Biotech bosses vs investors: are you misunderstanding or are they bad at explaining?
There has been a bit of confusion between biotech bosses and their shareholders this year.
In November Mesoblast (ASX:MSB) boss Silviu Itescu told Stockhead investors had “clearly misunderstood” the company’s latest heart failure trial results after $350 million was wiped from the company’s market cap.
Some shareholders weren’t pleased with the assessment.
“Wake up and start speaking english and treat your asx holders with due respect,” said one investor on the Hot Copper forum.
“Get your bloody announcements out clearly and explain them to the lay person!!!” said another.
It’s not the first time a biotech boss has expressed frustration with shareholders.
Earlier this month ResApp (ASX:RAP) boss Tony Keating lamented “we haven’t educated shareholders well enough on what a good result actually looks like” after his stock halved following what he described as “really positive” trial results.
Who is right? Are investors interpreting trial results — which are the bread and butter for biotechs — correctly? Or do CEOs have a point that complex trial results are misunderstood?
When it comes to trial results “you either hit your primary endpoints, or you don’t”, says Morgans senior analyst and health and biotech aficionado Scott Power.
A primary endpoint of a clinical trial is the main result that is measured at the end of a study to see if a treatment has worked.
Health and biotech investors look for this phrase in ASX announcements; as evidenced by Bionomics (ASX:BNO) shares diving when the primary endpoint of its PTSD trial was not met.
Mesoblast missed its primary endpoint but said health authorities believed that was “not a clinically meaningful outcome in and of itself”.
Still, that’s what investors focused on, to the frustration of Mr Itescu — who told us he “could not be more excited about the outcome”.
Morgans analyst Mr Power says investors are understandably cautious at the moment.
“There have been a couple of pretty bad misses lately, so the market is not taking too many prisoners,” Mr Power says, referring to to ResApp’s mixed results, the Bionomics failure and Phosphagenics’ (ASX:POH) court case loss.
“The market is a bit skittish at the moment, and when results aren’t absolutely crystal clean, investors are moving pretty quickly to the next thing to jump on.”
A crystal clean result is one that is easier for investors to grasp, such as the “significant immunological outcomes” Biotron reported from its HIV drug.
Less crystal clean are the announcements from Mesoblast and ResApp, in which some primary endpoints were not met, but other clinically meaningful outcomes were achieved.
Who’s right: CEOs or shareholders? Mr Power says he can see both sides.
“Companies that have met all their primary endpoints, such as a Biotron for example, that’s what investors are rewarding,” he says.
“But we were surprised that ResApp shares fell so much, because they did tick off on three of their primary endpoints, and will be filing for FDA approval.
“And my colleague had a look at Mesoblast and they missed their primary endpoint — but the fact that they hit a number of their secondary endpoints is relevant.”
Bell Potter retained a speculative buy and valuation of $4.06, a 177 per cent premium to Tuesday’s closing price of $1.47.
“In our view, the sell-off following today’s announcement suggests that the market has missed both the significant results on the primary endpoint in subgroup of patients as well as the fact that MSB has shown statistically significant benefit on bleeding and related hospitalisations, which under RMAT discussions have been advised by FDA to be an approvable and clinically meaningful endpoint,” analyst Tanushree Jain wrote.
“The sell-off therefore has created a buying opportunity.”
In the case of ResApp, Morgans said the market “over-reacted” in selling off.
“We view this result as sufficient to gain regulatory approval [from the US’s Federal Drug Administration] for three out of six indications”.
Mr Power agrees that biotechs could do a better job of educating investors on what a good result looks like. “That would probably be a good start,” he says.
He also says that, following a mixed or negative results announcement, to not lose all hope.
“Assuming that things aren’t terminal, a lot of companies who have been through this before, they have the initial fall and then slowly recover when the short-term money goes out of it,” he says.
His advice for health and biotech investors? Read the fine print, and remember that clinical trials take a long time.
“Go straight for the wording around primary endpoints and whether they have been achieved or not,” he says. “The market doesn’t tend to get things that wrong.”
But, he says, it is worth remembering an announcement’s full context. While ResApp and Mesoblast both had millions of dollars wiped from their market cap in the aftermath of the trial results, both are still moving forward, signalling reason for investors to stay on board.
“There does seem to be investor interest coming back into this space,” he says.