Opthea

Opthea stunned the market this week with news that patients receiving the drug in their Phase 3 trial actually did worse than patients on the sham (this is an injection, so a proper double blind trial requires an inactive injection). This was one of two Phase 3 trials. The outcome of the second is still unknown, but any substantial positive effect should really have been seen here.

This is bad news for the local biotech sector. Success would have returned billions of dollars to local investors. Instead, they’re landed with significant losses. This may have already led to selling in other companies, and will clip the wings of those who were willing to risk large amounts of capital on a trial outcome.

Opthea has been around for a long time and we met the company a number of times.

This was the main chart that stopped us from investing:

As you can see, the light blue line (low dose) is below the sham, which is what the trial ultimately showed.

There was a reasonable-sounding explanation given at the time, but one principle in biotech is that if something is wrong, you might only get one clue. So best to listen to it.

The failure of low doses to improve outcomes implied there was no ‘dose dependence’.

If a drug is active, you’d expect it to work increasingly well with higher doses, before hitting some plateau or toxicity limit. Different doses shouldn’t give results in different directions.

Ideally, even in small patient trials, outcomes should neatly align with dose up to the safety limit or the point where reaction kinetics stop further improvement.

I remember management taking us through recut data in this chart available in their January presentation:

Which does show a broad improvement. But note the lower dose, which showed a worsening effect, is absent. My guess is if it was included, it would align with the Phase 3 result.

I have to admit another reason we passed was that the idea of betting on ‘additional letters’ was too foreign and we couldn’t get comfortable with it.

Sometimes ignorance is bliss.

Financing

The company is now under a lot of pressure, as there’s a 4x multiplier on their financing. I don’t want to second guess management: biotech is usually starved of capital, and sometimes you have to take the deal that’s there. This was disclosed in the fine print, but it was absent from some investor presentations, and I can’t say it featured heavily in conversations.

A 4x multiplier is high. Apparently Sohn’s Hearts and Minds and some funds have marked this at 20c on their books, and perhaps this is justifIed if the next Phase 3 trial shows a different outcome. I certainly hope so, but that’s a long shot.

Usually a company like this would trade down to cash, and the remaining balance would give management time to go through the data properly and plan a path forward.

This can be annoying, and there’s generally a mismatch between what management wants to do (keep the company going, salaries flowing) and what investors would prefer (returning the cash).

Almost always, some subgroup has done better than the others and may be worth investigating, but most of the time this results in leftover cash being burned on an inactive drug.

That’s not a concern here though, as it seems the residual cash will be swept to these ‘DFA’ financiers, leaving equity holders with nothing.

In private markets liquidation preferences are common. The trade off is usually a higher valuation, though often capital with a liquidation preference is the only deal on the table.

Perhaps there was a similar dynamic here, where financing was optimized for success, since for a single asset company, failure is fairly bleak anyway.

Trading worse losses in a downside scenario in return for higher profits on success does have a kind of logic to it.

Even so, I don’t think I’ve seen a 4x multiplier before, which seems excessive given the company only has ~US$113 million cash.

Phase 3 readouts typically represent the life’s work of multiple people, who developed novel science, navigated some of the toughest regulatory barriers, and secured multiple rounds of financing from investors who can find easier returns elsewhere.

The only reason we get ~50 new drugs a year, which eventually roll off patent and become public domain assets, is because brilliant people risk their careers chasing these data readouts where the probability of final success is extremely low.

Those involved deserve our applause and gratitude, even if in this case the data came up short.

Michael

ps apparently the link to our previous update didn’t work for everyone, so here it is again: