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Important tipping point for biotech valuations

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Tipping points are always snapalicious!

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On May 3rd, the Oncologic Drugs Advisory Committee (ODAC) - an FDA advisory panel - will meet to discuss the approvability of drugs from two biotechnology companies. Besides being extraordinarily important for the valuations of these two companies, the ODAC meeting may be important for the biotech sector as a whole.

As you may remember from reading one of my prior articles, we have a new acting FDA commissioner, Dr. Lester Crawford. Under his last watch, the value of the NASDAQ Biotech Index (NBI) was cut in half due, in part, to the perception the FDA was making it overly difficult for companies to get drugs approved. That perception changed when Dr. Mark McClellan took over, but he is gone as of last March 24th. At the time of his newest appointment, Dr. Crawford claimed he would continue the initiatives put into place by Dr. McClellan.

For more than a few people, May 3rd is where the rubber meets the road on that claim.

But first, let's talk...

Before I get into the particulars, I have to set out some parameters. In order to explain why this ODAC meeting is a tipping point, I will have to share with you research opinions of the Biotech Monthly research team in order for you to understand the import of this meeting. This puts me close to the fine line we walk here at Minyanville between advice and education.

By doing this, I run the danger of creating the impression this piece is intended as advice. It isn't and you, the reader, need to understand this going in. In the first place, we don't do advice here at Minyanville. In the second place, this article will not provide the detail necessary for you to get a clear picture of the investment environment of either of the two companies involved. We've literally published hundreds of thousands of words on one of these companies at Biotech Monthly in order to set parameters around our research conclusions and I just cannot do the same here.

As long as we have it straight that this piece is not investment advice concerning either of these two companies, we're good to continue.

Genta story

Genta (GNTA:NASD) is one of those biotech companies everyone has an opinion on. With two of the largest biotech-focused hedge funds lined up on either side (one short, one long), it's been more like a war than an investment. Genta's leading drug candidate is Genasense, a drug designed to help other drugs (like chemotherapy drugs) do a better job of treating cancer. Genta partnered Genasense with Aventis (AVE:NYSE) in one of the largest single-product biotech licensing deals of all time.

In September 2003, Genta released results of a pivotal Phase III trial in late-stage melanoma. The results proved Genasense has activity, but the drug failed to reach its primary endpoint of survival. When a drug fails to reach a primary endpoint in a clinical trial, it equates with failure. As with most things biotech, there are failures and then there are failures.

For reasons it takes several thousand words to explain in detail, there is a reasonable explanation for why Genasense failed to reach its primary endpoint: Genta management opened the trial too early so the results were premature. To draw an analogy with baseball, it would like trying to predict the World Series winner in July - you might have a darn good idea but not all the data are available yet. Give yourself three more months, however, and you could pick that winner quite accurately.

Whether or not you believe "aging" the Genasense survival data is proper or will turn out to demonstrate a positive result, what cannot be ignored is the fact several other important secondary endpoints were clearly shown to be positive in the Genasense Phase III trial. In fact, the only negative among the predetermined endpoints was the survival data.

The bottom line here is on the morning of May 3rd, the ODAC panel will be faced with a drug where important secondary endpoints clearly indicate the drugs works but the most important endpoint of survival is clouded.

Allos story

Allos Therapeutics (ALTH:NASD) created a drug called RSR-13 which makes cancer cells more sensitive to radiation, therefore making radiation therapy more effective. This drug was studied in a large Phase III trial in lung cancer and breast cancer patients whose disease had spread to the brain.

The Phase III trial for Allos failed to reach its primary or secondary endpoints. When Allos examined the results, however, they learned that two subgroups in the population benefited from the drug to a much higher degree than the entire population.

The first subgroup included those lung and breast cancer patients whose disease had not spread to their brain at the time of diagnosis. Of the 668 patients in the overall trial, 237 patients met these criteria. The results in these patients were clearly better. Those who got the drug lived 6.6 months while those who did not lived 4.47 months. While an extra two months does not sound like much, it is a clinically significant difference in survival. The FDA has approved drugs where the benefit was a few weeks.

The second subgroup was only breast cancer patients. Of these 107 patients, those who got the drug lived 9.00 months and those who did not lived 4.47 months.

The problem with both these subgroups is they were not "prospectively defined." Biostatisticians hate it when a trial fails in one group so the company hunts among the results for a subgroup where the drug showed success. Why do they hate it? It dramatically increases the chance the results you are seeing are due to random chance. When you find a good subgroup in an otherwise failed trial, a biostatistician will tell you to run another clinical trial to eliminate the possibility the result was due to chance. The FDA has historically agreed.

Allos filed for approval in the second subgroup anyway. This creates two more problems in our judgment: (1) This is the smaller of the two subgroups. If you are going to rely on a retrospectively defined subgroup, pick the largest one you can find as it makes the outcome less likely to result from chance; and (2) On a scientific basis there is no reason why RSR-13 would work better in breast cancer patients than lung cancer patients.

The bottom line here is on the afternoon of May 3rd, the ODAC panel will be faced with a drug where the positive results were only found retrospectively and where those results are somewhat disconnected with the science behind the drug.

How does this affect biotech overall?

I believe the May 3rd ODAC panel meeting will be a referendum on whether the FDA will revert to the risk-adverse, timid state seen before Dr. Mark McClellan took over the Commissioner spot. If the results of the ODAC meeting point toward a more timid FDA, then the biotech sector will sell off because it means it will be tougher and more expensive to get drugs to market. If, however, the results of the ODAC meeting are interpreted in a way to say the FDA is much more eager to approve new drugs, then the biotech sector should see a lift because it will become easier and cheaper to get new drugs approved.

There's nothin' like a table to make this clear (NBI = NASDAQ Biotech Index):

The reason why any sort of an approval recommendation for the Allos drug would be bullish is that the FDA has historically slammed the door in the face of companies who seek approval on retrospective subgroups. For the ODAC panel to recommend approval of RSR-13 would represent a significant change in FDA policy. All eyes would turn to June when the final FDA decision on the drug is due. If the FDA approves RSR-13, biotech valuations will almost certainly improve.

As with any sort of handicapping, there are complications. There is big money betting against the idea Genasense receives a positive recommendation. Given this, it is possible any positive outcome for Genta would boost the sector since more than a few large players in this space believe the current FDA is not accommodative enough to recommend approval on a drug that failed its primary endpoint.

The first clues to the outcomes will be available the morning of May 3rd when the FDA makes its briefing documents available to the public. Trading in both companies will likely be halted from the close of after-hours trading on Friday, April 30 until after their votes are made public on Monday the 3rd. Watch the newswires on May 3rd as both companies will issue news releases detailing the ODAC panel results. Then join me in watching whether these votes have any effect on the NASDAQ Biotech Index (NBI).

Long position in GNTA.

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