Investors Could Have Easily Avoided This Bloodbath
My first major failure in biotech... Drug failures continue to reach the mainstream media... Investors could have easily avoided this bloodbath... Two easy ways to cut through the B.S... Why biotech investing can be incredibly lucrative... We go the extra mile...
Investing in cutting-edge drug discovery can offer huge payoffs...
But it will never be safe or easy. I (John Engel) had to learn this the hard way. Even today, I continue to use this lesson to my advantage as a biotech analyst for Stansberry Venture Technology.
In today's Digest, I want to discuss something most people experience but don't talk much about: failure.
So let's start where I did, many years ago, as a research associate for one of the largest pharmaceutical companies in the U.S.
I'm not ashamed to admit that my first few months in drug discovery were humbling. It took many years of practice before I truly gained my footing.
Back then, I had an advantage that most people aren't lucky enough to have...
I had tapped into a wealth of experience by befriending an older, wiser colleague who we'll call "Dr. A." He had seen the biotechnology industry grow from a pipe dream into the multibillion-dollar industry it is today. He loved to tell me how easy I had it, with all of the advanced tools that exist now.
For reasons unbeknownst to me, Dr. A offered to show me the ropes. Of course, I eagerly accepted.
Often, he'd size me up before showing me a new technique. I'd master it, and a few months later I'd show him that "advanced tools" had found an easier way. It was a fun game. That's probably why he put up with me.
Still, what we were working on wasn't trivial. We knew that a successful outcome could potentially add an additional $100 million in annual revenue for the company. We took it seriously.
Once, after watching me stumble my way through a difficult experiment, he stopped by my workbench. With a straight face and an unsympathetic tone, Dr. A said, "John, you stay in this business long enough, you're guaranteed to fail." Then he walked away.
I'll never forget the confusion I felt...
Did I botch the experiment? Did I overlook something so simple that even my mentor thought I had no future in this business?
It turns out, Dr. A had watched me perfectly execute the techniques. He just knew something I didn't: It wasn't the experiment that had failed, it was the molecule I was working with at the time.
In hindsight, this minor speed bump foreshadowed much bigger problems. A couple years later, still working on the same project, I found out what Dr. A really meant when he said I was "guaranteed to fail."
At the time, the project I was working on was well ahead of schedule. We were on a roll and nailing every milestone in development.
You can probably guess what happened next...
We hit a major snag and our good fortune dried up.
The biomolecule (a protein) that we developed had a hidden flaw that we discovered only after scaling up – a step to produce large quantities of the protein in pilot fermenters.
At high concentrations, the protein "fell out" of the solution. You could see it with the naked eye, sort of like a shaken-up snow globe. It made downstream purification a nearly impossible task.
I remember working long hours that summer trying to find a resolution. Nothing seemed to work. We knew going into year-end progress meetings that it was all over. Two-plus years of work and upwards of $1 million invested in the project all disappeared overnight.
As a bench scientist, nothing was worse than having to throw a project in the trash. I wasn't ready for that... In research, success isn't guaranteed. As Dr. A put it, the only guarantee was that I would fail along the way. I'm just glad the first failure happened early in my career.
It seems every week, another drug failure hits mainstream headlines...
Take Axovant Sciences (AXON), for example. The company aimed to solve the world's Alzheimer's crisis with a groundbreaking pill. The thing is, the pill wasn't much better than a shot of espresso. What Axovant had going for it was a huge marketing push and a big-name CEO.
Last August – just a few months before the company released its Phase III data – I told one of my colleagues in a private e-mail...
Axovant Sciences [has] a pill that increases the signals between neurons, but it does nothing to stop the disease. I've seen the CEO [David Hung] interviewed a few times. I'm disgusted at how much garbage the guy spews from his mouth. Harsh, I know, but he's what's wrong with the biotech industry.
Axovant's pill amplified neural signals (as does caffeine). But at best, the pill was a Band-Aid on a bullet wound for Alzheimer's patients. It had no real effect on the course of the disease.
What's worse, Hung was shamelessly selling his previous success developing cancer therapies.
Hung, who both founded and served as CEO of Medivation, made more than $350 million when he sold the company to pharma giant Pfizer (PFE) for $14 billion. Folks expected to see him do it all again with Axovant, but they were wrong... Hung left the company right after things hit the fan. His tenure as CEO lasted less than a year.
As for the drug, here's what things looked like when the company publicly announced its failure in Phase III. Axovant's stock fell again when the company killed the project a few months later...
Due diligence could have saved most investors from this bloodbath...
A few things stood out as I analyzed the company's position.
First, drug giant GlaxoSmithKline (GSK) tested the drug in 13 clinical trials. Axovant mentions this in its corporate filings, right before it says the following...
While the 35 mg intepirdine dose group achieved statistically significant improvement in the CDR-SB at 12 weeks and was numerically superior at 24 weeks and further time points, the benefits at 24 weeks and beyond were not statistically significant.
("CDR-SB" is a score for mental acuity, and "statistical significance" is proof that the drug does what it's designed to do. It's also important to note that 13 clinical trials is an extensive amount of testing.)
If you had done a little digging, you would have discovered that Glaxo had sold the drug for peanuts after conducting its trials. The deal closed after Phase II testing, which on average costs $20 million.
Add another $10 million (on average) for Phase I testing, and Glaxo likely invested more than $30 million in a drug it sold for $10 million. (The deal also included royalties if the drug was approved.) Believe me, Glaxo knows a thing or two about this business. It has entire teams of experts who determined the risks of failure far outweighed any chances of success. That's why the company sold the drug for a fraction of what it paid in development costs.
From late September (just before its top-line Phase III results were announced) to January, Axovant shares fell nearly 95%.
The point of this story is that this drug was never a safe bet. And every investor should have seen the writing on the wall. It's not always easy to make these connections, especially when the CEO is taking every opportunity to sell you on the idea.
I've found two simple ways to cut through the B.S...
First, as is the case with any stock, you should know what you're investing in and why. This may seem obvious, but I can't tell you how often someone has pitched me on a breakthrough drug without knowing what it actually does. "Why" is often a question of how big the market is and how much market share the drug could win.
Second, you need to let science dictate your decisions. You can't let a CEO smooth-talk you into an investment. They're often compensated with company shares, which means the more investors they attract who will boost the share price, the more money they make.
Once you have this mindset, it's easier to steer your investment.
Let me show you what I mean...
Based on ClinicalTrials.gov, a government-sponsored website that tracks experimental medicine, more than 280,000 active clinical trials are currently underway. And the odds of success are stacked against most drugs... Research firm Statista notes that nearly 85% of them fail.
That doesn't mean we haven't seen some huge winners out there, though. Take Humira, for example. The drug is designed to suppress the immune system. It helps people suffering from health problems like arthritis, psoriasis, Crohn's disease, and colitis.
In 2015, Humira became the most profitable drug in history (based on yearly sales). In 2017, it topped $18 billion in sales. Total sales over the drug's lifetime are approaching $120 billion...
Think about that for a second.
It cost around $1.5 billion to build Yankee Stadium less than a decade ago. AbbVie (ABBV) – which owns Humira – expects to make 13 to 14 times that from Humira prescriptions next year alone.
These figures are staggering. But most drugs (including Humira) aren't overnight successes. Consider that Humira began Phase I testing in 1997 and didn't reach Phase III for another three years.
What's important is that the drug proved itself time and time again during clinical testing. The data showed the drug was safe and helped patients. The evidence in patients was clear as early as 1999. It's published in Annals of the Rheumatic Diseases, a journal that highlights the drug's Phase I trials. Three years later, these positive results supported an approval from the U.S. Food and Drug Administration.
The point is, Humira generated a huge amount of data over many years of clinical testing. That means there was plenty of time to interpret the results and use them to guide an investment in cutting-edge medicine.
With 280,000-plus ongoing clinical trials, new data are being published in medical journals around the world every day and discussed at medical conferences. It takes work to separate the good from the bad.
Now, I'm not here to scare you away from biotech investing...
In fact, nothing is more satisfying than making the right call on an investigational new drug or technology. As I just mentioned, the amount of opportunity out there is huge. You can make a fortune if you simply learn to avoid obvious failures.
What if you don't have the time or desire to do the background work? Well, we have an easy way to take advantage of investment opportunities in cutting-edge medicine.
As I explained, my biggest advantage when I started a career in drug discovery was tapping into a wealth of experience. My colleague Dave Lashmet, editor of Stansberry Venture Technology, has chased investigational new drugs and technology for more than two decades.
These days, I help Dave with his research efforts...
To find drugs with blockbuster potential like Humira, we read through thousands of pages of medical and science journals every year. We comb through the data on dozens of clinical trials. We talk and meet with industry experts. And we attend several conferences each year. In the last year alone, Dave and I have attended 10 conferences covering a diverse range of illnesses including cancer, heart disease, Alzheimer's, and infectious diseases.
Our research has taken us all over the U.S. and to Amsterdam, London, and Barcelona. (By now, you should understand why.) This type of research is what differentiates Dave's work from the rest. It's this type of research that leads us to finding new and innovative drugs that can save lives and make investors a fortune along the way.
Dave's track record speaks for itself. Since launching Stansberry Venture Technology in November 2014, he has made 41 recommendations. So far, 13 of those have gone on to double or more. In other words, roughly one in every three picks he recommended to his readers over this period has doubled. It's an incredible track record.
If you want to invest in tiny biotech stocks that have the potential to double... triple... or make up to five times or more on your investment, you must read Stansberry Venture Technology. If you're interested in learning more, click here.
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Regards,
John Engel
Baltimore, Maryland
August 10, 2018