Shares of Edwards Lifesciences Corp. (EW) surged on Monday after the medical device firm reported results from an important clinical trial. The stock posted one of its best days in history, rocketing to its highest level ever as a publicly traded company.
Despite Monday’s news, the company’s gains may entice investors to overreact with enormous buying pressure in the coming weeks and months. However, it’s important for market participants to understand the role of clinical trials in the biotechnology and pharmaceutical sectors, including how they can often mislead investors into believing the company boasts long-term strength.
Let’s take a closer look at the trial news that boosted Edwards Lifesciences on Monday – and why the gains may just be a knee-jerk reaction…
The News
Edwards released a statement saying that its key transcatheter aortic valve replacement (TAVR) device – the SAPIEN 3 – was successful during patient trials, particularly compared to traditional surgery in those patients suffering symptomatic aortic stenosis. This is a condition in which the opening of the aortic valve narrows, restricting blood flow from the left ventricle of the heart to the aorta. According to Edwards’ statement, the SAPIEN 3 device experienced a 46% lower rate of traumatic heart events – including rehospitalization, stroke, or mortality – than traditional open-heart surgery.
“In the PARTNER 3 Trial, TAVR with the SAPIEN 3 valve showed a remarkably low death and disabling stroke rate of 1.0 percent at one year versus 2.9 percent for surgery,” said Martin Leon, the director of the Center for Interventional Vascular Therapy at NewYork-Presbyterian/Columbia University Medical Center. He went on to call TAVR “the preferred therapy in low surgical risk aortic stenosis patients.”
The company presented the stellar results on Sunday in New Orleans at the American College of Cardiology’s 68th Annual Scientific Session. The weekend news spilled over into Monday’s trading session.
How Investors Reacted
Market participants reacted rapturously to the trial results, pushing EW stock up 6.2% on Monday from $179.75 on Friday to $190.89. That marked the company’s highest settlement ever, besting the most recent record high of $174.10 on Sept. 1, 2018. Shares of Edwards Lifesciences are now up 24.6% this year from $153.17 on Dec. 31 to $190.89.
The Bigger Picture
EW stock’s record gain shouldn’t surprise even the most casual biotech observer when considering just how often these successful trial results serve as bullish catalysts.
Biotech investors typically watch these trials like hawks, creating “catalyst calendars” that provide the opportunity to play a bit of Russian roulette when it comes to making bets on the outcomes. That’s because if a biotech fails a trial for a new drug or device – or even reports results that are slightly below expectations – investors often dump their positions to devastating effect. For instance, shares of ImmunoGen Inc. (IMGN), a cancer-focused biotech firm, fell a massive 47% on March 1 after releasing its antibody drug’s phase 3 trial results, which showed that 66% of the female patients didn’t show any improved conditions than those that received traditional chemotherapy.
Conversely, biotech firms that report positive trial results will immediately see their stock price skyrocket. In addition to Edwards Lifesciences, shares of Dermira Inc. (DERM), which develops drugs for the treatment of acne and other skin conditions, exploded more than 82% on Monday following positive phase 2b trial results for Lebrikizumab, its treatment for atopic dermatitis.
But this kind of massive activity following trial results is usually short term. Investors typically don’t stockpile shares of a company in the months following a trial, as they find it more prudent to wait for the new treatment or device to get to market and reflect itself in the company’s quarterly earnings. A recent example of a company whose positive results never pan out is Synergy Pharmaceuticals Inc. (SGYP), whose stock gained over 40% in one day on June 17, 2015, when the firm reported strong phase 3 trial results for one of its constipation drugs. Shares have shed nearly all of their value since then, plunging nearly 97% to $0.03 Monday after the firm filed for bankruptcy in December.
Looking Ahead
It’s important to reflect on the rise-and-demise examples like Synergy when considering whether or not Edwards is a viable investment following Monday’s news. While the positive trial results certainly make EW stock seem sexy at the moment, there’s simply no way of knowing if the company will successfully bring the SAPIEN 3 to market in a timely manner that will keep the stock price aloft.
For investors currently on the sidelines, they’re likely better off taking a wait-and-see approach with Edwards. For investors currently enjoying the incredible ride, make sure to keep an even closer eye on the firm’s SAPIEN 3 news. Short-term trades may be wise in the off-chance that the device’s upcoming trials pose less-than-stellar results.
