic. The reason is that, when a product reaches the clinic, the valuation criteria of a company tend to narrow.

The value of an immature company is attributed to its early-stage pipeline or its technology. For more advanced companies, says Kaiser of 3i, this early stage is often completely disregarded in a bid to reduce the complexity of the valuation calculation. Instead, investors only look at the most advanced compounds. Suddenly, there is no longer any value attached to the early pipeline or the technology, while the risks associated with the more advanced compounds will be heavily scrutinised.

Interim results, in particular, can be very damaging if handled incorrectly and are something of a catch 22. On the one hand, they are very useful for showing whether or not a company is on the right track, and for giving essential answers about safety. Such results can also help to fine-tune further clinical trials and thus increase the likelihood of reaching a statistically significant result.

The problem is, by definition, such results are interim and ought to be treated as such. They can provide answers to certain questions and give hints as to future outcomes, but they are not meant to provide a final result. But for impatient investors looking to read the future, such ambiguity is difficult to handle. A company can, therefore, gain or lose considerably, depending on how it positions its interim results or even whether it reveals them at all.

Even encouraging clinical results, which should testify to the advancement of a company, can create problems if handled inappropriately. And if everything isn’t going to plan, it is even more important to take the right communication approach.

PAINFUL LESSONS
US company Biomira is only too aware of the consequences of communication. The interim analysis of the phase III trial of its Theratope cancer vaccine in September 2002 had repercussions in the market that could possibly have been avoided.

Biomira publicly placed high expectations on the results of this interim analysis – including filing a shelf registration in May 2002 at well above the company’s value in anticipation of the results. According to the press, the purpose of the interim analysis was to accelerate registration on the back of extremely positive results. While the company’s stock price rose significantly in the lead up to the interim results, it dropped equally sharply when they did not deliver the desired outcome. As BioCentury put it, given that the jury was still out on the efficacy of Theratope, the company’s bumpy ride might well have been the price for being too anxious.

Of course, it may not be up to the company whether or not it releases results, or how any communication is phrased. Corporate partners provide funding, expertise and, most importantly, credibility to biotechnology companies, whose products they in-license or jointly develop. Many biotechnology companies, therefore, carry out clinical trials in association with these partners. However, when it comes to releasing the results of individual studies, views on appropriate communication – or whether there should be any communication at all – vary widely.

For a large pharma partner, there is clearly much less at stake, so how it words the communication and when it releases any news is, in many cases, less important. Also, the pharma partner and the biotechnology company may have completely different interpretations of the results.

“One word of a pharma is worth more than 1000 words of the biotech company,” warns Michele Garufi, CEO of French biotechnology company NicOx. In February, news was released regarding a phase II study of one of NicOx’s compounds, which was jointly conducted with a large pharma company. The market reaction to the news was a steep fall in NicOx’s stock price, and the stock only recovered a little when NicOx released a clarifying statement three weeks later. Although the overall news was not actually that bad for a phase II study, the way it had been presented adversely affected public opinion and that has been hard to repair.

KEY STATISTICS
In a number of business areas, such as consumer goods, companies tend to proclaim themselves as market leaders by defining their market segment sufficiently narrowly. There is a similar tendency in biotechnology. As a number of analysts have commented, companies tend to slice and dice their data any way they can to show that their drugs work.

However, showing why a drug has worked better in a certain group of patients can pave the way to a better understanding of the drug and further successful trials. And while saying that a drug has worked in a sub-group means, reading between the lines, that it has failed in the overall set-up, the news itself might not be too bad at all, depending on the expectations that were attached to it beforehand.

When results are good for a sub-group only, how the markets respond is far from predictable, even if the results are presented properly. Compounding the problems of communication, sometimes even political correctness can come into play. Californian company VaxGen found itself confronted with this conundrum earlier this year when it was trying to explain to the public that, while the overall outcome of its phase II study for a HIV drug was disappointing, there were some encouraging results in two sub-groups – Afro Americans and Asians.

As BioWorld put it, “Mainstream media scrambled to get a handle on the story, as reporters tried not to embarrass themselves in efforts to be both accurate and politically correct.” The stock market’s reaction was unambiguous though, justified or not – the company’s share price dropped 47.3% on the day of the announcement.

While it is difficult to control the specialist press and the financial community, it can be even harder trying to control the non-specialist press. But this is essential. When dealing with life-threatening diseases, such as AIDS or cancer, too much is at stake when the cure is promised for tomorrow. Patients’ hopes are raised prematurely and in vain. The company loses credibility in the specialist community, and it might find itself being pulled into a compassionate need programme.

One trap, in particular, for young biotechnology companies to avoid is the local press, says Pollare of 3i. “They need to be wary of how they position themselves right from the start as they are likely to get a lot of interest, particularly if they are not located in a cluster. If in doubt, they should shy away rather than be too open, even if the founders’ ego would like to see it otherwise,” he says.

OUTSIDE INTERFERENCE
There is also a large amount of ‘uncontrollable’ outside communication going on that can have a direct impact on a company. Investment banks and analysts that cover biotechnology tend to have sophisticated valuation models in place that discount the expected future revenue streams of products to derive a current value for the company.

What is crucial is the discount rate. This usually depends on the stage and type of the product, as well as the validity of the target. Approval for the drug Erbitux, for instance should lead to a higher probability of success for other products in development against the EGFR, and could thus improve the respective companies’ valuations.

There is also the effect on the whole sector of high-impact scientific events, such as ASCO, the annual meeting of the American Society of Clinical Oncologists.

According to a review by DZ bank, the news in 2001 was predominantly positive, with good news coming from companies such as Novartis, Roche and Idec. This led to positive share price reactions overall.

But after ASCO 2002, the whole sector nose-dived following negative company news from companies such as Imclone.

This year, the reverse was true. Encouraging news from companies such as Genentech and Imclone turned the sentiment around, leading to speculation about whether the advances in cancer could even fuel the next biotech rally.

The conclusion that companies have drawn from recent examples is to try to avoid unnecessary hype prior to an upcoming regulatory body’s decision, as well as unnecessary disappointments.

“However, deciding simply not to communicate steps on the way is not the right approach either,” says Loibner. “Investors and the scientific community have the right to be adequately informed about the progress of a company’s development programme. To balance this justified need for information with the scientific community’s reservations against non-peer reviewed results is one of the challenges that must be met,” he adds.

Indeed, today’s companies need to learn that communication is as much a requirement for a biotechnology company as funding and technical skills.

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