Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

One of the most highly prized quality that biotech investors seek in a CEO is the ability to sell one's firm to big pharma at a huge premium.  

The current king is David Hung, the former CEO of cancer drugmaker Medivation, who stoked a bidding war that led Pfizer to acquire the company for $14 billion at a 118 percent premium to its unaffected share price. On Monday, Hung became CEO of Axovant Sciences Inc., a biotech focused on an Alzheimer's treatment, picking the company over what he says were more than 20 other job offers.

Axovant shares jumped more than 20 percent on Monday and rose a further 11 percent on Tuesday after the company announced a $125 million share sale at the newly boosted price. Hung's hiring is a publicity coup and represents a vote of confidence in the company's drug. But Axovant's fundamentals remain the same. It's attempting to rescue a previously failed drug for a tough-to-treat disease, and investors shouldn't allow excitement over a new hire to obscure that. 

Can't Stop the Pop
Investors continue to applaud Axovant's appointment of David Hung as its new CEO
Source: Bloomberg
Intraday times are displayed in ET.

Alzheimer's drugs are already exceptionally risky. Companies have put billions of research dollars into medicines that failed in critical studies. Eli Lilly & Co. and Merck & Co. Inc. are the most recent examples.

Axovant's lead drug has extra warning flags. It was bought for a $5 million pittance from GlaxoSmithKline's scrapheap after it failed a Phase 2 trial. The drug represents a different approach than Merck and Lilly's medicines and takes on the easier task of treating the symptoms rather than the cause of the disease. But both Lundbeck and Pfizer have given up on similar drugs after clinical trial failures.   

Axovant maintains that its drug may be better and that it has designed its clinical trial to avoid mistakes other firms have made. But tweaking trials and moving the goal posts is far from a sure path to success. Drugs that failed previously tend to fail again, especially in Alzheimer's.

Against that backdrop, the stock market reaction to Hung's hiring seems extreme. The 20 percent hiring bump was one thing, but the company was able to sell more than $100 million worth of shares at that new inflated price, and its stock continued to soar.  In an up-and-down biotech market, secondary share offerings more often come at a discount and lead to share price declines.  

Rare
Axovant's share price jump after tapping equity markets for cash is unusual
Source: Bloomberg
U.S. biopharmaceutical secondary share offerings that raised between $100 and $500 million

Investors are most likely overestimating Hung's possible impact. The riskiness and binary nature of the company's lead trial makes an acquisition unlikely before the data is revealed in the fall. And while Hung clearly picked a winner with Medivation's prostate cancer drug Xtandi, his track record with Alzheimer's is less inspiring. Medivation scrapped a once-promising Pfizer-partnered drug in 2012 after a late-stage trial disappointed.

Axovant is prone to hype, it has a charismatic founder in ex-hedge funder Vivek Ramaswamy and big upside if its drug is approved. That led it to one of the biggest biotech IPOs of all time at the peak of the 2015 bull market, with Axovant's shares spiking to nearly $30 at one point. But the stock was below $10 less than a year later on doubts about the drug's viability.

New chief or not, the company is as risky as ever. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net