Authored by Karl Simpson
This past week we saw the impact which positive clinical data can have on the share price of a biotech or pharma company, as rare disease specialist BioMarin reached lifetime highs as it reported on its MOR-004 trial for Mucopolysaccharidosis Type IVA (MPS IVA). BioMarin’s shares shot up over 30% on the prospects of their drug GALNS getting to market. I agree the impact of clinical or regulatory outcomes don’t always result in companies becoming worth a third more overnight, however, I wanted to take a look at the value created from these outcomes and the importance of selecting the right people to manage them.
Ask most CEOs what their headline objective is in running their companies and they would respond by telling you that it is to ‘create value for the shareholders’. Of course, companies are driven by a goal to innovate or to provide better products or services to their customers, however, these activities increase sales and generate profits which create that value for the shareholders. To do so, you make calculations about where and how you choose to invest, less or more, based on the value it creates.
Unquestionably, to build optimal value for a company you have to build a great company and so I referred to Jim Collins’s book ‘Good to Great’ where he investigates many aspects of what leaders need most to build a great company. One of the take away messages was that the old adage “People are your greatest asset” turns out to be wrong. Through his extensive research, Collins concludes that people are not your most important asset. The right people are, in the right places.
I then got thinking about how boardroom executives need to create shareholder value as well as get the right people in the companies looking after their drug candidates.
In pharmaceuticals and biotech we are currently seeing quite vividly the corrosive effect on value caused by the industry’s inability to successfully get products to market. Consequently, we have all seen how clinical and regulatory outcomes can create significant swings in the commercial prospects of a company. It seems nothing moves the needle of a biotech or pharmaceutical company more than negative or positive clinical data or regulatory approval. In public companies, this is often most visibly reflected in considerable spikes in stock price or alternatively a trough as negative outcomes erode previously created value.
In 2011, a piece of research was published in the Journal of the National Cancer Institute on ‘Company Stock Prices Before and After Public Announcements Related to Oncology Drugs’ by (Rothernstein, Tomlinson, Tannock and Detsky). This research explored the impact that positive or negative clinical data arising from oncology drug trials would have on a stock price leading up to and immediately after a public announcement about trial data. The research also studies FDA regulatory decisions. Through analysis of 23 positive trials and 36 negative clinical trials and from 41 positive and nine negative FDA regulatory decisions, the study found that the mean stock price for the 120 trading days before a phase III clinical trial announcement increased by 13.7% and decreased by 0.7% for companies reporting negative trials. This signals that as clinical information begins to appear it drives the share price. Yet, changes in company stock prices before FDA announcements did not differ statistically between those receiving positive and negative decisions.
This indicates that considerable value can be created for company shareholders through positive clinical data and subsequent drug approvals. Where this published study (J Natl Cancer Inst 2011;103:1-6) focuses more on the large companies who’s share price can tolerate bad news, the more radical swings are evident in those companies with less robust pipelines and portfolios, as perhaps seen this year by several companies which we have profiled here from sectors other than oncology in further support of the evidence.
I have elected to use US-listed companies to ensure exposure to index consistency and similar trading volumes and market liquidity.
Clearly these companies have a certain bias towards orphan drugs and rare diseases, which is particularly in vogue with investors right now, so perhaps the spikes and troughs are exaggerated relative to other segments of the same industry. Equally, the defensive qualities of the pharma sector are getting investor interest given the plight of other sectors. Yet we have chosen to cite the relative success and failures of rare diseases companies for a reason, because while it is attracting considerable attention right now, it is also a sector of the market with inherent complexities for clinical development and regulatory approval and so demands specialised knowledge to deliver these programmes.
In a separate previous study in 2006 by S.K Sarkar and P.J de Jong titled ‘Market response to FDA announcements’, they were able to investigate further the impact that FDA announcements have on the share price of a company. Again, they found that in the majority of cases, investors adjusted their expectations through the approval process, with most uncertainty resolved by final approval. This suggests the impact of regulatory announcements is more anticipated than the clinical data and has less effect on the share price. Although the study again shows that smaller companies see more considerable change in investor value. It cements the view that clinical outcomes for smaller companies with limited pipelines can see steep rises or declines in value owing to the results.
Size of pipeline is no immunity to this effect though. The recent market has seen sizable stock swings in companies like BMS on the 1st August 2012 when it suspended an on-going Phase II study of BMS-986094 (formerly known as INX-189) in Hepatitis C after safety concerns. The BMS share price dropped over 8% in one day, the most since 2002 after it acquired the product from Inhibitex for $2.5bn earlier in 2012. Gilead was also punished for the failure of their GS-7977 trial with a daily drop in their share price from $54.81 to $44.53. Of course, larger more resilient firms perhaps have the capability to restore eroded value over time where for smaller biotechs it can sometimes prove fatal.
When we look at clinical data and how it drives share prices and shareholder value, we are often drawn to new products, rather than the considerable upside value that can be garnered from effective life-cycle management of an existing product. In August 2011, McKinsey & Company looked at the importance of ‘Optimizing Clinical Strategy to Drive Lifetime Brand Value’. As a case study, they looked at Cymbalta, which through strategic clinical development and label expansion, achieved life-cycle growth which increased sales by nearly 70% and created an estimated $7bn in cumulative value between 2005 and 2012. The study by McKinsey clearly shows how smart clinical and regulatory strategies can enhance product value during the lifecycle.
So how does this relate to making sure your clinical and regulatory management is effective?
Some behaviours which pervade an organisation can result in poor decisions, particularly how to invest or allocate expenditure in the business. Cost cutting exercises typically encourage certain behaviours. The behaviours which focus acutely on eliminating small costs can sometimes inhibit a company from fulfilling a product strategy which can deliver a value multiple. This concentration on cost can be seen to impact the effectiveness with which clinical and regulatory strategies are resourced and managed.
Although the people appointed to manage clinical and regulatory programmes might not ultimately determine if a product succeeds or fails, the evidence we’ve reviewed in this article specifically builds the case that positive and negative clinical trial data can drive shareholder value up or down respectively. It outlines that through clear understanding of the clinical evidence in a submission package, share prices are less sensitive to FDA or regulatory authority announcements. It could also be argued that the effectiveness with which the regulatory process is managed between the company and the health authority in terms of designing the strategy and delivering against agency requirements leaves less room for surprising outcomes. Specifically though, if you are to achieve optimal value for your drugs, you have to provide the very best possible leadership of your clinical and regulatory programmes.
To allow marginal cost controls to override the value opportunity is ineffective decision making and a dereliction of responsibility to the shareholders. After all, they risked their capital through investment to help create the company. While pharmaceutical companies commonly share a purpose to help patients, they also serve their shareholders and in this sense they must ensure the behaviours which pervade a company as it seeks efficiency do not compromise the value which can be created. As Jim Collins asserts, having the right people in the right places is imperative to making your company great.