Biotech Roundup: ZymoGenetics, GlaxoSmithKline, Amgen...
Looks like a strong season for biotech!
I've been away on vacation for a couple of weeks, mountain biking in Mammoth Mountain, Tahoe, and Moab. Cleaning out the 1,000+ messages in my inbox has given me lots of grist for this roundup, so forgive me for covering a great deal of ground here…
Don't Forget the Benefit
You've seen me write before about how drug approvals are all about risk and benefit. The current FDA is largely ignoring the benefit side of the equation under the mistaken impression that drugs are safe. Since all drugs will kill or maim someone, it is an unrealistic goal.
When drugs have unexpected detrimental effects on children, it gets everyone especially excited. Such was the case a number of years ago with "SSRIs", a class of anti-depressants. A rather poorly done analysis suggested kids on SSRIs thought about killing themselves more often. This was picked up by the usual suspects in the media, resulting in a prominent warning being placed on the label of these drugs. Scared parents and doctors took kids off these drugs, reacting only to the overpublicized potential risks and not considering the solidly demonstrated benefits of these drugs.
The American Journal of Psychiatry published an article recently noting a sharp increase in youth suicides corresponding to the time period when the warning label went on the SSRIs. The study looked at US and Netherlands youth suicide rates, which went up 14% in the US and 49% in the Netherlands, both corresponding to roughly 20% decreases in the use of SSRI prescriptions in youths. The data suggest that for each 20% decline in SSRI use in kids, over 3,000 of them will take their lives.
In a Washington Post article, the director of the National Institute of Mental Health puts it succinctly: "If the drugs were doing more harm than good, then the reduction in prescription rates should mean the risk of suicide should go way down, and it hasn't gone down at all -- it has gone up." The FDA traded kids thinking about suicide for kids actually doing it.
I wrote previously that the current political imbalance at the FDA towards risks makes it difficult to invest in the healthcare sector. Only the counterbalance caused by the patent-expiration driven need for pharma and biopharma to acquire development-stage biotech companies makes the sector worth investing in – and then only in the development-stage area. These data are a perfect illustration of the problem where hype about safety overshadows hard evidence on benefit and efficacy.
The FDA cannot operate without payments from the drug companies it regulates because Congress is unwilling to provide it the proper funding. In exchange for providing the necessary funding, the drug industry extracted commitments from the FDA for timely responses to drug applications and other official communications. Called the Prescription Drug User Fee Act (PDUFA, pronounced 'puh-doo-fuh'), this legislation must be renewed every few years. We're on the fourth renewal right now, and it has been one of the most contentious. The renewal is late, causing a number of problems for companies and investors.
One of the reasons for the delay was the desire to tack on regulations about biogeneric drugs to the PDUFA IV legislation. Most of you are familiar with the idea of generic drugs. When a pill or shot goes off patent, generic manufacturers flock in and the price of the drug drops 50-75%.
Biologic drugs like monoclonal antibodies have no generic competition because no regulations exist for approving biogeneric drugs. Creating a generic version of a biologic is substantially more difficult. For a pill, it is easy to determine whether the active ingredients are the same. For a living cell, it borders on the impossible to guarantee similarity of function just by looking at the generic version or examining how it was manufactured.
PDUFA IV has been held up by trying to add contentious biogeneric enabling language. Recent news from Congress is it's abandoning this attempt and will address biogenerics in a separate bill. This will allow PDUFA IV to finally pass. I opined before I think the threat of biogenerics to most companies – as well as the opportunities to the generic manufacturers – is overblown. Nevertheless, it is worth watching what the final biogenerics bill looks like.
Industry will be very glad to see PDUFA IV passed. Money flow has essentially stopped to the FDA in the absence of the PDUFA legislation and FDA Commissioner Dr. Andrew von Eschenbach is using rainy-day fund money to keep his agency afloat. I believe we're seeing the effects from this in an unusual string of delaying actions from the FDA.
Adolor (ADLR) and GlaxoSmithKline (GSK) this week had the FDA's decision on restarting a clinical trial for its endangered drug Entereg. ZymoGenetics (ZGEN) had approval of its recombinant thrombin drug rThrombin delayed 90 days on a routine supplementary data submission the FDA previously told it wouldn't affect its approval timelines. Scan back through the biotech news flow over the past 3-4 months and you'll see an unusual number of these actions.
My theory is that Dr. von Eschenbach is slowing the amount of work (overtime) FDA staffers are doing to make sure his rainy-day fund can last. Once the PDUFA IV legislation is passed out of Congress and signed by the President (hopefully end of this month), we should see this problem go away.
Speaking of ZymoGenetics
Zymo has a favorable review of the company in the current issue of Nature Biotechnology, calling the company potentially the next Genentech (DNA). My firm has been covering Zymo since 2002 and while I'm not sure we have our sights set quite as high as Genentech, we're certainly fond of the company and its experienced management team.
Zymo is on sale right now because of the aforementioned 90-day delay and a mistaken impression among sell-side analysts that Omrix's (OMRI) human-based thrombin drug has a chance to compete favorably with Zymo's recombinant thrombin product. I'm not going to go into a ton of detail why they are wrong here, suffice it to say that in the history of drug development no recombinant product has failed to outsell an animal or human-derived product.
Keep an eye on this one, particularly for its atacicept product for lupus and arthritis. Its interferon lambda product is a sleeper pipeline candidate that could put all the overhyped hepatitis companies to shame.
Amgen Dodges a Bullet
Color me surprised that Amgen (AMGN) was able to dodge a bullet in front of an advisory panel this week. Many, including me, expected additional restrictions on its franchise epo drugs when used on kidney patients. Demonstrating once again that Richard Pazdur's Oncologic Drugs Advisory Committee (ODAC) has cornered the market on obstructionist decision making, a panel of kidney and cardiology experts correctly decided there was no need to reduce the maximum allowed dosage for these drugs.
Amgen hopes it can use this support, in combination with an updated label, to get Medicare to back off on reimbursement restrictions for this drug.
I am not sounding an all-clear for investing in Amgen. I think this company is broken and is a ways from being fixed. Its valuation is too high and will remain too high until it gets itself a viable pipeline of new drugs. Since it'll likely do that only via acquisition, Amgen investors have to worry about increased debt or the effects of arbitrage if Amgen decides to use its stock to acquire companies.
What it does mean is Amgen gets a reprieve. With biogeneric legislation next year's business and at least one part of its epo franchise apparently safe, it's passed a crisis point and can start working on repairs.
Pfizer, the Biologics Company?
Pfizer (PFE) built its empire on selling pills. You should take note of the fact, therefore, that it told investors at the Bear Stearns conference it was going to increase its focus on biologics – acquiring or partnering to build it portfolio of these drugs. Toss one more big company in to the mix of those who have said they must acquire or die under the weight of patent expirations.
Pfizer's rationale was interesting, as it noted generic competition in biologics would be more difficult. Even under the currently proposed biogeneric legislation, there is over a decade of protection (absent longer patent protection) against competition. Non-biologics enjoy just five years of exclusivity, again absent longer patent protection.
I've been repeating that I want to be invested in acquisition targets instead of acquirers. This is another good reason why. If Pfizer wades into this space, valuations will rise very quickly as Pfizer rarely, if ever, allows itself to be outbid for a drug it really wants.
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