Has A Streamlined FDA Raised The Value Of Drug Stocks?

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Last month, three Democrats from the U.S. Congress sent a now-famous letter toGilead Sciences ( GILD ) questioning the $84,000 price of its new blockbuster hepatitis C medicine, Sovaldi. Among the reasons raising suspicions that the price didn't need to be that high: the speed with which Sovaldi was approved by the Food and Drug Administration.

"Gilead filed for and received a Priority Review and Breakthrough Therapy designation, which reduces the FDA review goal date from ten to six months," they wrote. Among the questions the lawmakers wanted Gilead to answer: What was "the value to the company of the expedited review"?

Wall Street has pondered that very question as drugmakers soared to the head of the market in a multiyear rally. Gilead wasn't alone in getting fast-tracked approval for its drugs.

According to data collected by wealth-management firm Robert W. Baird, in 2006 the average time it took for a drug to go through the approval process was 17.5 months. Last year, it was 13.2 months.

The rate of regulatory approvals on a new drug's first attempt has also increased sharply, from 56% to 89%. Many argue that the effect of turning new drugs into breadwinners more quickly and shortening an R&D cycle typically estimated at costing above $1 billion has also driven up the value of many drugmakers.

And it has added another talking point in the great debate between bulls and bears about the true value of drug stocks. This point pertains especially to biotechs which, even after the recent sell-off, are still collectively worth triple their value at this time in 2011. The issue is: Has a streamlined approval process permanently increased the pipeline productivity of drugmakers?

"I wouldn't use the word 'permanent,'" said Baird biotech analyst Christopher Raymond. "But is it fundamentally changed? Absolutely."

Legislate, Then Collaborate

Raymond says that the streamlining began with the Prescription Drug User Fee Act, or PDUFA, first passed in 1992, under which drugmakers pay a substantial fee to the FDA every time they submit a new drug application. In exchange, the FDA agreed to stick to certain performance benchmarks.

The rule change resulted from complaints made by AIDS activists about how long it was taking to get new medicines approved. But it took years for the process to bear fruit, as the bureaucracy restructured, using funds provided by the PDUFA.

"Not only did they reinvest (the funds) in review staff, but they reinvested into doing their own research and having better infrastructure to be able to collaborate with companies," Raymond said.

The most important collaboration for most companies is in clinical-trial design. This is especially important for the most innovative drugs out there, which can potentially be the biggest sellers.

"There are unique challenges to approving biologics," said Amitabh Chandra, director of health-policy research at the Harvard Kennedy School of Government. "In principle because they're so new, there's going to be a lot of procedural uncertainty on the part of approval panels in terms of what to ask for."

However, industry insiders say that the ground has shifted noticeably in the past decade. Jay Luly, CEO ofEnanta Pharmaceuticals ( ENTA ), testified to this shift when IBD interviewed him in December about the company's biologic drug, called a protease inhibitor, that is part ofAbbVie 's ( ABBV ) three-drug cocktail to treat hepatitis C. He said that when his company started investigating hepatitis C in the early 2000s, he wouldn't have imagined clinical trials like those that AbbVie conducted on the cocktail.

"The assumption was that you would get a protease approved as a single agent, and then you would do combinations with it once it was approved," Luly said.

A decade ago, Luly said, few in the industry envisioned the FDA as a constructive partner in exploring such combinations in the early stages of drug trials and testing.

"The way it's played out is probably much better than any of us had ever imagined," he said.

Assessing Survival Vs. Cure

Another important task for drugmakers and the FDA is coming up with meaningful clinical endpoints for the trials. In the case of hepatitis C, the endpoint has been "cure," but a lot of serious, chronic diseases can be improved by treatment even if they fall short of a cure. And in some cases, waiting to see if the patient can really be cured would take a long time.

Industry watchers say that this problem has led to more use of the progression-free-survival ( PFS ) metric in cancer-drug trials. The most obvious metric to use is overall survival. The metric gauges how much longer patients on the drug live compared to those who aren't on it. But cancer cases can linger for years, making the data costly in terms of time and funding.

Drugmakers continue to track overall, long-term survival in their trial subjects. But when patients on the drug survive significantly longer without their disease getting worse, it can make a valid substitute for FDA purposes.

"People are realizing that just using overall survival is way too risk-averse," said Chandra. "Patients die the longer and longer you wait. And there's value to just living longer with cancer while waiting for the next therapy."

It's still not totally clear how much weight the FDA affords to PFS, though. For instance, this month the biotech community has debated whetherPfizer ( PFE ) can file for approval based on phase-two data it reported April 6 on its breast-cancer drug palbociclib.

The drug showed an excellent PFS benefit of 10.2 months when compared with the control group. However, it did not show an overall-survival trend, which defenders pointed out would have been nearly impossible with a small patient group at this stage of the game.

Some analysts have been claiming that phase-two data is enough to file on. Others have stated that the FDA will probably need at least interim phase-three data. Pfizer has not yet decided whether to file.

Hazards Of Fast Tracking

Nonetheless, observers generally agree that the trend has been toward earlier approvals of drugs, especially potentially life-saving ones. In fact, a study published in the Journal of the American Medical Association in January found that 37% of the FDA's approvals between 2005 and 2012 -- of both new drugs and new uses for older drugs -- came after only one large, "pivotal" clinical trial, which typically means phase two.

That shortening of the process traces to programs created in the 1990s such as 1992's Accelerated Approval Program and 1998's Fast Track designation .

But along with its benefits, fast-tracking also carries hazards. For instance, in 2006 the FDA approvedRoche 's (RHHBY) blockbuster drug Avastin for breast cancer, based on a single trial. However, as results rolled out from subsequent trials, there was no apparent survival benefit, resulting in the FDA removing breast cancer from Avastin's label in 2011. (It's still sold for other uses.)

Analysts say that other scandals that erupted in the late 1990s and the early 2000s, around such drugs asGlaxoSmithKline 's (GSK) Avandia andMerck 's (MRK) Vioxx, led to at least a temporary backtrack in the trend toward faster approvals.

"By and large, immediately following Vioxx, and to a lesser degree Avandia, you saw the FDA pull its horns in a little," said Les Funtleyder, author of "Healthcare Investing." "The danger, which we kind of saw in the late '90s and the early 2000s, is (the expectation that) the FDA just rubber-stamps everything."

Raymond agrees that there was a "road bump," particularly after Mark McClellan, who was commissioner of the FDA from 2002 to 2004, was perceived by many as being too lenient.

"It's possible that if we were to see a similar situation of a bigger magnitude, the FDA would pull back," he said. "But I think the science behind what FDA has done is so much more rigorous now, it's hard to see what that could be."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: GILD , ENTA , ABBV , PFS , PFE

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