We are pleased to have been interviewed by In Vivo about our advice to clients when facing a crisis. Please see below for the full article.

A Phase III Failure Is Not Always Terminal But It Is Always Major

Bouncing Back From A Phase III Flop

Small Pharma’s Road To Recovery

14 Apr 2020 Analysis

Executive Summary

The passing of a decade always brings with it an inevitable glance in the rear-view mirror to see how far we have come. The pharma industry is no different and it would be remiss to ignore the failings of the industry’s collective R&D engine while also celebrating its successes.

Joanne Shorthouse

  • The nature of an innovative industry such as biopharma means that failure is just as likely as success and preparing to fail is as, if not more, important than preparing to fly.
  • The R&D model for mid-sized companies is becoming more flexible and outsourced.
  • However, for smaller venture-capital backed firms a late-stage trial failure is not just a disappointment, it could mean a company fatality.The composite success rate of clinical development stages from Phase I trials to regulatory submission fell to 11.4% in 2018, down from 14.4% in 2017, according to IQVIA’s 2019 report The Changing Landscape of Research and Development. In the decade between 2008 and 2018, the average Phase III success rate was 68%. In 2018, the success rates for Phase I and Phase III trials both fell by about 7.5% while Phase II improved by less than 1%.Inevitably, all company circumstances differ and therefore govern how a company reacts to failure at a pivotal developmental stage. Levels of liquidity, number of R&D programs and shareholder confidence all play a role in how a firm bounces back. For some firms it may be the end of the road, others manage to recover, while some change R&D strategy entirely.The R&D model for mid-sized companies is becoming more flexible and outsourced, with companies able to scale R&D spend up or down depending on what happens. Their R&D portfolios are more open to a risk-sharing approach, so if a Phase III study does fail it has not thrown a lot of its balance sheet out of the window. The failure is recognized, as is the monetary loss, but the future of the company is not at risk and profits can be recovered in the future.
  • However, for smaller venture-capital backed firms a late-stage trial failure is not just a disappointment, it could mean a company fatality. If the company is not insured by a portfolio of therapy area development and is dependent on the success of a single lead asset, the failure of said asset may means curtains for the business. This is exactly the situation that Faron Pharmaceuticals Oy found itself in, in May 2018, when Markku Jalkanen, founder and CEO, was handed devastating results from the Phase III trial of the company’s lead asset, Traumakine (FP-1201-lyo).
  • John Rountree, managing partner at Novasecta Partners, a consultancy that advises mid-sized, mid-cap pharma companies, told In Vivo that for his clients a Phase III failure is not terminal, but it is always major, “a big deal.” The nature of an innovative industry such as biopharma means that failure is just as likely as success and preparing to fail is as, if not more, important than preparing to fly.
  • Despite these disheartening figures, the number of molecules in development in Phase II or later increased by 11% in 2018 to a total of 2,891.
  • According to US industry body PhRMA, the average R&D cost of a bringing an FDA-approved drug to patients is around $2.6bn over the past decade, including the cost of the many medicines that do not make it through to approval.


Faron And The Failed Trial

Markku Jalkanen

Traumakine, developed for acute respiratory distress syndrome (ARDS), had been in a Phase III pan-European study in 300 patients. Phase II studies had been extremely positive, and the company was confident in entering Phase III trials. However, the INTEREST trial did not meet the day 28 primary endpoint of ventilator free days and survival.

“It looked very promising at the time but when we finally got the results, that was the darkest day of my life”

Markku Jalkanen

Founder and CEO

The Finnish scientist had started Faron in 2007, and Phase II trials of Traumakine began in 2008 until 2011 and had “fantastic results,” an 81% reduction in 28-day mortality, which was consequently published in The Lancet.

“Of course, we got excited and thought to do repetition of that Phase II on a pivotal scale, and then decided to make it a pan-European trial,”

Markku Jalkanen

Founder and CEO

Faron received a €6m grant from the EU that covered one third of the trial cost, and set up an eight country, 70 site trial all over Europe in significant hospitals.

The original objective of the pivotal trial was all cause mortality after 28 days dosing. Being designed as a blinded trial, the team at Faron were “fooled a little bit” by the mortality results coming in as the trial was ongoing. Being an adverse event, the team were informed every time there was a patient death, but they did not know if this was from the placebo or treatment arm.

However, when the results came in the placebo and treatment arm looked very much the same.

While Jalkanen immediately requested to see the biomarker data, the company was reeling. Employees were disappointed, as was the market causing the company to lose 90% of its market cap when the news was announced. “But we believed the science and we said to the market that we would find out what went wrong,” explained Jalkanen.


Strategy For The Aftermath

In the days following the Phase III failure Faron’s chair, Frank Armstrong, advised the company to set up a three-day, -week and -month plan. Within three days the company’s secondary program, Clevegen ̶ a novel anti-Clever-1 antibody ̶ was the lead asset and allowed the firm to keep as many R&D employees at the business as possible to work on the immunotherapy.

Inevitably there were job cuts in the commercial department. However, three weeks after the Traumakine failure the company had a plan for the future of its R&D. It moved to make Clevegen as developmentally active as possible and, seven months after becoming Faron’s lead asset, the first patient was dosed in the Clevegen trial. After three months it had an evaluation of what went wrong with Traumakine. By analyzing the biomarker data, Faron found that the group that had not responded to treatment had been receiving corticosteroids.

The markets reacted favourably to Clevegen, and Faron experienced the third largest share price increase among AIM-listed companies in 2019. “We had a four-fold increase in the share price,” Jalkanen recalled. Faron is now a €150m company.

Two years after the Traumakine failure and Faron is rebuilding its regulatory program for Traumakine, and has agreed a new trial design with the FDA allowing the company to move forward with the controlled use of corticosteroids. Traumakine has also been introduced as a new treatment arm in the REMAP-CAP adaptive clinical trial initiative, a global study looking at how to improve treatment of critically ill COVID-19 patients. (Also see "Can Fresh INTEREST Breathe New Life Into Faron's Traumakine? " - Scrip, 6 Dec, 2018.)


Post-Shock Strategy

“It’s very hard, and particularly hard if the company has been set up as a one product play, which is typically what a lot of the venture guys are doing these days” ...“They set up one-product-plays and that does not lend itself to a company surviving post-flop, even if there might be some great scientists in there and some great ideas, it doesn’t lend itself to survival. The theory in the venture world is that they’ll reform in another company rather than keep the company going.”

Managing Partner at Novasecta Partners,

John Rountree,

Phase III Flops Of The Last Decade

2012 - Eli Lilly & Co.'s solanezumab, a disease-modifying treatment for Alzheimer’s disease failed in 2012 and 2016. The most recent disappointment comes from a failed 2020 study of the anti-beta amyloid drug along with Roche’s gantenerumab in people with the early stages of a rare, inherited form of the disease.


2012 – AstraZeneca’s antidepressant candidate TC-5214, licensed from Targacept in December 2009, may not have shocked the pharma industry, but it was a costly setback. AstraZeneca paid $200m up front for TC-5214, pledging milestones of potentially more than $1bn and agreeing to cover 80% of the costs of development.


2013 - Merck & Co. Inc’s HDL-raising cardiovascular drug Tredaptive failed to meet the primary endpoint in a 25,000 patient Phase III trial. Tredaptive, which tested the hypothesis that increasing HDL cholesterol could improve cardiovascular outcomes for patients, showed no significant reduction in risk of major cardiovascular events or death and an increase in non-fatal serious adverse events.


2016 – Bristol Myers-Squibb’s Opdivo (nivolumab) missed the primary progression-free survival endpoint in its Phase III study CheckMate 026, which was tested the checkpoint inhibitor in first-line lung cancer.


2019 – Last year Conatus’ pan-caspase inhibitor emricasan, partnered with Novartis AG, failed a Phase IIb study in NASH patients with decompensated cirrhosis. When the pivotal studies failed it announced a 40% staff cut and reviewed its strategic options including cutting its other pipeline program.


When the UK biotech Circassia Pharmaceuticals PLC experienced two Phase III flops in its cat and house mite allergy trials in 2016 and 2017 the firm reacted by dropping the allergy portfolio altogether and instead invested heavily into its respiratory portfolio, including the acquisition of commercialization rights to AstaZeneca’s respiratory assets Tudorza (aclidinium bromide) and Duaklir (formoterol+aclidinium). (Also see "Circassia Puts Aside R&D, Aims To Grow Commercial Platform" - Scrip, 24 Apr, 2018.)


“I think it was an okay solution, but it completely flipped the company from being a technology bet to a commercialization bet,” said Rountree. “Rightly so, the investors probably thought it was over. It’s very, very difficult to recover, it’s that confidence thing. If it’s a small company like that, you might be better off admitting that it’s over.”


In April 2020, Circassia announced it was terminating this commercialization deal with AstraZeneca, causing Circassia to change its business model again. The company also plans to drop "Pharmaceuticals" from its name to become Circassia Group PLC. The company will focus on its Niox respiratory diagnostic platform. Cancelling the deal with AstraZeneca "will transform Circassia into a debt-free business with a strong revenue-generating business, with which we have the potential to expand into new territories and a commercial infrastructure that can in the medium term be further leveraged through broadening its range of products," the company said in an 9 April statement.


US firm Conatus Pharmaceuticals Inc. announced at the start of 2020 that it would no longer be pursuing development of its non-alcoholic steatohepatitis (NASH) asset emricasan after a

Phase IIb failure and launched a reverse merger with privately-held Histogen, which develops regenerative medicines for male pattern baldness. Last June, Conatus’ pan-caspase inhibitor emricasan, developed in partnership with Novartis AG, failed a Phase IIb study in NASH patients with decompensated cirrhosis. The firm announced a 40% staff cut and reviewed its strategic options; it also shut down its other pipeline program, a preclinical caspase inhibitor for inflammasome disease. (Also see "Deal Watch: Conatus Ends NASH Ambitions, Merges With Regenerative Medicine Firm Histogen" - Scrip, 29 Jan, 2020.)


“Avoid flipping the company,” Rountree counselled. “It’s more sensible to double down on what you have left, there may be some gem in the data, or it might be that you’ve learnt something from that Phase III program that you can repurpose into a new molecule and go back to it,” he said.

Faron’s Jalkanen echoed these sentiments. “You should be honest about what has happened and then evaluate that against the previous data. And then try to come up with a new plan which will overcome the problem,” he said. “You have to work with your clinicians, and we have really succeeded in doing that. Today our clinicians are as excited as they were five years ago,” he said. “It doesn’t come easily, I know that, so you really have to go on and build, but use the data to do that, don’t just talk. Act on data, bring it back to the lab even, for some additional experiments in order to correct the whole thing.”


Sustaining Investor Confidence

Often pharma’s Phase III trials are heavily outsourced, the cash has been spent, gone from the company’s balance sheet. This is not the end of the world if the company can afford it. However, the confidence of investors and shareholders can be decimated, often calling into doubt the mechanisms of the company’s other asset programs, business strategy and management.


Even the best prepared company can, of course, experience a Phase III disappointment. In the aftermath the main thing is to manage the shareholders’ investment, said Novasecta’s Rountree. “Show that you’ve got something left,” he advised. “And you’ve got a plan for it.”


Tim Watts, CFO at Shield Therapeutics PLC, has been working to build up investor confidence since February 2018, when the UK biotech experienced what seemed like a Phase III failure. The firm, focused on iron deficiency, had put lead product Ferracru (ferric maltol) through a pivotal Phase III trial for patients with chronic kidney disease. The study was to evaluate haemoglobin response to Ferracru compared to placebo in the treatment of iron deficient anaemia.


So confident was the company that the results would be positive, it asked the contract research organization (CRO) that conducted the trial to share some topline results earlier than planned. However, when the results were announced, it appeared that there was no difference between the placebo and treatment arm.


Shield, listed on the AIM market, had to release the price sensitive information despite the company’s management, led by company founder Carl Sterritt, in disbelief at the results. Six weeks later, unblinded data showed that two or three patients in the placebo arm had received blood transfusions, bringing their haemoglobin levels up in the second half of the study.

Several of the patients in the Ferracru arm had experienced big bleeds and as a result had lost iron, unrelated to the efficacy of the product. Because of this the placebo arm had improved and the treatment arm got worse. At 16 weeks dosing the two arms were not statistically different. The trial protocol had said patients in those situations could be excluded from trial data. After this exclusion the study was shown to have succeeded.

Despite the trial result turnaround in a matter of six weeks, investor confidence in the company plummeted. Staff numbers fell from 90 to around 15 core members of staff in a matter of weeks, and even when those cuts were made the firm was forecast to run out of cash by the end of 2018. The share price had crashed from around £1.50 to 15p. “It was a pretty grim situation,” Watts told In Vivo.

Venture capital firms owned 48% of Shield, with the other ownership made up of strategic investors, management and several well-known institutional investors. “Most of them bailed out pretty quickly, which wasn’t helpful,” said Watts. “They didn’t bail out immediately, they bailed through the rest of 2018. Even with the news six weeks later, everyone’s confidence had been shot.” Watts, previously CFO at Oxford BioMedica, joined the company in August 2018 to help stem the tide of shareholder disappointment.

The company had aimed to market Ferracru itself in the US and Europe but had to shut down its UK and German selling organizations. By September 2018, the company struck an £11m deal to license the product to the Dutch firm Norgine in Europe. This was a critical step in saving the company, Watts said. It gave Shield back some credibility in the face of cynicism from commentators and analysts that distrusted the company considering the updated results. It also gave the firm a cash runway. “That initial license to Norgine was absolutely critical in terms of credibility and giving us the money to carry on,” recalled Watts.

For a company of Shield’s size, the share price is driven by retail investors trading small amounts. Institutional investors do not see enough daily trading, especially when a clinical trial fails. “Once the share price crashes and the market capitalization goes down, as it did to about £25m, big institutions just don’t want to hold shares in companies like that. They basically lose interest,” said Watts.

The company deliberately started to target retail and private investors with its refreshed confidence driven by the Norgine deal, FDA acceptance of the data package, and an expanded label from the European Medicines Agency that stated Ferracru could be used for all patients with iron deficiency (expanded from inflammatory bowel disease patients with iron deficiency anaemia). “By the end of 2018 we had a great story. We went out, very consciously and actively, to find ways of pitching the story to retail investors,” explained Watts. US approval of Ferracru came in July 2019 and the share price rocketed to around £1.90 per share from 30p. (Also see "Shield Therapeutics Looking At US Options For Feraccru" - Scrip, 24 Jan, 2019.)

Since late-2018 the company has also been working to refine its investor relation strategy. To enable analysts to publish research on Shield, it appointed finnCap as a joint broker, alongside Peel Hunt which is the company’s nominated advisor, as well as joint broker. It then paid Hardman and Edison to publish independent reports which “made more noise.” It signed up to investor portals, allowing it to create podcasts and videos which are available for interested investors to access.

“We went to as many retail investor meetings as we could so that we could tell our story face-to-face,” said Watts. “Our daily trading now has gone from a couple of thousand shares a day in the second half of 2018 to trading several hundred thousand shares a day most days. That is with the share price of just over a pound.”

 The share price has since been hovering around £1.30. The market cap at the time of writing is around £150m. Shield is working on a US licensing contract and has just signed a licensing deal for Ferracru in the Chinese market. Watts’ two-year steer seems to have been successful, and buoyed investor confidence. However, often it is not just investors that play a part in a company crash, but the media also.


Prioritizing Communication

Having worked with the press following a crisis Mary-Jane Elliott, managing partner of Consilium Strategic Communications, advises executive management to “be open, transparent and always have good dialogue speaking with compassion to all stakeholders.”

“Once the news is announced, speak about next steps, apologize, take care of the patients and patient groups. Ideally expectations will have been managed in the lead up to the read-out and the markets shouldn’t be too alarmed about read-out results,”

Mary-Jane Elliott

Managing Partner of Consilium Strategic Communications,

It is imperative that a company practise “good issues management,” Elliott told In Vivo.

“Well in advance develop a clear understanding of the organization’s reputation risk profile; map the exposure for different activities, draft messaging to cover a variety of scenarios, identify groups of stakeholders, identify the internal communications decision-making chain of command including clear direction on when to undertake proactive or reactive stakeholder and/or media engagement.”

Mary-Jane Elliott

Managing Partner of Consilium Strategic Communications

Effective issues management requires regular scanning of internal and external information for signs of emerging issues.

“An early response makes for lower impact and reduced reputation damage. Generally, the more open, proactive, rapid and comprehensive the response the less adverse impact there is on the company’s reputation, business operations and relationships with stakeholders.”

Mary-Jane Elliott

Managing Partner of Consilium Strategic Communications

Communicate with all stakeholders simultaneously and ensure the organization’s leadership is given a voice to express the ‘human’ impact should there be one, added Elliott. Increasingly, there is an expectation that those at the helm take responsibility and demonstrate leadership and transparency when things go wrong.

“Your communications have the ability to put the incident or crisis into context,” she said. This may be in the form of an interview or a quote in a press release. This maximizes your chances of being seen to be in control of the situation and the primary source of information as the crisis unfolds. “By being in control of the dialogue, you maximize the chances that your messages will be understood and accepted.”

Mary-Jane Elliott

Managing Partner of Consilium Strategic Communications

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