Trading The FDA, Part II

If you have any comments, questions, or thoughts on this article or on anything to do on biotechnology or medical technology, feel free to email me at prugg@tradingmarkets.com.

As I left off in Trading The FDA Part I, the filing of a New Drug Application (NDA) is a sentinel event in the life of a biotechnology company. It is an event that investors usually applaud with an immediate increase in the stock price and with some follow-through several days afterward. I see this time and time again, and gave several examples of a positive market reaction to this event in my first lesson.

However, many times, this enthusiasm is short-lived for a variety of reasons over the next 12 months. Once a New Drug Application has been filed with the FDA, then the agency needs to decide to accept it, based on the supporting clinical data. As I mentioned earlier, the majority of new drug applications are accepted and the period of time between NDA filing and acceptance is usually two to four months.

Once the initial wave of news reports has occurred announcing the NDA filing, investors seem to have a short attention span. This short attention span is often manifested by a slow, steady decline in the company’s stock price until the next sentinal event. This next sentinel event occurs when the FDA announces the acceptance of the New Drug Application.

However, without any more potential positive news on the horizon, gravity slowly exerts a downward momentum before the FDA acceptance announcement is made. Any negative news during this time period can only add to the negative decline. This scenario usually occurs with small-cap, unprofitable companies looking to get their first drug approved. I use Matrix Pharmaceuticals (MATX | Quote | Chart | News | PowerRating) as an example of how these early events can act as entry and exit points for investors watching a new drug make its way through the FDA decision process. 

On Jan. 4, 2001, Matrix Pharmaceuticals filed a New Drug Application with the FDA for its new inject able drug to treat refractory head and neck cancer. This announcement served as an entry point for investors and the stock responded accordingly. On March 5, 2001 the company was notified by the FDA that its application was accepted for review.  Again, investors responded positively to the news. Unfortunately, the two months in between were not kind to investors as the stock drifted lower, waiting for the next big wave of news to come along. Investors quickly lose interest once the news is out and wait for the next opportunity for a stock price movement. However, this choppy pattern does offer you an opportunity to plan early entry and exit points.

What Happens Once The NDA Application Is Accepted For Review?

This is where things get very interesting. Before going on, I need to make several points about the timeline ahead for many of these new drugs.  If the FDA has decided to designate a new drug as “fast track” status, then it has an obligation to make a final decision on the marketability of that drug within six months of accepting its New Drug Application. As I mentioned in part I of this lesson, fast-track status is given to those drugs that are aimed at patients with minimal current available treatment options. If fast-track status is not given, as is the case with most new drugs, then the FDA time line is normally one year before an advisory committee meets to decide the drug’s market fate. However, lately the FDA has been taking longer (12 to 16 months total) from the time of New Drug Acceptance to the actual decision on whether or not to approve the drug. 

Now, once the FDA decides to accept a New Drug Application, the best news a company can receive prior to being notified of the actual advisory committee meeting date is NO news. With all biotechnology companies, at this stage in drug development, no news is good news. However, this is not always the case and usually when the FDA speaks before the time of the actual advisory committee meeting, the company in question gets hurt.

Many times, the FDA will make an initial review of the clinical trial data supporting the application and raise questions about a drug’s efficacy and safety. Unfortunately, these questions can only delay the final outcome of the New Drug Application, delay the market arrival of the drug, delay projected potential revenues and make investors very nervous. At this point, the stock price often reflects how nervous investors get. United Therapeutics (UTHR | Quote | Chart | News | PowerRating) is a prime example of how any delay in a New Drug Application can hurt a company’s stock price. 

On April 16, the FDA announced a delay in the processing of the company’s NDA for its drug to treat pulmonary artery hypertension. The stock price dropped 24% that day, revealing the fragility of many of these first-time, unprofitable biotech companies. 

In addition to smaller biotechnology companies feeling the pain of a delay, the more established, profitable companies can also take a hit, if a high expectation drug is delayed. Genentech (DNA | Quote | Chart | News | PowerRating) is a prime example of this. 

On July 11, 2001, the FDA asked for more clinical data to support the safety of Genentech/Tanox's new drug to treat asthma. This new drug was aimed at a very large market and has the potential to generate over a $1 billion in potential revenue if approved. Unfortunately, as big as the potential revenue stream was for Genentech, the hit the company took because of this delay was even bigger. On the day of the FDA news, the stock price declined 16%. Even more striking was the negative reaction aimed at the company co-developing the drug, Tanox (TNOX | Quote | Chart | News | PowerRating).

Along with Genentech’s decline, Tanox lost close to half its market value that day on the news that would result in a delay in the asthma drug coming to market. Again, the smaller-cap companies looking to gain market share with their first new product get hurt the most if the FDA brings negative news. 

Can investors anticipate these potential land-mine delays before the FDA makes a final decision on a new drug? 

The short answer is no, unless you have access to the clinical data reviewed by the FDA. However, there is a way to begin to understand how the FDA is thinking when it decides to delay the final action on a New Drug Application. Any new drug aimed at a large disease market such as cancer, diabetes, heart disease, stroke, Alzheimer’s and the list can go on, has high expectations and can lead to some nice gains. 

Unfortunately, if the FDA expresses any doubt about the drug before it has a chance to decide its fate, then the downside drop can be steep. Be vigilant of new drugs aimed at treating a childhood diseases. Children hold a special place in the heart of the FDA and the clinical data presented with the New Drug Application better be extremely safe and pristine. 

Beware of new drugs that are called a “new class” of treatment. If a drug is defined as a “new class” of treatment, then it differs totally in mechanism of action from what is already approved. New class drugs invite extra scrutiny by the FDA with regard to safety concerns, especially if there already are approved treatments for the disease in question. 

Also beware of companies casting a wide application net for their new drugs, since this also will invite much scrutiny from the FDA before the meeting date is set. Often a company will list several disease conditions that its new drug could potentially treat.

Unfortunately, Genentech and Tanox’s new asthma drug encompassed many of the points made above, and thus invited much scrutiny from the FDA. The drug was aimed at treating both adults and children with asthma and allergies. It was also a new class of drug, a monoclonal antibody, different from anything already being used by doctors today. The end result was that the FDA got squeamish and requested more data covering the safety of the drug. Genentech and Tanox now have amended their application to include only adults with asthma. Both companies plan to supply the FDA with more clinical data regarding safety and efficacy in children.

New Drug Application Accepted For Review, What Next?

Once a company’s application has been accepted for review, there is no guarantee the drug will get approved for use. It can take up to 18 months (usually 12) for the FDA to meet and decide if the drug is acceptable. As I mentioned earlier, “fast track” status shortens this time to six months.  However, during this time period, another seminal event awaits the company applying, an event that gets it closer to the all-important advisory committee meeting. Like the aforementioned sentinel events, it offers you another opportunity to enter and exit the stock. This event is the announcement of the all-important FDA advisory committee meeting, the meeting that will ultimately determine the fate of the drug and, many times, the company presenting it.

Good luck with your trading. I look forward to seeing you at TradingMarkets 2001.

Paul

I have been investing/trading in medical and biotechnology stocks for years. The one common theme is that this is a high risk/reward endeavor. When you are correct, many times you are richly rewarded. When you are wrong, you can be badly punished. Please keep this in mind and hedge/protect yourself appropriately when trading/investing in these stocks.

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