Key points:
- Orphan drug status for AVA6000 is a vital part of the development process
- This has now been granted, which is good
- But why is there only a 4% reaction in the AVCT share price?
Avacta Group (LON: AVCT) shares are up 4% and change in London this morning as the news comes that AVA6000 has received Orphan Drug Designation from the Food and Drug Administration. Yes, this is important and in two different ways. Firstly as a demonstration of how everything about clinical stage pharma depends upon the FDA, and secondly, because without this designation, it's not obvious that AVA6000 itself is even economic. So, that it gains that status does indeed mean a lot. The small effect on the AVCT share price is largely because the decision was expected – we've got a confirmation of extant belief here, not entirely new news.
We had more news last week about AVA6000, which was that it was progressing with the Phase I trials. However, we do need to understand a little more about the development roadmap.
For a drug that is going to go into wide circulation there's this system of Phase I, II and then III trials. The whole set can cost up to $1 billion in actual cash layout, including the cost of capital and of failures. This money then needs to be made back in the 10 years or so – the time left on the patent after approval – which means the drug, to be profitable, needs quite a large market.
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As we're told from Avacta itself: “Doxorubicin has a market size that is expected to grow to $1.38bn by 2024” and that's the whole market, not the specific use that Avacta is testing – and looking to gain permission to market. Some fraction of that $billion and change isn't enough to support a full development program. So, the FDA says that drugs aiming at niche markets don't, in fact, have to go through that whole process. They can follow a cheaper path – Orphan Drug Designation. Which is the news from Avacta, that this has been granted.
This is an important stage in the development here. Without that Orphan designation, it's not obvious that the development of the drug would be worth it in a financial sense. With it, it might be. So, that's a roadblock to economic success that has been removed. It was always likely that it would be granted, which is one reason for the fairly muted response. An announcement that it had been denied would have moved the price down substantially.
The second reason for the muted response is that, of course, we're still early in the development process. Phase I clinical trials look at safety. Phase II assesses the effectiveness and further studies safety, and Phase III evaluates how the medication works in comparison to existing treatments. As above, we're still in Phase I here. So we've years to go – even with Orphan status – before we know whether full permission to go to market will be granted. Given that time span, positive news now moves the price little, while negative would cause a large movement downwards.