May 2 Biotech Update- The Ups and Downs of the Sector

It was a generally good day in terms of news for the sector (with notable exceptions) but the price action was bad. I think this is going to be the probable going forward in that trading will be very choppy and volatile despite positive or negative news. I do not see this trading as changing anything so far in that the large caps are still in recovery/stabilization mode and the SMID caps cannot find buyers.
1. ECYT reported that the vintafolide phase III trial in PROC was stopped for futility. I sold my position as this is a case of needing to change your mind when the facts change. Despite having evidence of activity in earlier trials and the NSCLC trial (not super strong but I believed strong enough that the drug was active), vintafolide failed in the trial that would most clearly demonstrate its potency. In addition, the bad news is not done as it is only a matter of time before the conditional approval is pulled in the EU and even if it were not pulled no one is going to use it. In addition, this calls into question whether MRK is going to further support development in NSCLC and/or other indications. As such, I can see a litany of additional negative catalysts and that combined with the futility is why I sold. ECYT still has the platform and so is not toast (yet). It all depends on why it failed. If it is toxicity, then you have to question the whole platform and there is significantly more downside. Given the safety profile to date and the PR specifically noted no safety issues were found, I think failure was driven by the fact that the drug is simple not very effective. Of course, even that may not be a problem (long term). If the low efficacy is target or payload related, then follow on drugs can fix those issues and the platform has value. If it is PK/PD related to the molecule size (cleared from the system before it can get enough drug to target), then you have a bigger problem and one that follow own drugs cannot address. Since we do not have the information to make an informed judgment on which is most likely, I am on the sidelines for awhile. I suspect this eventually trades at a discount to cash and at that point it is worth another look.

2. VRTX reported a decent quarter in terms of revenues and announced that it was leaving the hep-C space. Despite that news the real discussion revolved around their data on the Kalydeco and VX-661 combination in CF patients with a GFF1D mutation on one allele and a del508 mutation on the other. This was also a patient population that was stable on Kelydeco, so in many ways it is a relatively clean look at how well VX-661 can correct the del508 mutation. In general, the data were good and showed a 4.6% absolute increase in FEV but the story does not end there. VRTX has data on 4 placebo patients and refused to release it outside of saying they did worse than the VX-661 patients. The company argued that it is difficult to assess given that there were only 4 patients, which is likely correct. The problem that investors do not like unknowns, especially when they know the company has the answers. Is the company insulting the intelligence of the analysts and investors in not being able to understand that small samples can have large errors or is the company not confident in the data? We do not know and it is likely that VRTX is trying too hard to manage the situation, which is par for the course for them. It is this non-release of the placebo data that is hitting the stock and not the results of VX-661. In terms of the all-important phase III data releases later this year, however, the VX-661 data can marginally increase your confidence. That being said this is setting up like ECYT in that this is going to be a very binary outcome, so you can either hedge through position size or puts.

3. SGEN was down on what was a good quarter. I think the big news is that the company is going to look into changing the primary outcomes of their ECHELON-1 and -2 studies. This is good news. They already had to alter the endpoint of their AETHERA given how slow progressions were occurring. The company looked at their phase I data in HL and decided that something similar was going to happen in the ECHELON trials. While this could be the result of the control arms outperforming across all of these trials, we have more than enough data on how the control arms will perform(years of experience with these regimes and a lot of trials) and how Adcetris performed in earlier trial, so that that seems unlikely. So this is highly likely a sign of Adcetris efficacy. In addition, this will not delay the release of the data because the whole point is to keep it on track if not accelerate timelines. The only way it would get delay is the unlikely case that they could not get agreement on changes (they already did it once for AETHERA). So why is it down? First, uncertainty in this market is killer even if it is easily explainable and very likely positive for the long term. Second, I could imagine some concern that these changes in endpoints may affect the trial results and turn what are likely to be positive trials into negative trials. If this is the case, then it makes the AETHREA results all the more important as it would not just be an expanded indication but also be a proof of concept that the changes to the endpoints will not impact the trial results. Given that I think this selling is making a mountain out of a molehill and a molehill that is marginal net positive, I added to my position.
I will end it here and hope that we get a turnaround Friday. Have a great weekend.
Disclosure: No longer long ECYT, own VRTX, MRK, and SGEN.

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