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January, 201911:18 PM



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Seeking Alpha in Medical Treatment Stocks

Seeking Alpha in Medical Treatment Stocks

By Bob Kohut 10.12.2018


Most high-risk retail investors remain in a never-ending pursuit of “seeking alpha”, with alpha being a return on investment that beats the market.  There is a US-based website bearing that moniker that provides investment advice from retail investors for retail investors.

The most ardent of these intrepid souls search for the holy grail of retail investing – the coveted “ten-bagger”, a term popularised by US investor Peter Lynch for a stock that has appreciated ten times its purchase price.  Given the difficulty of meeting that standard, a more diluted reference to “baggers” is prevalent among the high-risk crowd, with a 2-bagger assigned to a 100% gain and a 5-bagger for a 400% gain.

It doesn’t take long for a newcomer to share market investing to discover that small-cap biotech/life science stocks developing medical treatments and pharmaceuticals are fertile ground for finding “bagger” stocks.  However, the ground is equally fertile for a rapidly deflating “bagger.”

On 23 October ASX Life Sciences company BARD1 Life Sciences Limited (BD1) announced the world’s first successful blood test for early detection of breast cancer.  Given the size of the market -- $20 billion globally – and the dominance of the mammography as a diagnostic tool – investors were eager to get into this stock.  BARD1 is also developing blood tests for the early detection of ovarian and lung cancer.  The share price also spiked following a similar announcement of a successful “test” of the company’s ovarian cancer screening test back in March.


In both cases the welcome news of successful testing was followed by a trading halt pending the announcement of a capital raise.  This is a pattern some savvy investors expect to see as companies spend considerable dollars to get to the testing point and then lack the funds to take the next steps.

Far too many retail investors obsessed with finding “baggers” forget or fail to learn some basic facts about success in this highly volatile sector, where the path to commercial success is long, costly, fraught with risk, with few companies succeeding.  The following graph is from a “must-read” website for anyone thinking of investing in this sector – genesisresearchservices.com.   Genesis Research is an Australia-based company offering help to companies getting into clinical trials.

From Idea to Clinical Trials to Market

In January of 2018 a study conducted by researchers at the Massachusetts Institute of Technology (MIT) found that of all the drug development programs that enter the process, 13.8% make it to final regulatory approval for market release.  The scientific community was impressed with the improved outlook from earlier studies indicating a 9.6% success rate, with different disease treatments showing different rates.  The current MIT study indicates the success rate for oncology drugs is 3.4% while infectious disease drug treatments reach final approval at a 33.4% rate.  While the scientists may be encouraged, the investment community should be looking at the 86.2% that don’t make it, but with many investors in hot pursuit of “baggers”, the failure rate is too often overlooked.  

There are further differences in likelihood of success depending on the clinical trial stage of the drug. Other studies have shown that roughly 70% of the drug treatments in a Phase 2 clinical trial do not make it to Phase 3 where the approval odds increase dramatically.

Announcements move stock prices up or down, but, the “holy grail” is a market release announcement.  Positive results such as those announced by BARD1 need to consider the stage in the process where they occur, and the nature of the “testing” reported.  Just how far along is BARD1 toward the market release goal?  Investors who don’t take the time to study the clinical trial process will be hard-pressed to answer that question. 

To further differentiate market announcements there are two more stocks to consider.  The first is Factor Therapeutics (FTT), a developer of wound care treatments, and the second is Paradigm Biopharmaceuticals Limited (PAR), a developer of pain treatments.  The following chart tracks the year over year share price movement of both.


Both companies announced results from Phase 2 Clinical Trials, one which was positive, and one which was not, as is obvious from the share price movement.  While the Factor results disappointed, investors in both companies should have been aware of the high risk of failure in Phase 2 Trials.  

The differences between trial phases helps understand the importance of being fully aware of what stage the company is at.  Borrowing again from the genesiresearchservices.com, we find the following summary chart.


Successful results from a pilot or exploratory study are much less likely to maintain positive upward stock price performance than positive results for a Phase 3 study, a short step from final approval.  

For investors who work hard to understand issues relating to a potential investment it is difficult to fathom the sad reality that some retail investors pour their money into pharmaceutical or medical device stocks without understanding what happens in each of the clinical phases on the path to final approval.

Note a true test of what effect the drug or device has on humans does not happen until Phase 2.  The announcement of a Phase 1 Study is hardly cause for boundless optimism as it involves healthy people to determine safety, yet it can have that impact.  

Phase 3 studies confirm results from a Phase 2 or 2B study with additional comparative measures. In certain cases, Phase 2 studies are done in two parts, with Phase 2A determining dosage and Phase 2B determining how effectively the drug treats the target condition.

From the actual press releases from BARD1 – with a blood test considered a medical device treatment -- it appears the much-heralded study was in the pilot or exploratory stage, using samples of malignant and benign breast tumours, not human subjects.  The release stated company plans to develop the breast and ovarian cancer testing in parallel, with expected commercialisation by early 2021.

The point is not to diminish the positive results but to ensure investors fully understand how early this treatment is in the process.  BARD1 may have a bright future with its lung cancer diagnostic test in development as well.   In contrast to Factor Therapeutics, with only one treatment in trials, BARD1 has three, although all are based on the same technology platform.  Micro-cap biotechs of the “one trick pony” variety are arguably among the most volatile and risky stocks on any market.

Paradigm Biopharmaceuticals (PAR) has a business model born of a new age of technology – drug repurposing or repositioning.  The idea is to take a successful drug compound for treatment of one condition and using modern technology “repurpose the compound to treat a different condition.  The compound in question is pentosan polysulphate sodium (PPS) to be repurposed for treatment of a variety of inflammatory disorders, such as knee and joint issues, general edema, and alphaviral arthritis diseases.

Repurposing an already approved drug compound dramatically reduces the time from concept to market.  Given the existing approvals on safety issues, the repurposed drug can quickly move into Phase 2 efficacy-oriented studies.

Considering Paradigm’s recent history, established in 2014 and listing on the ASX in 2015 and impressive share price performance since, the business model looks sound.  Despite some common biotech bounces, the stock price is up 280% since listing.


The company launched a Phase 2B trial to study the effects of PPS on patients suffering osteoarthritis (OA) of the knee and bone marrow lesions (BMLs) due to OA in 2017.  Paradigm had already successfully completed a Phase 2A study of PPS treatments for BMLs resulting from anterior cruciate ligament (ACL) injuries. 

Successful results began coming in during the month of November of 2018, with the company designating its PPS treatment as ZILOSUL® and is in the process of recruiting commercial partners for distribution. 

The company’s positive progress was interrupted in July of 2017 when a Phase 2 study of PPS for the treatment of hay fever did not show positive results.  

The successful OA trials to date were conducted under the special access scheme of the TGA (Therapeutic Drugs Administration) of Australia, showing a better than 50% reduction in experienced pain. 

The market potential here is significant with 31 million US citizens experiencing OA pain and a nationwide search for pain treatment alternatives to opiate based drugs.  Opioid use in the US is reportedly at epidemic proportions.

Paradigm is planning to begin the trek towards FDA approval in 2019, looking for fast track approval and a Phase 3 Trial comparing ZILOSUL® with opiate-based pain treatments. The Phase 2B trial here is not fully complete, with approximately 20 patients yet to report results, which are expected on 21 December.  The pain reduction of better than 50% has remained constant with each addition of reporting patients.

Paradigm is not a classic “one trick pony” as the company also has a Phase 2A trial underway for patients suffering from arthritis induced by a virus and another Phase 2A study for the treatment of inflammation and auto-immune disorders, and other application possibilities under consideration.

The company has nine patents in place for its bone edema treatments with another four in application pending status, with two registered in the US and another in application status.


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