Kerrisdale targets Proteostasis’ ‘ineffective’ cystic fibrosis drug in latest short attack

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As Kerrisdale sees it, Proteostasis rose owing to the unusually weak performance of a four-person placebo group. (Natalie Murphy)

Kerrisdale Capital has fixed on cystic fibrosis biotech Proteostasis Therapeutics in its latest attack. The short seller launched the assault after seeing shares in Proteostasis rise 200% in three months on the back of data from a small midphase trial and the receipt of an FDA breakthrough tag.

Investor interest in Proteostasis surged in mid-December when the Cambridge, Massachusetts-based biotech posted results from 24 patients who took either CFTR drug PTI-428 or placebo on top of their existing regimen of Vertex’s Orkambi for 28 days. Proteostasis focused its discussion of the top-line data on the 5.2 percentage point mean absolute divergence between the ppFEV1 lung function scores of the PTI-428 and placebo arms.

Triggering such an improvement over Orkambi suggested PTI-428 could establish itself as part of the cystic fibrosis treatment toolkit. Proteostasis’ share price duly shot up.

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However, Kerrisdale has poured scorn on the findings. As Kerrisdale sees it, the divergence stems not from the efficacy of PTI-428 but from the unusually weak performance of the four-person placebo group. Such a small control arm raises the risk of anomalous findings. 

Working from graphs published by Proteostasis, Kerrisdale estimated how the lung function of each patient changed from baseline to tell a far less positive story than the one put forward by the biotech late last year.  

“The PTI-428 group didn’t see its ppFEV1 values noticeably increase; an average 1-point move across 20 patients is negligible. Instead, the unlucky 4-person placebo group saw its average tank, driven by just 2 individuals. The results that the market has celebrated don’t show a highly effective drug; they show an anomalously bad placebo. But this fluke is unlikely to repeat in future, larger trials, suggesting that the illusion of PTI-428’s efficacy will eventually vanish,” the short seller wrote.

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Kerrisdale is hoping its take on the data will dampen investor expectations about PTI-428, driving down the value of the stock and enabling it to profit from the bets it has placed against the biotech. 

To further that agenda, Kerrisdale also pointed out perceived weaknesses of the results from other clinical and preclinical studies of PTI-428, dismissed the value of the biotech’s early-stage pipeline and questioned the transparency of its disclosures. 

The transparency comments cover both how the biotech has presented results and the fact data from a Kalydeco combination trial are yet to emerge. Proteostasis originally penciled the results in for the third quarter but the trial recently fell off its list of upcoming milestones.

Kerrisdale initiated its attack one day after Proteostasis filed to sell 9 million shares.

And, with more than a touch of inevitability, the biotech's shares fell 20% on the short report this morning, with a market cap of $185 million.