Biotech Values

[DewDiligence]

Re: Fallacy of ignoring program-survival bias

…you have a small biotech that had what appear to be good Phase II results -- which are hardly conclusive but certainly encouraging -- and then you have enrollment data, Phase III trial parameters, and a good (if not great) sense of likely survival for the control arm. Then you assume that the drug is performing consistent with its Phase II performance, and you get modeling outcomes that are consistent with the trial progress to date (e.g. with guidance from the company on when data should be available or when an interim trigger will be met or simply vis-a-vis how much time has gone by). In such a case, I think you have reasons to become bullish…

The fallacy in the above is the text I highlighted in bold. Because of program-survival bias, investors should absolutely not assume that phase-3 performance will be consistent with phase-2.

The modeling error from neglecting to take into account program-survival bias is essentially what iwfal’s exercise was about. Yet, over and over, many biotech investors continue to neglect program-survival bias to their detriment. Regards, Dew