Threshold Pharmaceuticals, Inc. (NASDAQ:THLD) just announced the latest data from its lead oncology trial, and things don’t look good for the company. The data essentially showed that the drug under investigation – Tarloxotinib – is ineffective against the two target cancers it was looking at, head and neck cancer and advanced non-small cell lung cancer. Threshold is down 45% on its preannouncement market capitalization, as markets digest the news, and it looks as though the company is set to decline further before the day draws to a close. Alongside the announcement of the drug’s failure, and resulting discontinuation, Threshold has announced it will shift resources to one of its other programs, evaluating the efficacy of a drug called Evofosfamide, again in an oncology indication.

With this in mind, and in light of the recent selloff, it is worth taking a look at this secondary indication, in an attempt to uncover whether there is value in an exposure on this corrective pullback.

Let’s take a look.

Some readers might always be aware of this program. Indeed, some may have already taken a hit from it – it basically already failed at the end of last year. The drug is a prodrug formulation what’s called a bis-alkylating agent, which is a type of chemotherapy currently in use as an established cancer treatment. The term prodrug refers to the absence of activation until delivery to the site of intended use – in this instance, the tumor that the treatment is targeting. The drug is of hypoxic activation, meaning it becomes active only in a hypoxic (or in other words, a zone with very little oxygen) region. Hypoxia is a pretty common factor in many tumors, so the potential list of target indications is wide.

In December last year, the company announced the outcomes of two separate studies investigating the efficacy of Evofosfamide in solid tumors. Both were phase 3 trials, and both failed to meet their primary endpoints. However, in a subgroup of patients from Japan, the trials recorded a meaningful benefit in the active arms when compared to placebo.

And what was Threshold’s response to this? To seek approval in Japan, of course.

So, it is now shifting all its capital resources (or at least, the majority of them) to this already failed drug based on a post completion analysis of regional data. It also intends to put together a protocol for some phase 1 studies in the US, investigating the drug in combination with another type of development stage oncology treatment – immune checkpoint antibodies.

We admire the tenacity of this approach, but from an investment perspective, Threshold pretty much just fell through the floor. The company has just revealed that its lead is ineffective in its target indication, and is revisiting last year’s lead to try and salvage some sort of value from its pipeline. Think about it like this: if management expected the new lead to succeed, why would it have shifted to the just failed Tarloxotinib in the first place?

For us, this is a big red flag, and is enough to put us off the company – at least for now.

So what’s next? Well, the likely major near-term catalyst will come from the registration process in Japan. The company is seeking approval of the failed and above mentioned oncology target, and as this progresses, we will likely see markets move on the inference of its progression points. It’s a long shot, however, and there’s every chance that Japanese regulators will request some sort of extension trial to reinforce what is essentially an anomalous result from the phase 3 on which the application rests.

Beyond that, we will be watching the Evofosfamide phase 1s closely to see if the drug can show any sort of clinical benefit, or whether it is likely to just burn out as it has done in the past.