Stockwatch: Earnings Season Turns Into Silly Season

When government recesses and summer vacations occur together the result is often called the silly season, where non-items of news are fermented into headline capturing events and belief is almost suspended. Over the last week, earnings season has also bled into the silly season as smaller companies reporting only increased losses fed into a news void that investment bank analysts attempted to fill. It could also be that summertime doldrums are a good time to release bad news but when clinical trial or regulatory failures meet silly season fiction, it's never good news.

When Auris Medical Holding AG announced the Phase III failure of its topical small-molecule NDMA receptor antagonist Keyzilen (AM-101) for the treatment of inner ear tinnitus it was "disappointed" that the TACTT2 trial did not show a significant difference over placebo in either of the co-primary endpoints (Also see "Auris' Outlook Bleak In Tinnitus After Failure Of Initial Phase III Trial" - Scrip, 18 Aug, 2016.). No numerical data was provided but the Auris CEO stated that the failure was unexpected based on the Phase II program. A number of considerations would have helped manage Auris' expectations. Firstly, any change to a clinical trial protocol between Phase II and Phase III often results in different outcomes – typically, worse results in Phase III. The Phase II studies for AM-101 listed on clinicaltrials.gov were conducted in between 44 and 85 patients per arm rather than about 170 patients per arm in the TACTT2 study. Larger patient numbers per arm imply greater heterogeneity but also weed out less statistically robust results in the smaller Phase II studies. The Phase II studies used either one, or a different, primary endpoint to the TACTT2 study. Also, the use of the brand name for a drug before the drug is approved typically shows a confidence that is frequently misplaced. The archetypal example of brand name gun-jumping was Thelin (sitaxsentan) from Encysive Pharmaceuticals Inc. – an endothelin receptor antagonist for pulmonary hypertension. The Thelin brand name was used from Phase IIb in 2003 through multiple Phase III studies and two decisive rejections by the FDA until the product's eventual withdrawal from the EU market in 2010 after reports of fatal liver toxicity.

While the Keyzilen Phase III program, like that of Thelin, continues unaffected by the small matter of clinical efficacy (or safety in Thelin's case), its investors headed for the exit sending its stock price down about 52% for the week against the NASDAQ Biotechnology Index's 1% decline.

In order to fill in the news void of silly season, the analysts from Piper Jaffray were keen to downplay the impact of the clinical failure of Auris' NDMA receptor antagonist in tinnitus patients on another NDMA receptor antagonist for tinnitus – OTO-311 – in Phase I at Otonomy Inc. The Piper Jaffray analysts divorced any link between Keyzilen's failure and Otonomy's valuation which was "in no way linked to the tinnitus program" but instead would be dependent on its recently approved topical drug Otipro (ciprofloxacin). Had the result of TACTT2 been different, no doubt the Otonomy valuation would now be happily married to a blockbuster. Otipro launched in March 2016 in competition with other generic antibiotic drops for ear infections and according to Piper Jaffray "this product alone justifies upside to Otonomy's [$517m] valuation" despite sales not being disclosed in its recent second-quarter earnings announcement. Nevertheless, the rearguard action by the analysts at Piper Jaffray did indeed deflect any Auris-related stock price fall-out as Otonomy's share price finished the week up 4.4%.

In a supposedly quiet week for news, the invalidity due to obviousness ruling from a Federal judge on Johnson & Johnson's (J&J) '471 Remicade (infliximab) patent should have sent a momentous shockwave across both the world's largest healthcare company and innovators of biologic products everywhere (Also see "Nixed Remicade Patent Clears Way For Pfizer/Celltrion Biosimilar Launch" - Scrip, 18 Aug, 2016.). Waiting in the wings is a recently FDA-approved biosimilar version of Remicade by Pfizer Inc. and partner Celltrion Inc. and while J&J is appealing the ruling, the prospect of biosimilar competition for a blockbuster biologic product was met with a rather muted reception. J&J's share price finished the week down less than 2.5%. J&J has, like some of the small-molecule generic companies facing price deflation, acted according to the ostrich-head-in-sand idiom by keeping its full-year guidance unchanged; an act of defiance that seems to be supported by the full-year sales forecasts of most investment bank analysts. The exception to this ostrich rule are the analysts of JP Morgan who do expect biosimilar competition for Remicade this year resulting in a just over $1bn in sales lost in 2017. The analysts from JP Morgan also forecast no net change in sales as other J&J products make up for sales lost to Remicade biosimilar competition. This momentous but net neutral stance reminded me of trees falling in a forest with no one around to hear the crash.

Other silly season new last week included a 'positive' clinical trial at Aurinia Pharmaceuticals Inc. with an inverse dose response, patient deaths and a glossing over of the chequered history of the drug voclosporin. With that sort of backdrop to the summer doldrums, I can't wait for the start of back-to-school season.

The Magna Biopharma Income fund holdings include Pfizer.

Andy Smith is chief investment officer of Mann Bioinvest. Mann Bioinvest is the investment adviser for the Magna BioPharma Income fund which has no position in the stocks mentioned, unless stated above. Dr Smith gives an investment fund manager's view on life science companies. He has been lead fund manager for four life science–specific funds, including International Biotechnology Trust and the AXA Framlington Biotech Fund, and was awarded the Technology Fund Manager of the year for 2007.