Are small companies carrying the complete response letter can?

A surprise complete response letter for Recro Pharma has promptly wiped away half the company’s market value. Cosmo Pharmaceuticals, which yesterday confirmed a similar fate with its lead project, has likewise suffered a stock market rout.

An important question for investors to mull is whether small drug developers are more likely to experience these regulatory knockbacks – and a quick look at the CRLs handed out by the US FDA over the last year suggests that these penalties have fallen heavily on the sector’s diminutive drug developers (see table below).

This quick-and-dirty analysis does not consider whether small companies are simply making more NDA applications – an important caveat here. But there are certainly reasons why their filings are more likely to fall short than those put together by bigger companies – including finding it harder to recruit staff with strong regulatory expertise and budget constraints.

Big pharma is certainly not immune to these knockbacks: Eli Lilly’s CRL for Olumiant ranks as one of the biggest regulatory surprises of the last few years, although the FDA did U-turn on its decision fairly swiftly.

EP Vantage assembled the list above from press releases from the beginning of 2017 which announced receipt of a CRL. It excludes complete responses letters for supplemental NDAs. The list will be far from exhaustive, as many of these letters will not be made public.

It is notable that of the list above, a large majority of the big pharma CRLs relate to biosimilars, a field in which both companies and the FDA are still feeling their way. Of the 34 CRLs found, nine were handed to large companies that should be able to get their regulatory ducks in a row. Exclude biosimilars, however, and this number falls to six – four if you exclude the two Advair generic applications.

The latest

Recro is the latest to feel the pain of rejection – shares were down 54% in early trade, slicing the company's market cap to $118m. Recro said the FDA rejected its application for IV meloxicam because the analgesic effects demonstrated in ad hoc analyses and selective secondary endpoints did not meet the agency's expectations. The FDA also raised chemistry, manufacturing and controls issues.

The rebuff is a surprise given that meloxicam, a Cox-2 inhibitor, is approved in oral form as Mobic to treat arthritic conditions. Some analysts had regarded approval as nearly a sure thing given the agency’s desire for more non-opioid pain relievers and that meloxicam was a known molecule.

Cosmo was similarly surprised by its CRL, which wiped a third from the company’s market value – about SFr700m ($707m). The FDA has asked for a second confirmatory trial of cancer diagnostic product Methylene Blue MMX - as the project’s active ingredient and delayed-release technology are already used in marketed products, perhaps the company presumed only one trial would be needed.

Still, the Swiss firm had agreed a special protocol assessment with the FDA, prompting analysts at Berenberg to wonder whether Cosmo did not follow the agreement closely enough.

Lack of transparency around the dialogue between these companies and regulators keeps investors in the dark as to what has really happened in these situations. Making CRLs public would help, though industry has pushed back on this idea, claiming that they do not want to risk competitive disclosure.

More openness might also help disprove the trend that this data points to – that less experienced drug developers are much more prone to messing up when it comes to the regulatory stage.

Small companies will always feel these regulatory setbacks more keenly, but the share price reaction to Cosmo and Recro suggest these outcomes were a big surprise. Until investors win greater insight, perhaps these regulatory milestones should be approached with more reticence.

To contact the writer of this story email Amy Brown in London at [email protected] or follow @ByAmyBrown on Twitter.