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How to Trade on an FDA Advisory Panel


Here are some key clues to using the expert panels as a trading catalyst in the biotech and pharma world.

Biotech and pharmaceutical investing can be a great long-term investment, but it's been harder to predict what's going to happen with these stocks in the short term. Investors are increasingly turning to smaller catalyst events as a way of actively trading these sectors. One of the most crucial events that can happen in the life of a biotech or pharmaceutical company is an advisory panel.

The advisory committees to the FDA consist of a panel of experts who have a huge impact on the fate of a drug. While these experts don't ultimately decide whether a drug will be approved, the FDA usually follows the committee's advice. Not all drugs garner the scrutinizing eyes of these experts; a committee is only called if the FDA has serious questions regarding the safety or efficacy of the drug. The panels can also be called if the FDA is evaluating a new technology or a first-of-a-kind medical product.

It's important to know how these panels work and to look at historical outcomes to see what they can tell you about panels coming up in the next few months. Some crucial drugs will be facing these experts in the near future, including Vivus's (VVUS) Qnexa on July 15, as well as both of the other companies in the obesity race -- Arena Pharmaceuticals (ARNA) on September 16 and Orexigen Therapeutics (OREX) on December 7.

(For a calendar of FDA advisory committee meetings, click here.)

According to Leerink Swann analyst Joshua Schimmer, who analyzed more than 100 panels that took place over the last three years, "investing around panels is as much [an] art as it is a science, and requires considerable due diligence."

A month prior to any panel vote, a stock is usually going to begin building -- 53% of small- to mid-size stocks gain an average of 24% leading up to the vote. The first things to look out for are the briefing documents that are released by both the FDA and the company; these documents are usually posted on the FDA website two days prior to the meeting (although some documents are released four to five days prior to a meeting if it's scheduled in conjunction with a weekend). The documents usually give a clear indication of how the experts are viewing the drug going into the data. "Negative reactions to documents are usually followed by negative votes; the 'short the document/long the panel' trade is erratic. After adjusting for liquidity, we find that the document trade might be a decent leading indicator of the panel trade," says Schimmer.

Through his research, Schimmer found that large-cap companies generally have a better track record at panels. Over the last three years, 60 companies with a market cap of more than $5 billion have faced an advisory panel and 82% of them received a positive vote. Meanwhile, of the 32 companies with a market cap under $5 billion, only 47% have gotten a positive vote. Yet, large-cap stocks don't generally swing as much in either direction around a panel vote.

After all is said and done, the FDA usually goes with how the panel voted. Schimmer found that votes against a drug being approved were usually due to questions with both safety and efficacy -- not just safety. Schimmer says, "Safety concerns alone infrequently derail a drug at a panel."

This finding bodes well for the upcoming Vivus panel. The company has clearly proven that Qnexa is effective, but questions have arisen around the side effects that the drug presents. If history holds true, Qnexa is unlikely to be delayed by safety concerns alone.

Overall, Schimmer recommends buying before the briefing documents are released or waiting until after a positive panel vote before jumping into a stock. He adds that waiting until the briefing documents have been posted can have a high cost if you're wrong.

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No positions in stocks mentioned.

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