Biotech investing can sometimes be a downright confusing game, even for people who are supposed to know what they are talking about. Ask the folks at San Diego-based Optimer Pharmaceuticals (NASDAQ: OPTR).
Optimer has been one of a few bright spots in biotech over the past year. Back in November, its lead drug candidate, an antibiotic for C.difficile bacterial infections that cause horrific and potentially fatal cases of diarrhea, reached its main goal in a clinical trial of 600 patients. It was slightly better than the standard vancomycin antibiotic at curing patients, and was significantly better at preserving healthy bacteria in the gut that protect people suffering a relapse. It’s the first new treatment against this pathogen in decades, and it’s about to hit the market right when public health officials are freaking out about fast-rising incidence of “C. diff” in U.S. hospitals. The statistical analyses left no doubt that this drug was working.
Optimer discussed this data in significant detail six months ago, but more complete data were presented on Sunday, May 17, at a medical meeting in Helsinki, Finland. Not much was really new, except for one tidbit about a subpopulation of patients with an especially virulent form of “C.diff” infection known as BI or NAP1/027. The Optimer drug, fidaxomycin, was no better than standard vancomycin at preventing recurrences. About one-third of all patients who get “C.diff” have this especially aggressive form.
So how did the market react to this news? It shot first and asked questions later.
Shares of Optimer closed at $11.60 the last day of trading before the Helsinki presentation. The next day of trading, analysts from Needham & Co., JMP Securities, and Ladenburg Thalmann all downgraded their ratings on the stock. Shares plummeted as much as 18 percent during the day, to as low as $9.54 on heavy volume, as investors followed their interpretation of the bad news.
Then things got weird. Two days later, Ladenburg Thalmann changed its mind, and upgraded the stock again to “Buy.” All those investors who ran for the exits in fear suddenly looked kind of foolish, as the stock regained all those losses and more, closing at $12.28. Since then, Optimer has done nothing but climb even higher, closing yesterday at $13.84—a whopping 19 percent gain since the supposedly negative results came out in Helsinki. Not bad for an obscure stock that was trading for less than $5 back in early November.
What’s going on here? That was the gist of my questioning a couple weeks ago when I spoke to Optimer’s chief financial officer, John Prunty, and chief commercial officer Kevin Poulos.
A lot of people were essentially confused about how to interpret the data, Prunty says. It’s true that the Optimer drug doesn’t appear to offer any special protection against recurrence of the hypervirulent form of “C.Diff,” he says. One could look at that simply as saying the market just shrunk by one-third for its drug. But that would be wrong, he said, because doctors faced with a diagnosis of “C.Diff” are dealing with an emergency that requires immediate treatment. The current lab tests that are sensitive enough to tell the difference between normal C.Diff and the hypervirulent form take three weeks to produce a result. So in the real world, no doctor is going to wait around for that result before deciding whether to prescribe the Optimer drug, or the usual vancomycin, Prunty says. They’re likely to prescribe fidaxomycin anyway, in the hopes that the patient is among the two-thirds of the population who will get a greater protection against relapse.
“It’s really a non-issue when it comes to the value proposition of our product,” Prunty says. “One-third of the time you would be prescribing and you’ll get something equal to the best treatment available. Two-thirds of the time you’ll be prescribing something that’s significantly better.”
The rest of the conversation I spent asking these guys about what to watch for from Optimer the rest of this year. The company raised $32.9 million in a secondary stock sale in March, so its balance sheet is in better shape than a lot of other biotechs around the country. It also announced plans to file an application for approval of fidaxomycin in the European Union on the basis of this single 600-patient study alone, although it hasn’t actually sent off the application yet.
The big news will come in the second half of the year, when Optimer expects to get results from a second study of 600 patients to confirm the earlier finding. This study is designed to be identical to the earlier one, except it draws patients from different geographies around the world, Prunty says. Assuming that data matches up, the company expects to apply on the basis of that heftier body of evidence to the FDA sometime in early 2010, he says.
The other important milestone will be signing up a partner to help commercialize the drug. The company isn’t saying how many companies are negotiating for the rights to fidaxomycin, but Optimer expects to complete a deal by the end of this year, Poulos says. Ever a dealmaker, he continues to talk like he’s been dealt a heckuva good set of cards to play in this poker game.
A couple years ago, Optimer was one of several companies jockeying to develop new treatments for “C.diff,” with competitors including Genzyme (NASDAQ: GENZ), Oscient Pharmaceuticals (NASDAQ: OSCI) and Salix Pharmaceuticals (NASDAQ: SLXP). At the time, Optimer looked like it might be second or third to the market with a new drug. All of those players have lost their momentum or dropped out of the hunt, and now Optimer believes it will have a hammerlock on this market for the next five years.
Of course, there are barriers to entry like in any market. Hospitals don’t like to admit when they have cases of C.Diff for liability reasons, and diagnostic tests can sometimes overlook cases. Pricing could be a challenge if Optimer establishes a steep premium over the existing standard of care. But Optimer, assuming it can win FDA approval, will have a sizable business opportunity to treat this dangerous bug that hospitals would surely like to get rid of.
“We have no other formidable competitors,” Poulos says.