One Biotech Crashes, the Other Skyrockets -- Here's Why

By Markets

In a tale of two biotechs,Novavax(NASDAQ: NVAX) andSarepta Therapeutics(NASDAQ: SRPT) shares couldn't have taken more divergent paths recently. Asbillions of dollars in projected sales evaporated because of a key trial failure at Novavax, optimism for sales growthskyrocketedbecause of anearly approval at Sarepta Therapeutics.

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In this week's episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell dive into these twostories to helpinvestors decide what to do next.

A full transcript follows the video.

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This podcast was recorded on Sept. 21, 2016.

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Kristine Harjes: Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. It'sSept. 21. I'm your Healthcare show host, Kristine Harjes, andjoining me viaphone is Todd Campbell, one ofThe Motley Fool'spremier healthcare writers. Todd, how are you today?

Todd Campbell: Hi, Kristine!I'm excited to talk today abouta lot of interesting things.

Harjes: Me, too. Today's show is a tale of two cities, or, rather, a tale of two stocks which metvery different fatesin the past week. One of them,Novavax, lost 84% of its market cap last Friday. The other,Sarepta Therapeutics, gained 74%on Monday. Let's startwith Novavax.

Campbell: Novavax was anintriguing -- well,it's still intriguing, but it's much less intriguing after they reported phase 3 data froma study that was evaluating a vaccinetargeting something called RSV, a very common viral infection that can bedangerous in elderly patientsand very young patients. So,patients that you could argue are immunocompromised.

Harjes: Right. RSVis actually the second leading cause of deathin children under 1 year old. It affects about 4 to 5 million children just in the U.S. alone. There are about 2.4 million adults over 65 that are affected. Novavax was looking to make a vaccine for thisvery common virus. You would think, if it was that prevalent,it was probably going to make a lot of money. So people were veryexcited about Novavax,and ultimately really disappointed, as we mentioned. They were down 84%when it was reported that,pretty much, the vaccine does not work.

Campbell: Yeah. Investors were very hopeful. Developing vaccines is hard and expensive. It involves trials that include thousands of patients, and multiple years. So people had really a lot at stake for this company, and they had bid the market cap on this company up into themultiple billions of dollars, with the view that basically, they were doing a study thattheoretically would allow for vaccinations of every elderlyperson over the age of 70. There are 76 million baby boomers out there. Novavax was estimating that if this study had panned out, its vaccine could be used in up to 100 million seniors per year. That's an astounding figure. They were throwing around numbers as high as $6 billion per year in peak annual sales.So the fact that this trial failed,obviously, was a devastating blow to the company.

Harjes: I think it's also a pretty good reminder about the statistics that happenin the background behind these studies. If you look at their initial smaller trial, it was 1,600 people, and half of them got the vaccine, half of them got a placebo, and the results werejust barely statistically significant. So they reported that there was a P value of 0.041. What that means is there is a 4.1% chance that thedifference between the two groups of patientsoccurred just by chance, and there's not actuallysomething meaningful going onwith the vaccine. It turns out,that was the case. When you get to the bigger trial,you have pretty much even resultsbetween people whoshowed signs of infectionwho had been taking the vaccine,and those who just got the placebo. It's a good reminder for investorsthat when you see studies that are justbarely passing the mark ofstatistical significance, that's a little bitof a reason to be nervous.

Campbell: Right, andit's also a good reminder to investors to look at -- last August, this company'smanagement came out and said, "Hey,look what we've done in phase 2, the 1,600-person study. We'vesuccessfully met our endpoint." Andwithout doing the due diligenceand digging a little bit deeper like you're suggesting,people were taking that at face valueand thinking, "OK, great! Youexpand this out to more patients andprove that this thing works in more patients. It's a no-brainer. Get this thing on the market,and let's make some money." You need to take smaller phase 1 and phase 2 trial results with a verybig grain of salt,recognizing that phase 3 trialsstill have a very high failure rate. I think I've seen in the paststudies showing that failure rates in phase 3 can run from 30% to 40%. That's asignificant failure rate. So you may have succeeded in phase 1 andsucceeded in phase 2,but that does not guarantee you will succeed in phase 3.

Harjes: Exactly. Now, Novavax,looking forward, they're trying thevaccine in healthy pregnant women toprevent the virus in the infants that are then born. They also have a fluvaccine and an Ebola vaccine that are both very early stage. There's reallynot much left with this stock.

Campbell: The value, potentially, in this stock now,in my view,is that study that's being donein pregnant women. But I think the completion data on for that trail is something like 2020.I don't know if we get interim results before then,but theoretically, we're talking a whilebefore we know whether or notthis vaccine can be savedand still have an applicationthat's worthwhile. Even though the stock is trading at only $1-something per share,investors have to realize that it still has a $444 million market cap. This is not a company that is valued at $50 million or something. It'sstill carrying a $444 million market cap, and it doesn't have a drug that'slikely to make it out to market now forat least a couple more years.

Harjes: Yeah. Neither of us istrying to catch this falling knife. Before we move on to the tale ofSarepta Therapeutics,I mentioned a few months ago some options resources that the Fool hasavailable, and a bunch of you wrote insaying you were interested. So I figuredI should mention that the Fool just released our Ultimate Income Report, which is written byone of the lead advisors for our Options newsletter service. The report itself istotally free. If you're interestedin learning about some of our best options strategies, shoot me an email at,and I can send you some more informationabout how to get that report.

So if Novavaxinvestors were going throughthe worst of times, then Sarepta investors went through the best of times earlier this week. Listeners will remember this company name from our May 4 episode. This is the company that wasdeveloping a treatment for a rare butdevastating disease known as Duchenne muscular dystrophy, or DMD. OnMonday, we found out that they gotapproval from the FDA for their drug, which was known as Eteplirsen, and will now go by the trade name Exondys 51.

Campbell: What anamazing and intriguing storyfor investors and for those who likesoap-opera back stories. There wasso much involved in the review of this drugleading up to the application. You almost have to look at it and say there's two stories here. There's the story of, "Wow,this is the first FDA-approved drug thatactually targets the cause of DMD." And then,there's the second story, which is, "Did the FDA stretch the bar too far,lower the bar too low, in approving this drug?"

Harjes: Right. Thestory involves a pretty heated internal conflictin the FDA. You had some peoplein the agency reallypushing for approval of this drug, saying, "Look atthe stories that the patients who are taking this can tell. Lookhow amazing this is, that this drug must be working." And thenyou had people on the other side, saying, "Wait a second,that's not what we're here to do. We're not hereto be pulled by emotions. We're here to look at the clinical evidence, which was,admittedly, a little bit lacking."

Campbell: Right. How much do you weight the science at the FDA, versus the unmet need of DMD patients? I think that was a core debate within the agency. On the one hand,in support of this drug,you had the head of drug evaluation, Dr. Janet Woodcock. Andon the other side, you had the head of the group within the FDA that was tasked withreviewing the data on this drug. The director of that group was a Dr. Unger. The two, Woodcock and Unger, had very different views onthe subject of the science versusthe unmet-need issue.

Harjes: Exactly. So what they were really disagreeing about was whether anincrease in this protein known as dystrophin, which was asurrogate endpoint in the trial, whether thatnecessarily implied clinical benefit. Dr. Woodcock said, "Yes, it does. If we can show that they haveincreased levels ofdystrophin, then there is a very good chance that the patients will have a clinical benefit." Whereas Dr. Unger worried about this, and aside from the worry over the data not being there, he also worried about whetherapproving this drugjust based on this limited data set would be a bad signal, wouldsend a message that the FDA can be pressured by things like politics and intimidation, as opposed to strict science.

Campbell: Yeah. Let'sgo back in time fora second. Maybe we should spend a little bit of timetalking about DMD, and whatdystrophin is. DMD is amuscle-wasting disease. What ends up happening is, inpatients that can't produceadequate levels of functionaldystrophin, which is a protein used toproduce and maintain muscle fiber, over time, their muscles weaken,and they lose the ability to walkby the time the reach their teens, and sadly, they lose heart muscle function typically when they get into their 20s.Unfortunately, they tend to succumb to their disease some time between their 30s and 40s. So this is an extremely progressive, life-shortening disease. And up until now, there has beennothing other than corticosteroidsthat have been approved by the FDA to try and offer some hope to this patient population.

Because of that, andbecause of the history with muscular dystrophyfundraising and awareness,there was advocacy forthe approval of this drug on a levelthat is unprecedented. I don't think I've ever seen anything like this. You hadpeople within the FDA sayingthey were receiving communications from Congress, letters and communications from patient advocates, from patients, from other interested parties. Andsometimes those letters weren't so nice.

Harjes: Right. There was anadvisory-committee meeting --howthese approvals work with the FDA is that first, you have anadvisory committee that convenes,and they review the evidence and make a recommendation foror against approval. When the team was consideringthe evidence, they heard testimonial from patients.I thinkwas actually one of the longest everpatient testimonial periods, where these young boys that are suffering from this disease, and their parents, and their caregivers, wereessentially pleading with the people from the FDA, "Please,approve this drug, there's no other optionfor these boys." As rare as the disease is, when you're looking it in the face, that pulls at you. I can understand that.

Campbell: Yeah. So, investors and everybody who's interested to know,what ended up happening is that Woodcock hadwanted to approve the drug all along. Unger and some of the other people on the review committee were not convinced that the drugprovidedenough of a boost indystrophin production todetermine that it would produce a clinical benefit. Eventually, they went to an appeals board. One of the things that'sinteresting about this story is that in May,the FDA was supposed to issueits final determination, go or no go. Theadvisory committee meeting, after hearing all of thattestimony, still concluded on a 7-to-6 votenot to recommendearly approval. Yet, walking outof that meeting, Woodcock, within days, was already saying, "I'mgoing to approve this drug." So Unger went to an appeals board. The appeals process went through and looked at the science,evaluated the stories from both ends, andeventually submitted a memo on this entire subject to the commissioner of the Food and Drug Administration. So this went all the way up to the top.

Throughout the entire process, Unger maintains, and Woodcock doesn't dispute the fact that she was involved very heavily, right from the get-go. And that process included various meetings withpatients and advocates during a period of time where thecommittee was reviewing the science. So all along, there was this push and pull between the science and the very big unmet need. And I think what Woodcock was arguing was, "Listen,we can't just operate only on the science, because there's nothing that can be done to help these patients and prolong their lives as it stands today. If we havesomething that even offers them minimal chanceof offering a benefit, that's safe and in trials," that was the one thing thateveryone agreed on, this drug was safe, "then we should approve it." And I think others at theagency took a different view,worrying that if they approved a drugthat wasn't scientifically proven to have the clinical benefit, what kind ofrecommendations would they have to givein the future?

Harjes: Exactly. Itdefinitely did show that the FDA has moreflexibility than maybe you would have thought. One thing that Woodcock had mentioned thatI definitely can't get behind is,apparently she was talking about Sarepta's need forcapitalization. She noted that their stock price has reacted to different FDA actions. That,this is my own opinion here,I would say definitively should notbe consideredwhen you look at something like this. I mean, she's right, if Sarepta didn't get approval,they probably would have run out of money and wouldn't be able to deliver this drug. But that can't be considered. And indeed, an FDA spokeswoman did say that the FDA did not consider those factors in their final decision. But I think that does highlight that Woodcock was willing to go to someunprecedented levels to push for this drug's approval.

Campbell: Yeah. Kristine,I believe those comments were actually made during the review-board hearings. I don't think those comments were made during theevaluation of the science behind this drug.I think the point that Woodcock was trying to make, in fairness, was that we have to recognize that Sarepta is working on all sorts ofother medicines that can treat these diseasesthat could work better,and if they were to go out of business,what would that mean for that science? It could end that science, and basicallyprohibitthe development of a second-generation drug thatconceivably works better.

If we just look at it fromwhat could have gone differently,obviously, the drug could have worked better. If it was a slam-dunk approval, none of this would havehappened. But the reality is, you had a 12-person trial that had all sorts of gaps in it as far as thevalidity of the trial results.

Harjes: For example, there was no control group.

Campbell: Yeah. Both Woodcock and Ungerbasically looked at it and said, "We don't know what we can trust out of this data." That's why, this past summer,they requested additional information from Sarepta,intro analysis of another trial that'sgoing on right now and took a look at another 12 boys,trying to determine just how muchdystrophin is being produced by taking this drug. They determined, after doing their own analysis, that is was a 0.3% improvement indystrophinproduction. By any measures, that's tiny.I think the argument from Woodcock was, "Yeah, but it's an improvement." And the argument from Unger was, "We don't know without a shadow of a doubt that that level ofimprovement would result in a clinical benefit."

Harjes: Exactly. So,technically, what happened to youwas an accelerated approval. What that means is that Sarepta isnot off the hook just yet. They did get their green light, but they'llstill have to provide more proof of efficacyas it becomes available. I would say that's a pretty good middle ground. They're not getting a go-ahead with no strings attached. But yet, this drug will become available, which is really important.

Campbell: Yeah. This is a very small treatment population. We're talking about 1 in 3,500 male births. I did the math on that, DMD therefore isoccurring about 580 timesnew patients diagnosed per year. And of that,this drug only works in about 13% of them. So,every year, we're talking about 60 or so kids that this drug might be able to benefit. It's great that they'regoing to continue their research and the study. But as we just talked about previously,once you open these studies upto more and more patients,that does not necessarily meanthat you're going to get the outcome you want.

Harjes: Exactly. So it'sdefinitely still a case to watch going forward. Interestingly, Sarepta's other drugs couldpotentially work on a much broader portion of the DMD population. We're talking about up to 80% of these patients. So hopefully, for the sake of the patients and their families, Sarepta cancontinue to prove that their drugs do work, and validate their entire platform.

So I want to wrap up today's episode with a Tale of Two Cities quote. It is the one you're thinking of,but you might be surprised to learn the lines that come right after it. From Dickens: "It was the best of times, it was the worst of times. It was the age of wisdom, it was the age of foolishness."

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.