Epic Test Fail Behind $4 Billion Rout Doesn't Faze Drugmaker

(Bloomberg) -- When Keita Mori, co-founder of SanBio Co., heard the news in January that the company’s flagship drug candidate had failed a major test, he almost lost his cool.

“It was a huge shock,” Mori said in an interview at the drugmaker’s Tokyo headquarters. “My head was spinning."

Epic Test Fail Behind $4 Billion Rout Doesn't Faze Drugmaker

SB623, its regenerative cell therapy, unexpectedly failed to yield meaningful results in a test of American patients suffering from chronic stroke. The market’s response was even more dramatic than Mori’s. The company lost $4 billion in market value over the course of a week, and some analysts wondered where SanBio’s future growth would come from.

Epic Test Fail Behind $4 Billion Rout Doesn't Faze Drugmaker

After a few minutes of digesting the unsettling news, Mori came to his senses and concluded “we’ll get through this.” He reflected that while the drug suffered a big setback in treating chronic stroke, the same medication is close to hitting the Japanese market as a treatment for traumatic brain injury, another illness much in need of a cure. And SanBio is proceeding this fiscal year with a late-stage trial for the U.S. market.

As for chronic stroke, in which a patient doesn’t get sufficient blood flow to the brain, Mori isn’t giving up. “We believe the drug will get approval in some sort of way and be introduced in the market as a treatment for chronic disease,” he said. “The drug has huge potential."

SanBio is among more than 500 companies racing to develop regenerative treatments, which are based on the reproduction of cells. While the business has huge potential for treatment of organ degradation that is at the root of many serious diseases, it’s still a relatively untested field. Small companies often stake their future on the fate of a single drug, and their fortunes are tied to the trial results.

SanBio, which had a market cap of about $1.2 billion a year ago, saw its value more than quadruple to $5 billion by January on optimism over early trial results -- only to lose all those gains in a matter of days.

SanBio doesn’t yet have clarity on why the drug failed to pass the U.S. trial. The result, which found no safety issues with SB623, was a surprise as earlier trials had proved its efficacy among a smaller group of patients. Also, the drug had passed a trial in November with patients suffering from traumatic brain injury, which was understood to be more challenging than treating chronic stroke, according to Mori.

Adjusting Target

The company is currently analyzing the results and will start formulating detailed plans for another U.S. trial within this fiscal year.

One possible approach could be to narrow the type of patients targeted for treatment, Mori said. The phase 2 trial that failed was conducted on a wider group of patients with different degrees of suffering than the earlier trials.

“Of course, we’d like to be able to treat patients with as wide a scope as we can,” Mori said. “But we may have to adjust that.”

Even if SB623 fails as a treatment for chronic stroke, Mori believes that won’t thwart SanBio’s chances for becoming a global leader in regenerative drugs. He says SB623 still has its value as a cure for traumatic brain injury, or TBI.

The drug has passed phase 2 trials for such treatment both in Japan and the U.S. SanBio plans to seek approval for commercialization in Japan this fiscal year and win approval within the next fiscal year. While a phase 3 trial is being prepped in the U.S., that step may be skipped because the data has been “so good’’ thus far, Mori said.

The American market for treating traumatic brain injury is almost as big as that for chronic stroke. An estimated 5.3 million suffer from traumatic brain injury in the U.S., which compares with an estimated 5.7 million patients suffering from chronic stroke, according to SanBio, citing data from the U.S. Centers for Disease Control and Prevention Heart Disease and Stroke Statistics.

‘Viable’ Treatment

Not all analysts are gloomy about SanBio’s prospects. Kyoichiro Shigemura of Nomura Securities has a buy rating on the stock. “The data suggest that SB623 is viable as a cell treatment product, and we continue to highlight the possibility that SanBio will also make further progress in redesigning its chronic stroke program,” the analyst wrote in an April 22 note.

While the payoff for a successful treatment can be huge, biopharmaceuticals carry big risks for investors, said Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets.

“It’s such a hard sector to trade given the inability to have full clarity on what’s exactly going on within the development pipeline,” Jackson said in an interview in March. “It can be like walking through a minefield blindfolded.”

SanBio shares remain volatile. They jumped as much as 2 percent in early Tokyo trading Friday, and have rebounded 58 percent this month. Yet they’re still down 62 percent from their January peak.

Mori downplays the swings in SanBio’s stock price, choosing to focus on the prospects ahead for the field of regenerative drugs.

“I understand the stock goes up and down,” he said. But “our strategy is SB623.”

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