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Tipping Point Part Deux

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Zero upside benefit, only downside risk

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In late April, I detailed what I thought would be an important tipping point for biotechnology valuations. The event was the early May Oncologic Drugs Advisory Panel (ODAC) meeting for Genta's (GNTA:NASD) Genasense and Allos Therapeutics' (ALTH:NASD) RSR-13. That meeting didn't go so well for the sector. The ODAC panel turned down both drugs.

The NASDAQ Biotech Index (NBI) hit a peak on April 27th at 845. It then declined into the May 3rd ODAC meeting, closing that day at 793. The NBI ended July at 680, down 14%. As I've written, I think that's just the start.

On September 3rd, we have another situation where an FDA decision could be a real tipping point. This time, unlike in early May, there is no real upside opportunity to a favorable FDA decision. What biotech investors have to be worried about is a negative FDA decision truly gutting sector valuations.

Last week, Eli Lilly (LLY:NYSE) presented their cancer drug Alimta (pemetrexed) to ODAC. The meeting provided a somewhat mixed message, but basically what ODAC did was recommend to the FDA - over the FDA's objections - that Alimta should be granted accelerated approval for the treatment of non-small cell lung cancer.

The crux of the tipping point this time is whether the FDA will listen to its advisory panel. After all, this is an advisory panel so the FDA is not required to follow their recommendations.

This situation has happened before. Early last year, ODAC recommended the FDA approve AstraZeneca's (AZN:NYSE) Iressa. FDA staffers were obviously incredulous. Through several conversations over the last year - particularly in the last couple of months - our research team has learned FDA staffers were not going to approve Iressa. The only reason it was approved is then-FDA Commissioner Dr. Mark McClellan insisted FDA staffers follow the recommendation of its ODAC panel.

Of course, Dr. McClellan is not there to inject some patient-centric realism into this FDA.

The PDUFA date for Alimta is Friday, September 3rd. If the FDA decides to ignore the recommendation of its advisory panel, biotech valuations will plummet. It will send a message that even medical professionals chosen to advise the FDA cannot move this FDA beyond narrow statistical concerns to bring medical advancements to cancer patients. Biotech will be "locked" down until either President Bush or President Kerry nominates a new FDA Commissioner.

What is dismal about this particular tipping point is there is no upside. If the FDA agrees with the ODAC panel and gives accelerated approval to Alimta, it is only doing what it is supposed to do. There's no sector valuation bump in that. If the FDA goes against the panel, watch out below.
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No positions in stocks mentioned.

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