3 Signs a Drug Will Fail

Brandy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Biotech and pharma investing often focuses on the potential approval and marketability of drugs. This can involve short-term investors trading on binary events or long-term investors weighing the marketability of several products to determine a company’s overall potential.

A Food and Drug Administration approval doesn’t guarantee a product’s success. Some drugs are obviously heading out into a blockbuster market -- such as the all-oral hepatitis C treatments coming down the pipes. But how can you tell if the reverse will happen?

Here are three signs that a drug could fail when it reaches the market.

1. The indication is tricky

Parkinson’s disease projects frequently fail out of clinical trials before they reach market. That’s because we don’t know what causes the disease, so treatments tend to fall into one of two categories: another version of the same old drugs or a new shot in the dark.  

The currently available drugs treat the symptoms of Parkinson's, since there isn't a cure. And those basic drugs have been on the market long enough for generics to arrive. So there's not a lot of incentive to bring out slightly better versions of old drugs--especially when added to the chances of other problems along the way. 

One of the leading Parkinson's projects has gotten hung up in regulatory concerns. Impax’s (NASDAQ: IPXL) Rytary for Parkinson’s is an extended-release version of the old school carbidopa-levodopa, which converts into dopamine -- a neurotransmitter degenerated by the disease. The FDA issued a complete response letter (CRL) in March citing concerns with the manufacturing facilities. 

Impax is primarily a generics company, so its branded pipeline only contains three drugs, including Rytary. Partner GlaxoSmithKline decided to bail out of a nearly $200 million partnership after the CRL. The setbacks forced a 10% workforce cut in June to help manage costs. And all this fuss is to advance a drug that will have strong generic competition. 

2. Too much established competition  

The GLP-1 diabetes market serves as a good example of too much established competition. Market leader Victoza from Novo Nordisk had 2012 sales of about $1.6 billion. Trailing behind are Bristol-Myers Squibb’s Byetta and its once-weekly baby brother Bydureon.

So this is another example where the new drugs would really have to blow the old drugs out of the water to steal a leading market position.

Sanofi’s Lyxumia received approval in February, but has been labeled a Byetta clone. Following that down the pipes is GlaxoSmithKline’s albiglutide, which recently had its PDUFA deadline pushed back three months to April of next year. Albiglutide underperformed Victoza in trials and likely wouldn’t find a substantial market slice.

A possible exception to the rule is Eli Lilly’s (NYSE: LLY) dulaglutide, which outperformed Byetta in trials. The drug’s undergoing a late-stage comparison to Victoza, and if that pans out in Lilly’s favor the drug could scoot towards the front of the pack

Why would big pharma companies bother with a saturated market? Lilly has several diabetes projects in the pipes, but needs to risk even a minor victory due to an impending patent cliff. Lilly's second quarter featured a 6% growth in worldwide revenue.

But a major player in that growth -- the $5 antidepressant Cymbalta -- falls off patent this year. And $1 billion osteoporosis treatment Evista hits the cliff next year. That's two of Lilly's top 10 products wiped out in a short time period. 

The company's overall pipeline has seen several crashes lately, but the diabetes projects have turned up the best results. So sometimes it's worth the risk of entering an overly-competitive market. 

3. Cost is too high

Sanofi had to slash the price of its colorectal cancer drug Zaltrap by 50% after high profile doctors advised against prescribing the drug due to its cost -- and the fact that Zaltrap wasn’t a better drug than a much cheaper competitor. But cost problems can also arise when insurance companies don’t want to play ball.

That’s one of the reasons Vivus (NASDAQ: VVUS) saw a soft launch last year for its much-hyped obesity drug Qsymia. Insurers were reluctant to cover the drug since diet and exercises are free alternatives. As Brian Orelli noted, only one-third of Qsymia patients were covered by insurance -- and that was largely at the highest price tier.

Qsymia was also limited by a Risk Evaluation and Mitigation Strategy requirement that limited its sale through mail order pharmacies. That REMS has since been modified and Qsymia’s prescription numbers are growing slowly. But it’s not exactly what explains why investors forced in new management.

The newly-reported second quarter showed exactly how bad Qsymia has stung Vivus. Net product revenues were $5.5 million, but the company's overall net loss was $55.5  million -- most of that relating to Qsymia expenses.  Shares dropped over 5% following the news. 

New CEO Anthony Zook outlined a four-point plan for Vivus' recovery, which included finding a big pharma partner. But the plan will surely involve finding ways to make Qsymia more affordable for more patients. 

Putting the signs to use

When evaluating a company’s development pipeline and/or commercialized products as a long-term investor, you should look at each drug with these factors in mind. A company like Vivus only has the cost-probative Qsymia and a market saturated erectile dysfunction drug, which helps explain why investors have gotten mutinous.

But remember that sometimes a minor victory is all the company needs. Eli Lilly, for example, wouldn't need to lead the market with its GLP-1. The company only needs to help offset a portion of Cymbalta's losses. 

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