The Uneven Pendulum: Measuring Upside and Downside in Biopharma Stock Performance
It has happened. After years of blood, sweat, and tears, the lead compound has made it to Phase 3 pivotal studies. Patients, physicians, the company team and investors all wait patiently for recruitment to complete and data to be collected, hoping to improve patient lives (and their portfolio returns). If the company has already gone public, financial stakeholders will now see to what extent their investments will grow, or drop in unfortunate cases. But just how much will a stock price move on the news? Locust Walk undertook an effort to quantify recent historical impact of major late-stage events that might provide some guidance to investors or company management eager to understand the immediate impact of a clinical trial result press release on their stock price. From our analysis of 25 recent Phase 3 successes, failures and strategic alliances, we observed that for prospective investors in a public security, there may be more to lose than to win.
To understand the performance of public Phase 3 biopharma companies following trial results, we looked at select late-stage events over the past year. For these events, we looked at the immediate change in stock price based on closing stock price post the day of press release. To account for outliers, such as successes with extenuating circumstances or an especially high-risk / high-reward drug that can skew the average, we eliminated highs and lows for Phase 3 successes and misses .
During the selected period, the 10 companies that experienced a Phase III topline “miss” averaged an immediate decline in stock price of 73%. Value can fluctuate based on many factors, but it is of no surprise that companies with a less diversified portfolio and a single lead program are hit the hardest. However, what is surprising is that the magnitude of the decline is remarkably consistent across all 10 companies.
Despite this large decrease upon failure, we observed ONLY a +21% increase on average for a Phase 3 clinical success. One may be surprised to see such a large difference in the average stock jump on a Phase 3 win vs the tailspin seen during a miss. What this seems to imply is that there is far more downside to a prospective biotech investor than immediate upside for a late-stage trial read out. Obviously, over time, a positive trial should continue to add value to a biotech’s stock price. However, for those looking for a “quick-hit,” caveat emptor.
Since taking on clinical trial risk seems to be only for those with strong stomachs, Locust Walk has observed another way for shareholders to capture value from growth biopharmaceutical companies. We see a mean stock increase for successful licenses and deals ~+25% which is an increase of about +4% over Phase 3 successes mentioned above. We speculate that when another company buys in, it bolsters investor confidence. Instead of the sound of one hand clapping, a second team is now a believer in the scientific and commercial story.
While there are obviously many further iterations of these data (and others) one could perform, based on this simple (but current) analysis, we would like to propose a new set of heuristics for biotech industry observers to consider: specifically, companies should expect to see between a 20%-30% pop on a Phase 3 win and about the same range for concluding a strategic partnership. Investors look positively to the future, and hopes to bank on success for these companies. When trials fail, growth biopharma companies are hit especially hard, averaging a stock price drop of (73%) the day of announcement. We echo the sentiment of investors, and hope many companies continue to see a positive value inflection in 2017 .
Locust Walk works with life sciences companies at all stages of development to help them navigate biotech’s choppy waters. If we can assist you in managing these risks, please don’t hesitate to contact us at chris@locustwalk.com Chris Ehrlich, Managing Director.
