It’s a fact of the pharmaceutical business that not all drug trials result in a promising product, unfortunately for pharmaceutical companies, shareholders and most importantly patients. Indeed it’s the very nature of drug trials to discover if the proposed medication works as planned. A failed drug trial, as much as investors may not like it from a financial standpoint, scientifically is almost as valuable as a successful one – the trial did its job.
It’s in this light that news this month from AstraZeneca (LSE: AZN) saying the company will be writing-down $100m after trials of its heart disease drug Epanova were “disappointing”, must be taken. In fact it should be noted that the drug in question is actually successful and already in use. It’s a treatment for a specific type of condition that increases the risk of heart disease. The failed trial was undertaken in hopes that it may work on another specific type of condition, which it failed to do.
Research and development
In many ways, the R&D departments of big pharmaceutical companies are where the money is made. Developing new and better medications, I’d argue, is usually more important than all the admin, sales work and perhaps even management that a company has. I’d say, for example, that a pharmaceutical company could make money if it invented a cure for cancer, even if it was badly managed and had poor sales staff.
R&D is an area in which AstraZeneca has really stepped up over the past few years, and in no small way has been responsible for what many call a turnaround following a rather lacklustre period. Its new medicines have been accounting for a big chunk of its sales, with heart disease treatments and oncology medications some of its most notable money-makers.
Carving out a niche
It’s with its oncology treatments that Astra has in many ways been distinguishing itself from the competition. While the majority of cancer treatments have generally focused on later stages of the disease, AstraZeneca has instead been focusing more towards early detection, prevention and treatment. This has been giving it an advantage.
And it has been pro-active in addressing one major issue facing ‘big pharma’ too. This is, of course, the growth of cheap, generic versions of branded drugs, particularly after the patents end, and particularly in China. While AstraZeneca has not been immune to these troubles, it has managed to offset much of the damage through working with local hospitals and the government in China to help secure fair prices for its treatments.
So to answer the title question of this article, I think the failed trial will by no means have a detrimental impact on Astra shares. As I said earlier, the aim of the trial was to see if this drug could work or not in a specific case – it couldn’t, and so the trial actually did what it was supposed to.
Far more important for the company is its increased interest in and spending on the R&D of new drugs. If it keeps that up, a few failed trials will easily be absorbed by the exponential benefits of just one or two great drugs.
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The Motley Fool UK has recommended AstraZeneca. Karl has shares in AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.