The Impact of Positive Phase 2 Trial Results on a Smaller Company

A few weeks back, we covered the effect an Orphan Drug Designation (ODD) can have on smaller biopharmaceutical development companies. A 2017 study showed that micro-cap companies, more so than their larger counterparts, benefited from receiving an ODD. Market capitalization for micro-caps increased on average 4.25% following an ODD, while large companies stayed about the same.

We used the performance of some recent, similar companies to highlight the potential for Cardiol Therapeutics Inc. (Nasdaq: CRDL) (TSX: CRDL) as it awaited the US Food and Drug Administration’s decision on its orphan drug application. Cardiol is conducting two Phase 2 trials for orphan drug-eligible heart conditions (recurrent pericarditis and acute myocarditis), and was recently granted an ODD for their lead drug candidate, CardiolRx™, for the treatment of pericarditis. The company also plans to file an ODD application for the treatment of acute myocarditis.

Here we will take a look at what happened to Cardiol’s valuation following the announcement. Keeping in mind the possibility of a second ODD, we will delve into the potential impact positive Phase 2 results could have on the company and its ~$100 million market cap (all figures in US dollars unless otherwise noted).

What Happened Following the Orphan Drug Designation

Cardiol Therapeutics announced the ODD grant on February 15 and its NASDAQ listing had closed the previous day at $1.04 with a trading volume of 222,700 shares. It closed February 15 at $1.48 with a trading volume of 3,506,100 shares. The price went up ~ 42% in that one day and continued to rise before closing February 29 at $2.06/share, a level not seen since 2021. In those two weeks the stock price rose 98%. 

It seems the company had flown a bit under the radar with the investment community at large up until the point of the ODD, which could explain the dramatic rise in valuation. A year ago, Cardiol’s market capitalization was in the ~USD$33 million range despite initiating two Phase 2 trials and having a promising novel drug formulation for the treatment of heart failure in the pipeline. And although the company’s market cap has now more than tripled to about ~$100 million, there is much evidence to suggest that Cardiol’s upward climb has only begun.

Phase 2 Results on the Way

Cardiol is further along in its Phase 2 MAvERIC-Pilot study for the treatment of recurrent pericarditis, having recently reached full enrollment for the trial. One of the potential drivers for Cardiol’s stock in the near term is the announcement of topline results from this study, which the company expects in Q2 2024.

Cardiol’s other active Phase 2 clinical study, the ARCHER trial for the treatment of acute myocarditis, recently passed the 50% enrollment mark. One of the effects of conducting trials for rare conditions is that patient enrollment takes a bit longer than it does for more common diseases, so investors sometimes have to wait for results from studies of orphan-eligible conditions. Still, with the MAvERIC-Pilot study results expected in the next few months and the ARCHER trial progressing toward full enrollment, it shouldn’t be long before Cardiol stakeholders receive meaningful news.

Investing in the Phase 2 Stage

Historically, and according to several sources, Phase 2 results tend to have a higher immediate impact on valuations when compared to FDA approval. In this 2019 article, Phase 2 results returned an average of 18.1% increase, compared to 8.1% for Phase 3 and 4.7% for approval. The previous year had Phase 2 creating a 6.7% average return, compared to 13.7% for Phase 3 and 1.1% for approval. Another study looked at 13,807 clinical trial outcomes from 2000 to 2020. The study found that clinical trial results have an outsized impact on smaller, early-stage companies like Cardiol when compared to larger companies. 

Every company and every trial are unique, and the sample size for these particular numbers is fairly small, but the trend is clear. Investing in the Phase 2 stage can produce solid returns upon the announcement of positive results.

The Upshot

Based on general data around the impact of clinical trial results on public company valuations, the path forward appears to be full of potential for Cardiol Therapeutics. Considering Cardiol is a smaller company within the biotech market, the impact from positive trial results can be outsized compared to what has been witnessed in larger companies. The company is on the verge of completing two Phase 2 trials, giving investors an even greater chance of reaping the rewards of positive results. Now could be a very good time to consider Cardiol Therapeutics as it moves forward through a pivotal stage of development.