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FDA Bruises the Biotech Sector


Choosing math over patients is not cool

Development-stage biotechs were hit the hardest in 2002, with many trading below their cash value. While the start of the decline had to do with the overall macro market sell-off, I firmly believe the depth of the decline had its roots in wrongheaded FDA policy.

Since Dr. Mark McClellan left the top FDA post in February, our research team has been polling our contacts in the biotech industry to determine whether there have been any changes in their dealings with the agency. We are hoping to detect whether assurances by temporary FDA head Dr. Crawford of continued "McClellan-esque" behavior are true or whether we will see a return to the days of over-zealous biostatisticians, adversarial mindsets, and attention to process instead of patients.

Until recently, we heard nothing but praise for how the troops at the FDA were going to carry on in Dr. McClellan's tradition of working with companies to get drugs approved by focusing on patients and not mathematics. Praise for the FDA is common among people who work with them closely. While we are sure there are good apples at the agency, most of the praise is lip service from people acutely aware their futures are in the hands of a government bureaucrat.

Lately, we've heard rumblings of discontent from our contacts. We now have more detailed information on how companies are interacting with the FDA since Dr. McClellan left.

The news is not good.

What we are now hearing from multiple sources is the tone at the FDA changed almost immediately after Dr. McClellan left the FDA. Companies who were in detailed conversations - particularly about upcoming or completed pivotal trials - saw a marked decrease in the FDA's enthusiasm for their plans. These changes took place abruptly - so abruptly that some companies who thought they were in the final phases of coming to an agreement with the FDA on the design of pivotal trials at one meeting essentially had to go back to the drawing board after the end of the next meeting.

Two companies told us of a complete change in the attitude of their FDA counterparts towards data under discussion. Both companies noted even though they were speaking to the same people, where once the demeanor was positive and encouraging in discussions occurring in early 2004, by April those discussions had turned increasingly stand-offish -- if not hostile and uncooperative.

We have also heard stories of companies inches from formal, written agreements on the design and endpoints for pivotal Phase III trials that were notified at the last minute the agreements would have to be extensively remodeled. In some cases, the discussions had been ongoing for months only to be completely changed in the space of one meeting. Agreements reached early in the process were re-opened with an eye by the FDA to making proposed clinical trial programs more restrictive and costly.

As of yet, we have no evidence that formal agreements - such as existing Special Protocol Assessments (SPAs) - have been affected. It is unlikely these agreements will be affected since these are legally binding. Some companies where the ink was not dry on their SPAs, however, have seen significant changes.

In October and December of 2003, I told our Subscribers how election risk would affect the willingness of the FDA to work with biotech firms because of the likelihood Dr. McClellan would no longer be the head of the FDA after November 2004. I've shared similar thoughts with my fellow Minyans. My theory was once biotech investors realized this, biotech valuations would decline.

If you look at a six-month chart of the AMEX Biotech Index, you'll see valuations began their decline in early March - just at the point where Dr. McClellan was confirmed by the Senate for his new post. With the exception of a rally in April driven by short covering in response to a couple of drug approvals, March was it for biotech valuations this year.

I noted in a previous article that the last time Dr. Crawford was in charge of the FDA, biotech valuations were cut in half. While some of this decline was a justified trimming of unreasonable valuations, no sane biotech watcher would say the behavior of the FDA during his reign had no part in that decline.

Biotech investors can expect additional declines in valuations over the remainder of the year and perhaps into next year until we discover who Dr. McClellan's replacement will be. If President Bush wins the November election, the overall rise in the macro market may drag the biotech sector along for the ride. If Senator Kerry wins the November election, then the gloom over this sector will likely last into next year. (I'm aware talk about the election is a hot button that engenders cries of partisanship masquerading as financial commentary. Please understand partisanship has nothing to do with my comments today.)

It will be especially important for the sector to have a new FDA Commissioner in place as soon as possible. The characteristics of the new Commissioner will be crucial as the sector needs someone who is willing to take charge and be an advocate for patients (as opposed to a slave to process). An overall macro-market rise will drag the biotech sector up, but I suspect it will underperform until this issue is resolved.
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