Health­care Innova­tions: Properly Asses­sing Clinical Risks

Analysis by Dr. Maria Specogna

Develo­ping new drugs involves testing hypotheses about human biology. And human biology is complex and not entirely predic­table. Even with sound science, carefully designed clinical trials, and promi­sing early data, the outcome of clinical trials remains uncer­tain. This risk has always been an integral part of investing in health­care innova­tions.

What is remar­kable today, however, is not so much that clinical trials fail, but rather how strongly and how quickly the market extra­po­lates the results of a single trial to other compa­nies.

When a research finding has a major impact on an entire field

Incre­a­singly, a setback invol­ving a drug leads to immediate stock price reactions among compa­nies that are perceived as similar from a scien­tific or commer­cial perspec­tive. This sometimes occurs even when the active ingre­di­ents, mecha­nisms of action, study designs, or patient groups differ signi­fi­cantly. We have seen several examples of this recently:

Follo­wing the failure of Novar­tis’s HORIZON study, Amgen and NewAm­sterdam also came under pressure.

Follo­wing the failure of Novartis’ HARBOR study, shares of Dyne Thera­peu­tics and Sarepta were also hit.

Follo­wing the results of the CARDIO-TTRans­form study on Wainua by Astra­Ze­neca and Ionis, Alnylam also came under pressure.

Such an extra­po­la­tion to compa­rable compa­nies may well be justi­fied. However, there is a growing impres­sion that the market reacts first and only then makes a more nuanced assess­ment.

Why Health­care Exper­tise Is Crucial

For us as health­care investors, it is precisely in situa­tions like these that we see how important in-depth industry knowledge is.

Under­stan­ding Biology

Clinical results must be evaluated in the context of the under­lying science. What matters is not just the headline of a study’s results, but what those results actually mean from a scien­tific perspec­tive.

Distin­gu­is­hing Between Compa­nies

Active ingre­di­ents, mecha­nisms of action, study designs, and patient groups can vary signi­fi­cantly, even when compa­nies appear compa­rable at first glance. A nuanced analysis is there­fore neces­sary to assess the extent to which a study result can actually be genera­lized to other compa­nies or active ingre­di­ents.

Asses­sing Risks and Oppor­tu­ni­ties

Spill­over effects can lead to increased volati­lity in the short term. At the same time, oppor­tu­ni­ties may arise if the market genera­lizes a negative study result too broadly to other compa­nies.

Stay focused on the funda­men­tals

A long-term perspec­tive helps put indivi­dual data points into context, distin­guish relevant signals from short-term market noise, and maintain a focus on a company’s funda­mental perfor­mance.

Specia­lization Provides Direc­tion

Clinical setbacks will continue to be part of health­care innova­tion in the future. For investors, it is there­fore crucial to under­stand the scien­tific background and to assess market reactions in a nuanced way. Especi­ally in a complex and research-inten­sive field such as the health­care sector, in-depth industry exper­tise can help investors better assess risks and identify poten­tial oppor­tu­ni­ties.