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Making sense of FDA designations

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Ooh, I love vocabulary tests

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It doesn't take too much poking around to know that the FDA is instrumental to the rhythms of biotech and healthcare investing. As with any agency, the FDA has developed its own language surrounding the approval process. Understanding that language and the real impact on the fortunes of the drug involved can help you segregate actionable news from the biotech equivalent of navel lint.

Fast Track

Fast Track status is often confused with a granting of accelerated review (see below) because almost all drugs granted Fast Track status are also granted accelerated review. In truth, all a Fast Track designation allows is the company to file for approval on a "rolling" basis. In a normal application scenario, the voluminous application for a new drug approval has to be completed in full before it is submitted. With Fast Track status, the main sections of an application can be submitted separately. This theoretically saves time.

Companies have to apply for Fast Track status. After an application is made, the FDA will respond in 60 calendar days. If a company announces it has applied for Fast Track status, and much more than 60 days go by without an announcement the request was approved, it should cue the smart investor to start digging. I suggest you look first to the status of ongoing clinical trials and the company's ability to manufacture the drug.

Investors often mistakenly interpret the granting of Fast Track status as an early indication the FDA sees the subject drug as approvable. This is not the case. The authorizing legislation merely states Fast Track status is designed "to facilitate the development and expedite review of drugs and biologics intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs." The "demonstrate the potential" bit is where most people get over-excited. If a drug is targeted to a serious or life-threatening condition that has no existing good treatment, it will get Fast Track status because that is "potential" enough for the FDA.

From March 1, 1998 through March 31, 2004, the FDA received 119 requests for Fast Track status. It approved 70 while denying 47 (the rest are pending). It is obvious there is some qualitative judgment involved as to the worth of the drug, but our resources indicate most of the yes/no decision making has to do with whether the drug is truly targeted towards an "unmet medical need" and not a sneak preview of any FDA bias towards drug approval.

Orphan Drug Status

There are certain medical conditions where the number of sufferers is very small. To encourage drug companies to develop drugs for these patients, Congress and the FDA developed the Orphan Drug program. If a drug is granted Orphan Status, it receives market exclusivity for seven years. The company also gets certain tax benefits and patent extensions. The exclusivity part is a little tricky and not well understood.

One thing to understand is the exclusivity is not absolute. If another drug comes along that proves itself in clinical trials to be a superior way to treat the same patients, it becomes the new Orphan Drug. This requirement for superiority does raise the bar for subsequent drugs, but it does not bar the door - to mix a couple of metaphors.

The other thing is that "exclusivity" is a porous idea. Millennium Pharmaceuticals (MLNM:NASD) was granted Orphan Status for Velcade for the treatment of multiple myeloma (a kind of blood cancer). However, the FDA has the ability to approve several other drugs for multiple myeloma - even if they don't prove superiority over Velcade - just as long as the new drug doesn't work in the exact same way and/or treat the exact same patient group.

For example, Genta (GNTA:NASD) is developing Genasense for the treatment of multiple myeloma. Genasense has also been granted Orphan Status even though it will be used in the same patient group as Velcade. The difference is Genasense is made to be used in combination with chemotherapy and works in a completely different way.

Orphan Status also gets investors overexcited. It is a good thing for a drug to receive, but it is no predictor of eventual regulatory or market success.

Accelerated review

Since 1992, there have been three versions of the Prescription Drug User Fee Act (PDUFA). This Act is designed to speed up the FDA's drug approval process. The current PDUFA approval goal is 10 months from the filing of the complete application, though all analysts assume 12 months. Under accelerated review, the FDA promises to get back to the company within six months of the date the filing was completed. If an application was completed on January 1, the "PDUFA date" under accelerated review would be July 1.

Be aware that under a Fast Track designation, the PDUFA date is six months from the time the last piece of the application is sent to the FDA. Almost all drugs with Fast Track status receive accelerated review, though they are separate designations. A drug does not have to be part of the Fast Track program to receive accelerated review, however.

Investors will know for sure whether an application will receive accelerated review 60 days after the application is sent to the FDA. At that 60-day mark, the FDA "accepts" the application and informs the applicant of the review status - accelerated or "full" review.

Full review

A full review means the FDA will first get back to the company in 10 months. As we noted above, most analysts assume this will be 12 months.

FDA acceptance for review

When a drug application is submitted, the FDA checks it to make sure it is complete. This process takes 60 days. Inside that 60-day window, the FDA and the company are likely to converse so there are few surprises when the 60-day mark hits.

Many investors attribute too much to the fact the FDA has accepted something for review. This process is all about whether the application is correctly filled out. Think of it like when your grammar school teacher handed your paper back when you forgot to put your name on the top. She wasn't making a qualitative assessment of your work, just kicking it back because it wasn't complete. Acceptance for review carries no qualitative judgment by the FDA about the drug or its chances for approval.

Our view on this last bit - acceptance carrying no qualitative judgment by the FDA - is somewhat controversial. We believe one way to view the ImClone (IMCL:NASD) 2001 Erbitux debacle was the FDA screwed up by imposing a qualitative judgment too early in the process. The fact that the FDA was not comfortable with the trial design for Erbitux was not an acceptance question - it was a review question. If ImClone's application was technically complete, it should have been accepted for review. The FDA, in our view, has learned this lesson well and will now accept anything that fits the statutory requirements for a complete application.

When the application is accepted for review, the FDA will tell the company the PDUFA date for the drug. The company should share that information with its shareholders.

New Drug Application (NDA)
Biologics License Application (BLA)

These are the formal names for the two main types of applications for a new drug to be approved by the FDA. Whether a drug goes through the BLA process or the NDA process depends on its composition. If it contains live cells, it will generally go through the BLA process.

In the past, there were significant differences between a BLA and an NDA. The differences that remain are subtle and fading fast. At some point, I might address the difference if I can find a good, real-world example of how it has affected stock prices. For now, think of the two as synonymous.

Next time

In a coming article, I'll describe the dreaded "approvable letter." I'll also detail the difference between accelerated approval and full approval. While either approval allows for immediate marketing of the drug, they are not equivalent. The recent increase in the number of companies seeking accelerated approval raises the specter of the need for their drugs to show competitive superiority, something very few on Wall Street have factored into their due diligence.

A long position in GNTA

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