Slower FDA to give shareholders headaches

Data Insights

A full late-stage pipeline of experimental drugs is ultimately what companies strive to achieve, and rightly so. But with the regulatory climate becoming tougher, in terms of stringency and timeliness, those very same assets are set to exert even more short term pressure on share prices.

In the US, it has become more common for review periods to be extended, while mounting political pressure in the wake of the Vioxx withdrawal has caused the regulator to become much more cautious, and issue more approvable letters. With the surprise news last week that the FDA Office of New Drugs Director John Jenkins has granted reviewers discretion to miss PDUFA action dates by up to 2 months, the situation is only likely to get worse.

Last year, the FDA approved the fewest new drugs since 1983, and with the climate getting even tougher, sales growth across the board is going to slow. The worsening outlook is partly to blame for the under-performance of pharmaceutical stocks in the last year, and has caused the sector to loose its “defensive” tag.

But alongside the long term growth worries, tussles with the regulator while trying to win a marketing license are increasingly likely to cause short term pain for shareholders.

Curse of the approvable letter

Last year, the FDA issued about 35 approvable letters, up from 25 in 2006, as its stance became more cautious. Impressively, a quarter of those were received by GlaxoSmithKline. The company has by far the broadest pipeline of the drug majors, so filed more NDAs or line extensions than others in the first place.

As well as the ongoing scrutiny of cervical cancer vaccine Cervarix, both Lamictal XR and Trexima received approvable letters, delaying the drug-maker’s plans to extend the life of valuable franchises. With the company boasting of 34 key assets currently in phase III or registration, further delays are inevitable.

Being so large, often the news will not have a big affect on its share price, but constant delays could weaken sentiment in the long term.

The table below, from EvaluatePharma's Calender of Events, shows which companies have the most regulatory decisions facing them this year. A short term investment case could be made to avoid such stocks, as set backs become more the norm when dealing with the FDA.

    Products up for FDA review in 2008
Rank Company Total PDUFA Dates Advisory Committee Meetings Update to FDA Action Letters
1 Johnson & Johnson 8 7 1 -
2 GlaxoSmithKline 8 5 - 3
3 Wyeth 6 5 1 -
4 UCB 6 6 - -
5 Schering-Plough 5 3 2 -
6 Ligand Pharmaceuticals 5 4 1 -
7 Amgen 5 2 3 -
8 Abbott Laboratories 5 5 - -
9 Roche 4 3 1 -
10 PDL Biopharma 4 4 - -
11 Nektar Therapeutics 4 2 2 -
12 Merck & Co 4 2 - 2
13 Astellas Pharma 4 3 - 1
14 AstraZeneca 4 3 - 1
15 Eli Lilly 4 2 - 2
16 Cephalon 4 3 1 -
17 Takeda 3 3 - -
18 Sciele Pharma 3 3 - -
19 Salix Pharmaceuticals 3 3 - -
20 Pfizer 3 2 - 1

While the majors are protected by their vast size to a certain extent, the stock can still be affected when a particularly crucial product is involved. The PDUFA dates for Eli Lilly’s prasugrel on June 26 and Johnson & Johnson’s paliperidone palmitate on August 28, for example, will be hugely important to the companies.

Rocky ride

The smaller drug developers present on the list, such as Salix and Sciele, with a pivotal year in front of the regulator, are almost guaranteed to provide investors a rocky ride.

Being far more vulnerable in terms of share price sensitivity, an increasingly hesitant and cautious regulator is likely to cause even more volatility in the future.

Last August, Glaxo and partner Pozen received a second approvable letter for Trexima, prompting shares in the US company to plunge 48%. The first approvable letter in 2006 had already wiped 60% off the price.

Buying ahead of an FDA decision, gambling on positive news for a quick gain, will now become an even higher risk bet.

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