This article discusses the implications of the impending release of results for Prana Biotechnology's (PRAN) IMAGINE trial. For more background regarding PRAN you can read my article here.
To say there has been some volatility in the trading of PRAN recently would be an understatement. The intraday trading range has often exceeded 10% with the share price swinging from an increase to a decrease and back again on no substantial news.
Figure 1. Candlestick share price chart of Prana Biotechnology over the last month.
(click to enlarge)
This is a clear indication that the market is unsure of what the prospects for PRAN are and that there is an opportunity for the more astute investor to gain an edge. For investors interested in writing options, the premiums on offer are large, the April 19th $11 calls last traded at $3.50 and the puts at $3.20 but the risks are not for the faint hearted.
There has been much commentary about the implications of the results of the recent REACH2HD trial results, some negative, some positive and others more balanced.
In the short term as is often the case, psychology and momentum are having a far greater influence on the share price of PRAN than any rational discussion about the actual fundamental situation.
The price action surrounding the REACH2HD results provides a clue as to what might unfold around the release of the IMAGINE results. The share price initially surged to $13.29 as people bought in prior to the release of the REACH2HD for fear of missing out.
Supply would have been from long-term shareholders with the benefit of an average buy price in the $2 range and those buying on the way up to lock in profits. Short-term momentum traders would have joined them and we saw PRAN sink back down to the $7 range. For longer term shareholders, this was still a >200% gain but would have left most recent shareholders in the red.
The share price surged above $10 upon the release of the REACH2HD results, saw an initial surge above $10 before it dipped below $8 again on sustained bad publicity. This proved to be a good buying opportunity for those able to analyse the results more rationally as they were better than anyone could have reasonably expected prior to its release.
Where to from now?
March has arrived and the impending release of the IMAGINE results looms large. The REACH2HD results were encouraging as the hurdles for PBT2's use in Huntington's disease will be much lower, but it is the Alzheimer's dementia indication where the big money lies.
At a market capitalisation approaching $500m, PRAN no longer has the margin of safety it once had as one of many struggling micro-cap Australian Biotech Companies. Investors with the foresight to have invested in PRAN at that stage have seen a >5-fold increase in their investment. Those that did not book profits prior to the release of the REACH2HD results would be sorely tempted to take some off the table. I have done the same in the past but added to my position post the release of the REACH2HD results.
New investors however face a much more difficult situation as the IMAGINE trial was designed as a proof of mechanism of action trial due to monetary constraints and is not the fully fledged phase 3 registration trial PRAN should have performed.
Possible scenarios for the IMAGINE trial:
Armageddon. PBT2 is unsafe.
The safety profile of PBT2 has been one of its selling points as no real concerns were raised in the REACH2HD or the previous phase 2a trial. That the ethics committee at Austin Health also approved an extension to the IMAGINE trial is also reassuring. Furthermore, 83% of patients decided to enroll into this extension trial despite its onerous protocol.
The likelihood of this outcome is very low but would see PRAN possibly drop to cash backing and below $1.
PBT2 does not hit any endpoints.
The IMAGINE trial may be small but it has a smart study design. It uses PET and MRI scanning to track changes in beta amyloid and brain morphology of trial patients along with standard neurocognitive testing. As few as 7 patients would be required to show a significant change in beta amyloid depending on the efficacy of PBT2. A possibility that PBT2 may also reduce brain atrophy was raised in the imaging sub study of 6 patients in the REACH2HD trial.
In its phase 2a trial patients treated with 250mg of PBT2 for 12 weeks already showed a dose-dependent and significant reduction in CSF Abeta. This coupled with the extension of the IMAGINE trial at the behest of a physician involved in the trial increase my confidence of at least some endpoints being hit in the IMAGINE trial. The extension would likely only have been requested if clinicians had seen favorable signals in trial patients and an alteration of the natural progression of Alzheimer's dementia.
It is important to note however that management reiterated at the recent conference call that the results of the IMAGINE trial were still blinded. There are also many possible confounders to interpreting results prior to the unblinding of trial participants, most critically the placebo effect which can be quite strong. The selection of healthier patients into the trial who will have more mental stimulation by participating in the trial might also skew clinician's views of patient progress.
The likelihood of this outcome is low but would see PRAN possibly drop below $3. Some investors would still see hope for PBT2 in Huntington's disease but others would call into question the validity of the previous phase 2a and REACH2HD results.
Rapture. PBT2 hits all endpoints in the IMAGINE trial
This would be the ideal situation but a rather high burden to put on the small IMAGINE trial. Only 42 patients were recruited into this trial and they were only treated for a year. Finding a significant difference in a blunt tool like neurocognitive testing in this few people would be very difficult.
The most successful of the monoclonal antibodies for Alzheimer's dementia was Solanezumab promoted by Eli Lilly (LLY). They treated >2,000 patients for 18 months and were unable to show a significant benefit in cognition without data mining. The 34% reduction in decline of the ADAS-Cog 14 score in patients with mild Alzheimer's disease was enough for LLY to commit to another phase 3 trial for Solanezumab.
This data mining criticism has also been made about PRAN but the key difference was that LLY's EXPEDITION and EXPEDITION 2 trials were supposed to be powered for efficacy unlike the phase 2 trials run by PRAN.
The likelihood of this outcome is very low but would see the share price of PRAN increase many fold.
Expected result. PBT2 hits some endpoints in the IMAGINE trial and misses others.
Much of the criticism of the REACH2HD trial results centered on PBT2 not hitting secondary efficacy points even though it was not designed to do so. I have indicated above why I believe some endpoints will be met in the IMAGINE trial. The share price response will depend on which endpoints are met and by how much.
Likelihood of this outcome is high, share price implication uncertain.
Conclusion
Biotech investing is a high risk game with the release of results from clinical trials typically a binary event. PRAN currently offers a favorable entry point before the IMAGINE trial due to the muted response to the REACH2HD results but failure would see the share price plummet.
Success in the IMAGINE trial would validate the REACH2HD and phase 2a results. This would see PRAN in a strong position to start discussions with Big Pharma as the last man standing in the neurodegeneration field. PBT2 would progress into phase 3 trials in Huntington's disease and Alzheimer's dementia with an NDA being filed for Huntington's disease as early as 2016.
For those who were expecting the results of the IMAGINE to remove doubts about the efficacy of PBT2, you will likely be sorely disappointed. There are not enough participants in this trial to make any sensible judgment as to its definitive efficacy which would require a larger phase 3 trial.
In terms of what the share price will be in April, your guess is as good as mine.
Disclosure: I am long PRAN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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