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Weird Interview and Foolish Manager

Postby Nate W. » Sat Apr 30, 2016 1:41 pm

Yesterday, I had a strange interview with a start-up biotech hedge fund for an analyst position. There was only one question. It was so broadly worded that I just froze and, after reflection, thought what the guy might be doing to be foolish (for his investors and employees). So, I wanted to get your opinion. The manager of the hedge fund, an MD, asked "what expertise do you bring to the table that would help you determine scientifically whether a therapeutic would work effectively and make a good investment (absent any clinical trials data; not mentioned in the question)?"

I paused a moment then replied that you would need Phase 1-3 clinical trials data to determine this. He didn't like this answer because he said you can't make any money waiting until the human trials. I replied that you might lose money too because you don't know whether the drug actually works and institutional investors buy based on positive clinical trials data (when you get a significant rise in the stock price; there is lag period between the positive trials data and stock price appreciation). Sensing he wasn't satisfied I said you can make an educated guess based on the biochemical and genetic data of the target gene and the therapeutic. This might include PK/PD data for a small molecule, knockout data in a mouse model of a human disease, off target effects for a siRNA, the specificity of therapeutic antibody, metabolic data for the therapeutic, the stability (or half life) of the siRNA/mRNA, and gene expression of the target gene if a RNA knockdown approach is being used.....etc.

Still with this type of analysis (and if the data is published or available), the clinical trials data is key. The preclinical therapeutic might work in mice and doesn't work in humans. I believe this hedge fund is trying to short the stocks of preclinical biotechs who have therapeutics in their pipeline that don't have a reasonable chance of working scientifically (based entirely on preclinical published data; no clinical trials).

Of note, 96% of fund managers can't beat the S&P 500 which is about 8.25% for the last ten years. This manager thinks he can make a sound investment (hedge fund) based on start-up biotech stocks w/o assessing clinical trials data. What I am missing here?

Can anyone name a time when there was sound non-clinic and basic research data for the efficacy of a therapeutic and it fails in the clinical trials? This is probably more common.

Can anyone name a time when there was conflicting non-clinic and basic research data for the efficacy of a therapeutic and it surprisingly works in the clinical trials?

What should I do with this interview if this manager wants me to do a sample exercise for him (i.e. he said he would send it)?
Nate W.
 
Posts: 484
Joined: Fri Apr 06, 2012 6:48 pm

Re: Weird Interview and Foolish Manager

Postby D.X. » Mon May 02, 2016 9:34 am

Nate W. wrote:The manager of the hedge fund, an MD, asked "what expertise do you bring to the table that would help you determine scientifically whether a therapeutic would work effectively and make a good investment (absent any clinical trials data; not mentioned in the question)?"

I paused a moment then replied that you would need Phase 1-3 clinical trials data to determine this. He didn't like this answer because he said you can't make any money waiting until the human trials. I replied that you might lose money too because you don't know whether the drug actually works and institutional investors buy based on positive clinical trials data (when you get a significant rise in the stock price; there is lag period between the positive trials data and stock price appreciation). Sensing he wasn't satisfied I said you can make an educated guess based on the biochemical and genetic data of the target gene and the therapeutic. This might include PK/PD data for a small molecule, knockout data in a mouse model of a human disease, off target effects for a siRNA, the specificity of therapeutic antibody, metabolic data for the therapeutic, the stability (or half life) of the siRNA/mRNA, and gene expression of the target gene if a RNA knockdown approach is being used.....etc.

Still with this type of analysis (and if the data is published or available), the clinical trials data is key. The preclinical therapeutic might work in mice and doesn't work in humans. I believe this hedge fund is trying to short the stocks of preclinical biotechs who have therapeutics in their pipeline that don't have a reasonable chance of working scientifically (based entirely on preclinical published data; no clinical trials).

Of note, 96% of fund managers can't beat the S&P 500 which is about 8.25% for the last ten years. This manager thinks he can make a sound investment (hedge fund) based on start-up biotech stocks w/o assessing clinical trials data. What I am missing here?

Can anyone name a time when there was sound non-clinic and basic research data for the efficacy of a therapeutic and it fails in the clinical trials? This is probably more common.

Can anyone name a time when there was conflicting non-clinic and basic research data for the efficacy of a therapeutic and it surprisingly works in the clinical trials?

What should I do with this interview if this manager wants me to do a sample exercise for him (i.e. he said he would send it)?


Hi Nate,

I can answer here. The Manager was not foolish or incorrect in his question and the use of the word "scientifically" was more on the Approach and way of making the Analysis.

In Terms Hedgefund, he wants do know if he's making a good Investment and the way to first get to that is to understand the Market you're playing in.

Not to give you a lesson in Marketing but part of any Business decision is related to your market size, and contibuting to that sizing of the market does not Need clinical Trial data - you can go based on your target product Profile (TPP) and target patient Group, validating a true medical Need exists etc - put that into the context of sizing the market (your Patient potential) by understanding the market Dynamics (clincal practice, HCP and Payer behavior, reimbursement, competitor landscape, Patient flow, disease course etc etc) and you can decide if a drug is a good Investment or not. So that the first part.

Whether or drug will be therapeutically beneficial here also can be assumptive at this Point with any available data and the TPP (target product Profile), you can take assumptions on efficacy and safety based on that and come to a conclusion on benefit or incremental benefit in relation to Standard therapy or competitor if any. You're talking hedge-fund, here and there is toleerance for alot of assumptions provided sufficent referencing and acknowledgements. Alot of commerical decisions are taken Long before Phase III and even at Phase II. We're probably even trying to get data out of combined Phase I/II Trials or even micro Phase I's right? Its about building a Business case, i.e. why invest? what's the ROI and when? . Remember there is risk in drug develompent right? so you work with assumption and best guess estimates based on the data you have both from the market and based on what you have available and then take your decison at the various decision Points.

So he's not that foolish at all rather quite sane, we all want to know our market potential/Business case is as we move towards our commerical decision pints. In early developement, alot is best guest estimates with good udnerstanding of the market with the data you have. And even when you do get those Phase III results you still Need to continuously assess your market right?

To leave that Topic and answer your more scietific question related to clincal studies. For your first question on an example of a product with good non-clincal data and data to predice efficacy that failed in clincal studies? Easy. Clincial Trials of Alzheimer's Disease targeted anti-bodies, such as bapinuzimab.


Regarding your question on questionable on conflicting non-clincal data and Basic science data but gave clinical results? The early days of anti-epilepsy Treatments was something like this as an example. Remember in the early days of drug development, Basic science data and non-clinical data was quite limited and scientists back then did things more on a hunch and a Signal. This was pre-GCP days right, pre molecular biology days? We didn't know such things as "mechanism of Action" - we saw an effect and went with it. That's how it was and you'll find alot of this with alot of mature drugs (established brands) where I like to Play - fun to go back into an old dossier an see what's beind some of our most well-establised drugs consistent with the WHO essentials drug list. Probably many would not make it in today's Research landscape.

But to be clear we should never go ahead on questionable pre-clinical and Basic science data on safety!! That's an accident waiting to happen
This is what happened recently with the Bial Trial with the FAAH inhbitor as we are still learning here (look it up) and related to the TeGenero case where some oversite of pre-clincal and actually, Basic science data in that latter case lead to severe organ damage in patients in the Phase I (if not a death).


Hope I was clear -

DX
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Re: Weird Interview and Foolish Manager

Postby Dick Woodward » Mon May 02, 2016 11:17 am

Nate:

DX is absolutely correct. One other thing to remember. Investors in early-stage drugs (angels, VCs and hedge funds) are looking for the home run(s) that make up for the break-evens and total losses. You do not get a home run by investing in a late-stage drug - you get the home run by finding an opportunity early on - before the whole world knows about it. Investors of this sort typically assume that they will get the majority of their returns out of a small percentage of their investments, and look for reasons to tilt the odds ever-so-slightly in their favor.

An example from real life. We were looking at a company where we were proposing to synthesize their kinase inhibitor. In something like this, one of the things that you want to assess is the drug's probability of success, as this can lead to longer-term manufacturing contracts. We compared the chemical structure of the drug in question with all of the other inhibitors of that kinase in development, and discovered that, while all of the other inhibitors had similar chemical motifs, this one was entirely different. Did this tell us it was going to be a success? Of course not! It did tell us that it was likely to have a different mode of action than all of the others, and that difference had the potential to make it stand out from the pack.

The manager's questions struck me as being entirely realistic. He was absolutely correct that you do not make much money as an investor when the clinical trial data are known - you certainly don't make as much as when you are in early.

Dick
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Re: Weird Interview and Foolish Manager

Postby Nate W. » Mon May 02, 2016 11:21 am

D.X. wrote:

Hi Nate,

I can answer here. The Manager was not foolish or incorrect in his question and the use of the word "scientifically" was more on the Approach and way of making the Analysis.

In Terms Hedgefund, he wants do know if he's making a good Investment and the way to first get to that is to understand the Market you're playing in.

Not to give you a lesson in Marketing but part of any Business decision is related to your market size, and contibuting to that sizing of the market does not Need clinical Trial data - you can go based on your target product Profile (TPP) and target patient Group, validating a true medical Need exists etc - put that into the context of sizing the market (your Patient potential) by understanding the market Dynamics (clincal practice, HCP and Payer behavior, reimbursement, competitor landscape, Patient flow, disease course etc etc) and you can decide if a drug is a good Investment or not. So that the first part.

Whether or drug will be therapeutically beneficial here also can be assumptive at this Point with any available data and the TPP (target product Profile), you can take assumptions on efficacy and safety based on that and come to a conclusion on benefit or incremental benefit in relation to Standard therapy or competitor if any. You're talking hedge-fund, here and there is toleerance for alot of assumptions provided sufficent referencing and acknowledgements. Alot of commerical decisions are taken Long before Phase III and even at Phase II. We're probably even trying to get data out of combined Phase I/II Trials or even micro Phase I's right? Its about building a Business case, i.e. why invest? what's the ROI and when? . Remember there is risk in drug develompent right? so you work with assumption and best guess estimates based on the data you have both from the market and based on what you have available and then take your decison at the various decision Points.

So he's not that foolish at all rather quite sane, we all want to know our market potential/Business case is as we move towards our commerical decision pints. In early developement, alot is best guest estimates with good udnerstanding of the market with the data you have. And even when you do get those Phase III results you still Need to continuously assess your market right?

To leave that Topic and answer your more scietific question related to clincal studies. For your first question on an example of a product with good non-clincal data and data to predice efficacy that failed in clincal studies? Easy. Clincial Trials of Alzheimer's Disease targeted anti-bodies, such as bapinuzimab.


Regarding your question on questionable on conflicting non-clincal data and Basic science data but gave clinical results? The early days of anti-epilepsy Treatments was something like this as an example. Remember in the early days of drug development, Basic science data and non-clinical data was quite limited and scientists back then did things more on a hunch and a Signal. This was pre-GCP days right, pre molecular biology days? We didn't know such things as "mechanism of Action" - we saw an effect and went with it. That's how it was and you'll find alot of this with alot of mature drugs (established brands) where I like to Play - fun to go back into an old dossier an see what's beind some of our most well-establised drugs consistent with the WHO essentials drug list. Probably many would not make it in today's Research landscape.

But to be clear we should never go ahead on questionable pre-clinical and Basic science data on safety!! That's an accident waiting to happen
This is what happened recently with the Bial Trial with the FAAH inhbitor as we are still learning here (look it up) and related to the TeGenero case where some oversite of pre-clincal and actually, Basic science data in that latter case lead to severe organ damage in patients in the Phase I (if not a death).


Hope I was clear -

DX


DX,

A week before this interview, I spoke with an established biotech VC guy and before that I spoke with a biotech analyst at an investment bank about much of the same topics. I am trying to paraphrase the question as best I remember because I had to ask 2-3 times before it was clear.

He wasn't interested in the potential marketability of the pre-clinical drug, only the basic science behind the drug. I am certain about this. As part of my answer, I told him that you would also have to assess the strength of the patent portfolio surrounding this therapeutic. No, he keep going back to the science. When I spoke with the VC about this beforehand, the VC emphasized that having clinical trails data is key to determining whether an investment is sound. Convincing data from a mouse model of the disease, toxicology/dosing data, and comparison drug studies is also helpful. The biotech analyst who I know and work with told me that the only reliable indication of whether a biotech's stock price will rise is positive phase 1-2 clinical trials data. The hedge fund manager gave me an example: tell me scientifically why an inhibitor of farnesoid X receptor as a new target of non-alcoholic steatohepatitis (NASH) wouldn't work?

I agree with everything you are saying. The marketability and the business decisions are all important in determining whether a company's technology will be successful. These factors only seem to make my case which is you can't rely solely on the science in determining whether a company's stock will rise or if that stock is a good long term investment. There is the example of bardoxolone methyl. It wasn't determined until Phase 3 trials that bardoxolone methyl was toxic at certain doses. The basic science data provide no evidence that it would be toxic. When several patients died in the clinical trails, Abbott pull its collaboration and financing of this small biotech. Imagine if you (or the hedge fund) invested in the stock of this biotech based solely on the science. From the standpoint of the hedge fund, it would seem that clinical trials data is key in determining whether the stock of a small biotech is a good investment. Of note, big Pharma (or institutional investors buying the stock) will only collaborate and invest in a small biotech if some clinical trials work has been done.

I like your examples of the clinical trials and conflicting basic science data. If interested, look at the IPOs and the stock price of the more successful biotechs. There is a strong correlation between the rise of the stock price and positive clinical trials. There was six months between the Pharmasset phase 2 trials of nucleoside/tide analogs (Ledipasvir/sofosbuvir (trade name Harvoni)) showing 100% effectiveness in treating HepC infection and the rise of Pharmasset’s stock price from $20 to 137 per share. There is a pattern.
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Re: Weird Interview and Foolish Manager

Postby D.X. » Wed May 04, 2016 4:20 am

Nate W. wrote:


A week before this interview, I spoke with an established biotech VC guy and before that I spoke with a biotech analyst at an investment bank about much of the same topics. I am trying to paraphrase the question as best I remember because I had to ask 2-3 times before it was clear.

He wasn't interested in the potential marketability of the pre-clinical drug, only the basic science behind the drug. I agree with everything you are saying. The marketability and the business decisions are all important in determining whether a company's technology will be successful.

I like your examples of the clinical trials and conflicting basic science data. If interested, look at the IPOs and the stock price of the more successful biotechs. There is a strong correlation between the rise of the stock price and positive clinical trials. There was six months between the Pharmasset phase 2 trials of nucleoside/tide analogs (Ledipasvir/sofosbuvir (trade name Harvoni)) showing 100% effectiveness in treating HepC infection and the rise of Pharmasset’s stock price from $20 to 137 per share. There is a pattern.


Well from my Point of view if the VC is not intested in the potential marketability then he may not be such a good VC. Put it this way - For the past few years accross my roles I've worked cross-functionally with our BD&L Teams as a Subject Matter Expert for assessing in-licensing and co-development opportunities - I know what a good proposal from a biotech Looks like and what a bad one does. I also know what to look for. The good ones, consider their market potential, and in generally try to sell us a story. I've rejected some VC backed biotechs who have had Phase II data and had moved into Phase III. The science is contextualized into the market. The patents you talk about all well and nice, great wonderful, but when I first get that non-confidential dossier, I can careless about patents at first pass- thats the next step if we agree to get the confidential dossier and if we agree to know more then the legal Team will become activated. So on my first past, I'm looking the product, science etc. but I'm also lookcing at fit to Portfolio, our Business model, and the market dymnamics, in the context of what data they have and the opportunity that they are already thell me there is. So becareful on what you're Hearing and your interpretation. Any Company Comes to us with just the science and no thinking about the market may raise some questions.

So yes the data package is great to have, but put it this way, just because you have great pre-clinical data, and great clinical data, will no way mean your product will be sucessful at all in the market. I had one product in my past - among all its competitors it had the best data..actually the best of the best. Solid efficacy, solid saftey, awesomely differentiated and provided a true value to patients. I started when they were doing the Launch, which was awesome. But..well..slow uptake, hard to get reimbursement, the amazing data translated in to an incremental benefit that payers didnt want to pay for and the MDs, well didn't see the value despite the awesome data. And seriously the data was rock solid, not only siginficant but we had hit what's called the MCID or Minimial Clinical Imporant Difference vs competitor product in a Head to head trial. So great data. Sales didn't come as expected - we deprioritized the product and all of us moved on.

We still joke today that we had the best non-selling product on the market. I am personally quite sad, I had alot of fun on that product. But this was where I learned the importance of understanding the market etc (i.e. the elements i mentioned in my upper post). And really contextualizing and putting the data into context earlier, rather than later as we did.

There is another product out there in Heart Failure, one of the best clinical studies done in HF, amazing outcomes, I mean amazing and this was a Trial of over 8,000 patients. Primary endpoing for mortality and hospitalizaion is like p<0.001 The got FDA and EMA approval in near concert - put it this way, it aint performing too well at least to-date as forecasted. Entrenched clinical behavior and payer reluctiong to pay for incremental benefit vs. cheaper competitor (comparator arm product) as I understand serving as barrier. So remember great data-package is not a predictor of commerical success.

Regarding your Point on stock Price and Trial data - no Need to tell me, been there or still there - i'm part of teams that are censored for material information to the investor community. The other Thing that moves stock Prices postiively...budget cuts and head count reductions.

Anwyays, so just Point is becarefully, and always be commericially minded, it will alway work to your advantge, be mindful of the pitfall related to just thinking about the science and perhaps in your case, patents. Much more going on.

DX
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