Evaluate Biotech Stocks With Cynicism
Biotech investing is a risky business, so investors should thoroughly examine a company’s vital statistics before taking the plunge. That’s the recommendation of Managing Director Debjit Chattopadhyay of Emerging Growth Equities, who brings a strict scientific discipline to stock analysis. As a former medical researcher, Chattopadhyay comes by his skepticism honestly, and in this interview with The Life Sciences Report, he brings five exciting—but critically scrutinized—growth names to investors’ attention.
The Life Sciences Report: Debjit, you’re a biomedical engineer by training, and did your post-doctoral fellowship at Memorial Sloan Kettering Cancer Center. You have authored more than 20 peer-reviewed papers, and you have two patents. Is there anything I’ve missed?
Debjit Chattopadhyay: My background is in drug delivery and medical devices, and subsequently, at Sloan Kettering, I was with the translational medicine group, primarily focusing on radioimmunotherapy and antibody-drug conjugates.
TLSR: And today you’re a sellside analyst, working with institutional investors and hedge fund managers. Most times it’s not easy for a scientist to translate his/her knowledge into stock valuation skills. What mental shifts did you make when you became an analyst performing stock valuations?
DC: One of the key lessons that I learned, in grad school and as a research fellow, is that when you look at scientific data, you have to be skeptical. You also must be data-driven and objective. Those three attributes go a long way in evaluating stocks. If you are valuing a company using a discounted cash flow (DCF) model, you want to make sure your inputs are correct. That’s not very different from running a scientific experiment in the lab. Are your assumptions correct? What do the numbers really tell you? How does it compare with other experiments (comparative and peer group analysis)? The language of finance and the language of science may be different, but the discipline is the same. Just for the record, I also have a master’s degree in finance.
TLSR: As a scientist and analyst you have watched preclinical candidates migrate into human clinical trials. The odds of a phase 1 candidate getting to market are very long. A product never gets into a human without meticulous preclinical work evaluating both safety and efficacy. What goes wrong when a promising preclinical molecule fails in the clinic?
DC: I think what is often missed is that drugs are only as good as their human handlers. Lots of preclinical data and many experiments go into selecting a drug candidate, but success depends on how high you set the bar for a candidate. If the bar is set too low, a product advancing into the clinic is being set up for failure—and with the risk of endangering people’s lives. Many companies lose objectivity because vested interests—the combination of career risk and the availability of cheap capital—cause them to pursue a product or concept to the grave.
In a late-stage failure, the human element is often overlooked, which just compounds the single-digit success rates (from pre-investigational new drug application to new drug application (NDA)/biological license application approval). Success in phase 3 comes down to how well a product candidate has been assessed and vetted step-by-step along the development path.
TLSR: You’re saying that you can enhance a candidate’s chances of success in the clinic by being more stringent on the product preclinically?
DC: Even clinically. Drug development is a very long and arduous process. For a drug to get from phase 1 to an NDA might take six to 10 years, depending on the therapeutic area. There are plenty of options between phase 1 data and the last time point of a pivotal trial in which trials can be stopped. But developers think of candidates as their children and don’t want to let them go.
Back in August, for example, there was the failure of Vical Inc. (VICL:NASDAQ) Allovectin (velimogene aliplasmid) vaccine for metastatic melanoma. It didn’t achieve its primary or secondary endpoints, and should never have gotten into phase 3 trials. In fact, if you look at the data, there was actually more harm done to patients in the treatment arm of the study than in the control arm. GlaxoSmithKline’s (GSK:NYSE) antidiabetic drug Avandia (rosiglitazone) increases the risks of heart attacks and death; there were signals in the data. Look at the COX-2 inhibitors—specifically Vioxx (rofecoxib) from Merck & Co. Inc. (MRK:NYSE). The drug, intended for chronic use in pain, as in osteoarthritis, is not on the market any longer because of the increased risk of heart attack and stroke in long-term use. This happens in small companies like Vical and large pharmas like Merck or Glaxo.