Key points:
- Kezar stock jumped 85% on Phase II results
- There's still considerable development work to do
- The key point is that the treatment hasn't failed tests yet
Kezar Life Sciences (NASDAQ: KZR) stock has jumped 85% premarket on news about trials of their lupus nephritis (LN) treatment. The detail is that the experimental therapy for active lupus nephritis (LN), zetomipzomib, showed a clinically meaningful response in a Phase II trial.
That's not an easily understandable phrase there, so to unpack it. Lupus is a disease spreading rather, and there are no good to perfect treatments for it. So, the hunt is one for such treatments. Nephritis is kidney failure, one of the things that lupus can cause. Given that nephritis leads to either dialysis or kidney transplant the price that could be charged for a drug which prevents either of those dual outcomes would be large. So, a successful LN drug would be something of a moneymaker.
So, good results from a trial, that increases the value of Kezar stock. We do though need to realise that this has happened before. Back in November Kezar stock jumped near 50% on earlier results from the same trials and since then have rather slid back.
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The problem being faced here is that the path of a drug or treatment from test tube to revenue is a long and tortuous one. Phase I trials are to check that it doesn;t simply kill folk when given to them – this is usually done on student volunteers. Phase II looks at whether it actually does something useful against the disease or condition we hope to treat. That's the stage that Kezar is at here. The answer is that yes, there are indeed indications that the treatment does work against this lupus nephritis. It's not perfect, doesn't treat everyone, not everyone can cope with it, but on balance yes, there's enough evidence of positive effects to go on to the next stage.
That next stage is Phase III trials these are very much larger, with many more patients. The task here is to find out whether there are any side effects that we don't see in smaller trials. It's possible that some measurable percentage of the population simply cannot tolerate the treatment, are allergic to it, or suffer deterioration as a result of it. Not saying that this will be true here of Kezar, but that is till a stage that the drug will have to go through.
Only after those Phase III trials will the FDA consider authorisation – and only after that will revenue start to arrive. So while these Phase II results are good they are only “good so far”, for there are still further steps that need to be accomplished.
Which is what makes Kezar stock so volatile, in common with others in the pharma space. Any reasonable valuation of the future has to work out what the likely probability of beating the next tests are. Over and above whether management are competent, there's sufficient capital and so on. Trading positions have to be based upon those probabilities of success.
