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Biotech execs worry about the FDA


Prior performance sometimes does predict future results


Each year we undertake to write an Anniversary Issue including recaps, updates, and prognostications on the 22 companies in my firm's coverage universe. We survey the executives of the 22 companies we cover and others in the industry to get their view on the biotech space - specifically, what they believe the positive and negative drivers will be for biotech valuations in the coming twelve months.

I love these conversations and I always obtain significant new insights into the biotech space. Our Research Team stays pretty hooked in to the industry on a day-to-day basis and, of course, has our own ideas about what will drive valuations. The other 11 months of the year, these CEOs are usually calling us to inquire our views about the direction of the market. This time, they return the favor and we get to pick their brains.

Most of the executive teams we spoke with expressed concern with leadership at the FDA. Some had specific criticisms, more than a few had praise, but most were concerned that it will be difficult for valuations to advance without firm leadership in the top spot.

As I've pointed out before, they have good reason to be afraid.

As most of these executives noted, a new FDA Commissioner is unlikely to be a November appointment this year. If Senator Kerry wins the election, we are not likely to see a new FDA Commissioner until some time in Q2-2004 - assuming Senator Kerry gets the job done faster than the two years it took President Bush to appoint a permanent Commissioner.

The fear goes beyond the uncertainty at the top position, however.

Oncology companies we spoke with cited uncertainty connected with the FDA's reorganization of this division. Three of the four FDA sub-bureaucracies currently charged with assessing and approving cancer drugs are being merged into one sub-bureaucracy. And while I believe the net result will be business as usual, biotech executives developing cancer drugs believe we will see slower reviews as bureaucratic reorganization takes cycles away from the real work of approving drugs. They also worry about internal politics that are sure to flare up as three groups are merged into one. For these companies, who is appointed the head of this new group is perhaps more important than who is appointed head of the FDA.

The other fear I found interesting was a fear that the FDA staffers are worked too hard. Timelines for approvals are now compressed to 10 months. Firms who are granted accelerated status - a status that is increasingly popular - have review guaranteed in 6 months. New programs increasing the time the Agency meets with each applicant for approval exacerbate the problem. Several biotech executives we spoke with believe this problem will cause the FDA to implode as overtime and recruiting costs will exceed the fees companies pay for the review process.

Some executives believed the harm to future valuations would come from mistakes. This is an interesting point. Whenever an approved drug is pulled off the market for safety concerns, it hurt biotech and drug valuations. Some of this is just Wall Street selling the sector as a whole. The longer-term potential detriment is even more strenuous approval hurdles. After such a failure, the FDA revises their guidelines to be tougher. Congress often gets involved since "saving consumers from the bad drug companies" makes a convenient campaign talking point - especially when the news is ripe with stories about the pulled drug.

The number one potential harm to biotech valuations, according to the biotech executives we spoke with, is late stage trial failures and failed new drug applications (NDAs). This is always a driver for valuations across the sector (success begets success) so those responses were expected.

What we expected and didn't get was a lot of concern about reimbursement issues. We know this is a huge concern for big biopharmaceutical and big pharmaceutical companies. What was interesting was the executives we spoke with noted their drugs were either one-of-a-kind or targeted at a specific specialty (medical discipline). They believe drug price controls are unlikely to reach that far into the biotech breadbasket.

These biotech executives are an optimistic lot, so they wanted to talk about positive valuation drivers more than the negative. Tomorrow, I'll talk about what these executives believe will drive valuations higher over the next twelve months.

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No positions in stocks mentioned.

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