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Alzheimer's Disease

Bad Investments

Here are some sequels to stories I’ve written about here, things that have had some new chapters added to them. First off, this 2015 post mentions the steep drop in shares of Clovis Biotechnology, brought on by a rather sudden revision in the announced clinical performance of their lead drug (the covalent kinase inhibitor rociletinib). Well, it appears that the SEC found this to be rather abrupt as well, and Endpts now reports that the company has been under investigation. Some of their investors have long claimed that the presentation of the clinical data had been manipulated in order to keep the company’s stock price up, and it looks like that theory is getting a hearing.

It’s worth remembering the different time scales involved. Think of the different parts of a cell: you get fast service from receptors and second-messenger systems (starting on a time scale of less than a second), but if you’re waiting for proteins to be synthesized, you need to come back in a few hours. Likewise the stock market reacts pretty quickly to bad news (Clovis got sold off on that news as if the shares were giving off radon gas), but the regulatory authorities are much slower. That said, they’re also pretty hard to dislodge once they get a fix on your position.

But the markets can take a while to react to things, too, because it’s differences of opinion that make them work in the first place. Here’s another post from 2015 where I wrote about the IPO of a company (vTv Therapeutics, formerly TransTech) trying to make a go of it with a retread Alzheimer’s therapy. The comparison with Axovant was obvious at the time, and some readers will recall what eventually happened to them when their own drug failed yet again in an Alzheimer’s trial. As that post mentioned, I was short Axovant stock when that took place (an event that financed the purchase of a new 18-inch Dobsonian telescope around here). Well, vTv announced their own clinical trial results on Monday, and to no one’s particular surprise, the compound failed for them, just as it had for Pfizer back in the day when TransTech had licensed it to them in the first place.

The company’s stock had been up over $7 earlier in the year, on what I thought was rather misplaced optimism. I sold them short in January at $7.42, and have been careful not to write about them in any way since doing so (in fact, I haven’t mentioned them at all since that 2015 post). VTVT had been dropping since then, and was back down in the $3 range before they announced this news, but that failed trial sent them down steeply. At that point I naturally covered my position, which is one reason I mention it now. The stock is trading this morning at about $0.67.

And you know, if someone else comes along with a drug that’s already failed one or two Alzheimer’s trials, I’m very likely to short them, too. One of these days some odd AD mechanism is (I hope) going to work, but given the odds of clinical success, financing things like Axovant’s or vTv’s drugs that have already failed in the clinic seems like a bad idea. And that’s the other reason I’m bringing up my short sales of these companies: I (and the other people who were also short these outfits) should actually not be handed such opportunities. Axovant and vTv should not, in a more rational market, have been able to go public as blithely as they did with the assets that they had, and their market caps should not have achieved what heights they did.

This is a great time to finance small biopharma companies (and here’s a series of Twitter posts by Bruce Booth with some good advice on that subject). But with all this money sloshing around, some of it (as always under these conditions) is going into some rather stupid ideas. Caveat investor.

31 comments on “Bad Investments”

  1. RM says:

    On the “bad investment” theme: in news that will surprise no one here, Theranos has just fired all but a handful of their employees in a (probably futile) attempt to stave off total collapse for a few more months.

    Caveat investor, indeed.

    1. Design Monkey says:

      Nah, doesn’t matter, as far as their extra fancy director board of senators and generals is faring good and is cashing in their golden parachutes.

    2. Old Timer says:

      But Lizzy still has two personal assistants and two body guards that chauffeur her around in an Escalade! How do the current investors put up with THAT!?

    3. Anon says:

      And now: “Holmes asks Theranos’ investors for cash as crunch looms”

      Yeah right, let’s see how that goes down – the sheer cheek of it!

  2. Andre says:

    “Axovant and vTv should not, in a more rational market, have been able to go public as blithely as they did with the assets that they had, and their market caps should not have achieved what heights they did.”

    I could not agree more a string of other companies can be added to the list including Theranos (mentioned above) and maybe Moderna (soon?).

    This picture strongly contrasts to the situation you face when talking to VC and potential early investors to raise money. VC insist on their smart due diligence processes to evaluate the merits of your business idea. You essentially always get NO if you do not have a compound (not matter who bad it is) ready to enter Phase 1 testing. These mechanisms partly explains why Axovant and VTVT managed to raise well over hundred millions for their failed drug candidates.

    I see much rubbish being funded because there is sufficient hype or there is a window for a rapid exit with going IPO…. but then that’s part of the game. Selling hype and me-too approaches is much easier than convincing VCs to invest in rationally defined early drug discovery projects, particularly if its completely novel. Typical question: what will be the exit strategy in 3-5 years? I firmly believe that this is part of reason why we have not made any significant progress in AD therapy in the last two decades. We just recycle the same ideas and drug candidates….. So sad.

    1. M says:

      Theranos never went public . . . it was all VCs and other private investors.

      1. Andre says:

        Good point! Had overseen that in my comment. Theranos were however certainly planning to do so in the future. Unfortunately for the VCs, the business model collapse too early….

  3. Kelvin says:

    Very strange, but one of the best predictors of success vs failure in a clinical trial, is success vs failure in a previous trial testing exactly the same drug for the same or related endpoint in the same or related patient population.

    Even stranger that so many companies and investors seem to ignore this fact.

    1. Kelvin says:

      PS. It all reminds me of that quote:

      “Insanity is doing the same thing over and over, and expecting a different result”.

      1. tlp says:

        Only the dynamics of Vivek Ramaswamy’s net worth will tell wether it’s insanity

        1. MrXYZ says:

          I wonder if this is actually the correct way to think about this. If in 10 years time, Vivek Ramaswamy invests in 10 large ventures, 9 of which fail spectacularly (like Axovant) or barely break even but the 10th ends up with an enormous ROI, does that make him a good or bad investor?

          1. Kelvin says:

            Put it this way, if he “invests” all his money in gambling on a roulette wheel, and happens to make a profit, does that make him a good investor?

            Conclusion: A good outcome is not the same as a good decision/strategy, and vice versa.

          2. Hap says:

            Probably depends on how big the gain is and how reproducible (if you start Google, then almost any probability of investment and amount would pay out, but most aren’t that big – a company might get $10B at the high end, and you’d only get a piece of it). The problem is, this is a really expensive lottery ticket – even though I know math, I am willing to invest (err, discard) $2 in a lottery ticket on the (vanishingly small) chance that it will pay out, but I am unlikely to be willing (or able) to invest $10M on similar terms. I imagine that if you lose enough money, the investor pool will shrink some – people don’t really want to pay lots of money for other people’s winning lottery tickets.

    2. Calvin says:

      You are largely correct. The problem is that there are plenty of examples where a company runs a bad clinical trial that fails and then the asset wipes out. But if they’d run the correct trial they’d have found that the drug actually works.
      One example that still makes me giggle (sorta) are the idiots at AZ who ignored all the scientists at Kudos (whom they fired) who invented Olaparib and ran a fundamentally flawed trial which failed. AZ even went as far as to officially write off the asset, announced a financial charge…….and the program looked dead (this is even covered on Wikipedia)
      But they figured out their error and hey presto it’s on the market and doing quite nicely.

      So in that situation, there is always the belief by some that a better trial can be run and success found. And money can be made that way. Lots of easy money. And while that chance exists investors will pursue that approach even if the chances are really rather low, tiny in fact. The out-size returns are just too tempting.

      1. Kelvin says:

        “You are largely correct. The problem is that there are plenty of examples where …”

        I think that’s the real issue right there: People paying far too much attention to rare examples and unlikely outliers, rather than the real odds of success. It’s cognitive bias, wishful thinking and lottery ticket mentality. But then if we were all truly rational, nobody would play the lottery, either.

        1. Calvin says:

          Totally agree with you

  4. Curious Wavefunction says:

    “But with all this money sloshing around, some of it (as always under these conditions) is going into some rather stupid ideas”

    Hasn’t that been happening with tech for a long time now (to quote Peter Thiel from a long time ago, “We expected flying cars, instead we got 140 characters.”)? Unfortunately it seems to me that there’s no good way to separate signal from noise in a windfall of funding. Personally I don’t know whether I would rather have both good and ideas funded rather than have nothing funded.

    1. Hap says:

      It’s always better to fund good and bad ideas than none – at least you know something after the funding, while if nothing gets funded no one never knows anything.

      I wonder if people would make saner judgments in other fields – if they chose to invest their money elsewhere, would they (or we) have gotten either better things, companies, or information? I don’t know – if people are being irrational, I’m not sure you can herd those cats anywhere useful (“you can’t cure stupid”), but biology has so much people don’t know that even good ideas can die badly.

  5. Chrispy says:

    “The market can remain irrational longer than you can remain solvent.”
    John Maynard Keynes

    It is not hard to shuffle through the dung heap of biotechs and find ideas that are sure to fail, the problem is that the valuations of these companies are not rooted in facts. And they can continue to go up despite how fictional their narrative is.

    If go long on a stock you could lose your investment. But if you go short on a stock you could lose much more than you invested. Caveat investor, indeed!

    1. M says:

      People who short often buy options that limit their maximum loss (puts or calls, I never remember which is which.) This increases the “investment” cost but covers against a big gain,

      1. Fred the Fourth says:

        If your short is “naked” (i.e. you don’t actually have the shares in hand to cover if the stock price goes up) you might try to protect yourself with “call” options (buying the right to purchase shares at a fixed price). This limits your risk if the stock goes up. (A “put” is the right to sell shares at a fixed price, useful if you think the stock might decline but don’t want to actually sell shares, for tax reasons for example.)
        But. under many circumstances “naked shorting” is technically illegal, not to mention extremely risky.
        I MIGHT have got that explanation right. Don’t come crying to me if you lose money by taking investment advice from an anonymous commenter.

        1. johnnyboy says:

          Speaking of shorting, am I correct that the most money you could ever hope to make out of a short is twice your investment, in the ideal circumstance ? If this is true, it’s really not that attractive for biotech, considering the risks. Biotechs stocks can easily go up 2-5X or more in fairly short timespans, and all you can lose is your initial investment, so I don’t really see the attraction of shorting in this particular field – or maybe I’m missing something ?

          1. Derek Lowe says:

            That’s correct. And risks are, in general, as you describe. But there are a lot more failures in this business than successes, of course, and a lot more small biotech stocks crater and are never heard from again than take off to the skies. . .

          2. Hap says:

            There’s an awful lot of irrational investors, particularly in small biotech (as <a href = ""here – with the money quote: “Not for the first time, I’m reminded that too many people who invest in small “story” stocks have worldviews that resemble the story lines of professional wrestling. I’d call it Manichean, but that’s a bit too elevated. No, it’s all Good Guys and Bad Guys, and there’s no room for someone like me, a person with no money in the game who finds the whole thing bizarre and amusing. The smaller the stock prices involved, by the way, the crazier the investors seem to be.”).

  6. Barry says:

    We all watched Merck convince itself that CETP was a valid target despite torcetrapib’s failure, and plow another $billion in to follow Pfizer’s. We all watched Lilly plow another $billion (and another!) into AD when some thought they had themselves already falsified the beta-secretase hypothesis.
    Short of insider trading, one couldn’t be better positioned to evaluate these investments than Merck and Lilly respectively were. Sobering, really how hard it is to bring a drug against a novel target to market.

  7. truthortruth says:

    How many instances of post-hoc analysis following a clinical trial have led to a successful outcome in the subsequent trial? Are there instances where this has been successful in the clinic?

  8. Sam Weller says:

    Somewhat related to that – Teva has settled with the previous owners of Rimsa after it tried to sue them for fraud related to the acquisition of Rimsa by Teva. Hoping to recover a substantial amount out of the 2.3 Billion deal, Teva now settled for 45M, practically admitting that it did not do its due diligence properly.

    Interestingly enough, the settlement paves the way for a lawsuit of Teva’s stockholders against the company’s (mostly former) executives and directors for negligence. The proceedings were put on hold at the time in expectation for the US process conclusion.

  9. fajensen says:

    As that post mentioned, I was short Axovant stock when that took place (an event that finance the purchase of a new 18-inch Dobsonian telescope around here).

    Well Played, Sir. The windfall is suitably re-invested too!

    Beware when shorting ‘unicorns’ and fad-stocks where fraud may be involved (like anything that touches Blockchain, f.ex.) that they are sure to “die” but while collapsing they can go all the way to “Trading Halted”. Then one suffers the ignominy of getting the position right while being stuck paying borrowing fees until the SEC sorts whatever it is out.

    It has been known to happen that some of the really hard-nosed investors will buy shares in fraudulent companies exactly to collect the lending fees from “stuck shorts”. Probably rats them out to the SEC too.

  10. johnnyboy says:

    In related news, Ramaswamy is now starting up a RNA shop (called ‘Genevant’, of course), planning to develop RNAi, mRNA, and gene mod approaches, dontcha know (hey, once you’re playing around with gene stuff it’s all the same, right ?). He plans to have 5-10 products in the clinic by… 2020, ie. 20 months from now. I think you’ve might be able to upgrade your telescope relatively soon…

  11. Marcin says:

    The freedom of your fist is limited by the proximity of my nose

  12. Tom says:

    Interesting stuff! Is there a good news site where these drug purchases, re-trials, IPO launches are reported?

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