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Biotech is Getting Uglier


We still need another publicly-traded biotech to be acquired (or a large licensing deal) to jumpstart the sector...


The FDA recently announced they would be reviewing the way their advisory panels are put together and operated.

It's about time.

The effort, spearheaded by recent FDA addition Dr. Scott Gottlieb, will focus on how panel members are chosen, what they are asked, and the level of panel participation by the heads of the FDA divisions that convene them.

On one side, drug company haters are convinced the game is rigged in favor of the drug companies because people with industry ties sit on these committees. As with most silly arguments by overzealous nuts, they want to trap the industry into a Catch-22. They want clinical trials to be much larger. To do that, companies must pay more researchers to run trials. Then the zealots want people on the advisory panel to not have any financial connection to the companies whose drugs are under review.

You honestly can't have it both ways and expect to have people who know what they are talking about sit on the panel.

On the other side, companies are tired of capricious decisions. FDA panels and the FDA itself do not operate under the concept of precedence. Panels that have historically passed drugs through on surrogate endpoints and non-randomized data all of a sudden want to see hard endpoints and randomized data before they approve a drug. The process is exceptionally frustrating, and overly expensive, for the drug companies.

I can only hope (well, more than "hope" as I'm lobbying for it) that precedent makes an appearance into the vernacular of FDA panel meetings. I think court-like reliance on precedence would be stifling, but a panel that's parting from historical behavior should be required to discuss why they are doing it.

I also believe there should be restrictions on a FDA division head's ability to swap people in and out of a panel. In May 2004, for instance, nearly the entire ODAC panel was swapped out without advance notice to the companies or the public. We've seen similar nonsense in the form of expanding a panel markedly. Even if I'm kind and only call it making it "appear" FDA heads are trying to skew the votes, it's bad practice.

One of the other big points is coming to some kind of standard practice on how much the FDA head can talk at the meetings. Some advisory panels are truly that – the FDA division head sits back and answers the occasional question, but he/she lets the advisory panel work out the issues themselves and independently come to a conclusion. On other advisory panels, the division head and his/her staff never shuts up. They have an obvious agenda and actively work to skew the conversation "their" way. The advisory panel merely provides political cover.

Doctors Gottlieb and von Eschenbach are clearly trying to push through a great number of positive reforms in the two years they have remaining on their tenure. This review of FDA panel procedures is a big one that will benefit investors and patients alike. Better rules and guidelines are more likely to increase the chance good drugs get to patients and decrease the chance bad drugs are approved.

Oncology is the sub-sector most likely to benefit by the decisions/restrictions I describe above. The pathway to approval for those drugs is especially tortured and uncertain. I wouldn't be on too thin a limb if I said this panel review arose in large part from complaints on how the ODAC panel has been operated over the past 2-3 years.

Biotech market

Biotech is getting uglier and people are beginning to want to slit their wrists. We've been less affected than most so far (by 'we' I mean the model portfolio we operate) because of covered call sales and a recent focus on stocks less affected by this downturn. But it's still painful.

Technically, the NASDAQ Biotech Index (NBI) looks to want to test support around 765. The AMEX Biotech Index (BTK) failed again at resistance at 689. We see buying pressure appearing in both related ETFs (IBB and BBH, respectively), but nothing that encourages us to make a big bet on the sector.

Fundamentally, little has changed. We still need another publicly-traded biotech to be acquired (or a large licensing deal) to jumpstart the sector. Continued acquisitions of private companies will help a little, but only insofar as that continues to push up already overheated valuations in the private sector. That causes private VCs to spend money in the public companies, supporting stock prices.

ASCO has largely been written off by players in the space as a yawn this year, likely eliminating one of the obvious catalysts. Seasonality is currently in the sector's favor by the calendar, but we don't see the proximate catalyst as developing.

For those who still measure "long term" in years, biotech is unquestionably the place to be. Population demographics and healthcare trends are certain to benefit companies in this space over the next couple of decades. The challenge will certainly be to pick the right companies since an overall index approach – despite the self-selecting nature of the indices – simply tosses too many bad apples in with the good. Remember, only one of ten of these biotech companies succeeds. Consider that when you're trying to play the sector with an ETF.

Honestly, if the sector goes catatonic and trades +/-10% (which is calm in my world) from these levels through to fall I'd be perfectly giddy. From a purely selfish basis, we've got a great deal on our plate here at BSR between working up new companies, redesigning our web site, and rolling out new products. However, on the basis that the minx is, well, "minxy" I'm guessing my desire for flattish behavior will be met by wide price swings. That's worth keeping in mind as we edge from spring to summer.
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