Oncothyreon: A Failed Drug Autopsy Performed By A Short Seller

NEW YORK (TheStreet) -- Today's failure of the Stimuvax lung cancer trial was expected and therefore not a surprise to short-sellers. The goal of this article is not to gloat but to help investors avoid the next Oncothyreon (ONTY) blowup. I will try to impart a few rules and guidelines that could help Oncothyreon longs the next time they think about predicting results of a clinical trial.

Mechanism matters.

A drug's mechanism of action is central to its effect. Do not ignore this! Clinical data can be misleading, innocently biased, meaningless, manipulated and sometimes even downright doctored. However, the question, "How does the drug work?" is always critical. Stimuvax was supposedly cancer immunotherapy, or "vaccine" targeted against the mucin-1 protein. I never once saw anyone attempt to analyze what this meant.

Why do we want to inoculate people against mucin-1 and promote an immune response to it? If you did think through this Stimuvax mechanism, you realized quickly that it wasn't likely to have any effect on a tumor. Not doing this type of fundamental research into a drug's mechanism -- in other words, letting greed blind decision making -- is a fast way to lose money.

A cancer trial taking longer than expected means nothing.

Many Stimuvax believers bought the stock because the Phase III lung cancer trial took much longer than expected to complete. This is almost universally a disastrous reason to buy a cancer drug stock. See: Telik (TELK), Cell Therapeutics (CTIC), Genvec (GNVC), Novelos (NVLT) and now Oncothyreon. When a cancer drug works really well, the clinical trial usually reports out early. See: Roche (RHHBY) (Zelboraf), Onyx Pharma (ONXX) (Nexavar), Roche (Avastin), Algeta (Alphadrin) and Johnson & Johnson (JNJ) (Zytiga.)

Clinical trials taking longer than expected usually means someone made bad assumptions about the way control-group patients would behave. When a company tells you results from a cancer drug trial are being pushed back, don't think, "Hurray, the drug must be working!" Instead, run away, scared.

The advice offered by biostatiscians and other consultants is often over-rated.

I remember a huge trade I made in 2006 shorting the stock of a blood substitute company called Northfield Labs. My firm consulted every single statistical expert we could find hoping we could get an edge on predicting pivotal study results.

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