Adam, We had a couple of companies -- OncoGenex Pharmaceuticals (OGXI) and Merrimack Pharmaceuticals (MACK) - Get Merrimack Pharmaceuticals, Inc. Report -- announced results from phase III studies of cancer drugs last week. Howd these results gibe with the predictions forecast by the Feuerstein-Ratain Rule?

The F-R Rule accurately called the failure of OncoGenexs custirsen prostate cancer study. The OncoGenex market cap on Dec. 28 (four months before custirsen results were announced) was $120 million. A market cap under $300 million forecasts phase III study failure.

And what about Merrimack? Its phase III study of MM-398 in second-line pancreatic cancer was positive.

That's correct, but Merrimack's relevant market cap (for F-R Rule prediction purposes) was $545 million. For companies with market caps between $300 million and $1 billion, the oncology phase III success rate is 59%. Investor expectations for MM-398 were definitely low, so the positive results are somewhat of an upside surprise. However, the F-R Rule did not rule out success like it did with OncoGenex.

Weren't you supposed to update the Feuerstein-Ratain Rule with some new data?

Yes! I presented the updated Feuerstein-Ratain Rule at the American Association for Cancer Research (AACR) annual meeting in April. The big headline: The F-R Rule is still 100% accurate predicting failure for oncology phase III studies undertaken by companies with market caps less than $300 million.


Sure. When Dr. Mark Ratain and I came up with the concept for the F-R Rule in 2011, we were limited to analyzing a data set of 59 phase III oncology clinical trials conducted between 2000 and 2009.

For the update, I asked the research staff at BioMedTracker to help me bridge the gap between the initial analysis and the present by compiling a new list of phase III oncology phase III studies conducted from 2009 through February 2014. BioMedTracker delivered to me a list of 72 oncology phase III trials.

-- Twenty-eight of the 72 studies were positive -- a success rate of 39%.

-- Forty-two studies were negative -- a failure rate of 58%. Results for two of the studies could not be determined.

Did you break down these 72 studies by the market caps of the companies developing the cancer drugs?

I sure did. Here are the results of the analysis, separated into the three main market cap buckets. (The slides come from my AACR presentation):

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Again, no company with a market cap less than $300 million managed to conduct a positive phase III oncology clinical trial.

That's right. Remarkable. Were beyond calling the F-R Rule a fluke finding at this point. Combined, the two data sets encompass 112 oncology phase III clinical trials from 2000 to February 2014. Of these 112 trials, 36 were conducted by companies with market caps of $300 million or less, measured four months prior to results being announced. NONE of these 36 trials reported a positive outcome.

You believe investors excel at predicting clinical trial results.

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I believe investors, collectively, are remarkably accurate when it comes to identifying cancer drugs destined to fail phase III studies. In this way, the Feuerstein-Ratain Rule is a very reliable negative prognostic indicator. The F-R Rule's ability to predict cancer drug study success is much more mixed (and some might say, not much better than a coin flip.)

What was the performance of the Feuerstein-Ratain Rule across all 112 oncology drug studies you examined?

For large companies (market caps exceeding $1 billion), the success rate was 64%. For the middle tier companies (market caps between $300 million and $1 billion), the success rate was 59%.

As you can see, as a positive prognostic indicator, the F-R Rule doesnt work as well. The rule can tell you with a lot of confidence which cancer drug phase III studies are going to fail, but doesn't do as well predicting those studies that will be successful.

What you're basically saying with the F-R Rule is micro-cap companies suck at cancer drug development. Why is that?

The market forces and internal discipline at larger companies which kill off weaker cancer drug candidates before they reach phase III studies is totally absent in micro and small-cap companies.

The thinner pipelines at small companies means less competition for drug development resources. All drugs are "stars" at small companies. R&D budgets are tighter, which steers these companies towards running smaller phase II studies -- most non-randomized and uncontrolled -- which too often delivers clinical data skewed positive. The positive signals seen in phase II studies cannot be replicated in larger, better-designed phase III studies.

Externally, investors reward small companies when drugs advance into later stages of clinical trials. If you've ever sat through an investor presentation, youve seen companies make a big deal about having a cancer drug in a phase III trial. I call it the "phase III badge." When investors bid up the stocks of companies with phase III drugs, the companies raise money, which leads to bigger paychecks, more stock and options for company executives. It's a self-serving feedback loop.

On the other hand, the market doesn't like when small companies kill off a drug. Stock prices take a hit because the pipelines are so thin to begin with. The management teams of small cancer drug companies are incentivized to ignore signals their drugs may not work and just push ahead with new trials.

How are larger companies different or better when it comes to oncology drug development? Dont they face the same pressures?  

Larger companies certainly don't have perfect cancer drug track records, but they do have fatter pipelines, which forces early-stage drugs to compete for R&D dollars. The bar for moving a drug into phase III studies is higher at larger companies, which is why their success rates are higher (although, again, far from perfect.)

The market also incentivizes larger companies to be more disciplined with R&D expenses. Wasted R&D steals from earnings -- something investors do not like.

Maybe someone should stop small-cap companies from developing cancer drugs.

That will never happen, nor should it. The message here is not small companies are incapable of developing successful cancer drugs. Rather, if a small company does have a successful cancer drug in its early-stage pipeline, investors and/or larger companies tend to notice rather quickly. Pharmacyclics (PCYC) is a good example: A small-ish company with a very promising cancer drug (ibrutinib) which was licensed to Johnson & Johnson (JNJ) - Get Johnson & Johnson (JNJ) Report. Onyx Pharma acquired privately held Proteolix for the multiple myeloma drug Kyprolis. Amgen (AMGN) - Get Amgen Inc. Report later acquired Onyx.

The market for good cancer drugs is very competitive, when a small-cap company advances a drug on its own into phase III studies, investors should see a red flag. Assume the market and larger companies have vetted that drug and found it lacking.

Will the negative prognostic value of the Feuerstein-Ratain Rule ever be challenged?

No rule goes unchallenged forever. Nothing is perfect. I'm actually looking forward to the day that a small-cap company posts positive results from a phase III cancer drug trial -- breaking the F-R Rule. We'll learn something from it.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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