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FDA Rejection Sees Amylin Stock Cut in Half in Morning Trading

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The FDA has essentially postponed approval by two years, blindsiding investors who stampeded for the exit.

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Amylin Pharmaceuticals (AMLN) stock lost more than half its value this morning after US officials refused to approve a diabetes drug the company is developing together with Alkermes (ALKS) and Eli Lilly (LLY).

Did Amylin lead investors on? There was wide agreement among followers of the stock that the drug Bydureon would be approved for sale. Last night, the company said the Food and Drug Administration asked for a heart risk study that may delay Bydureon's approval by two years.

In July, Amylin CEO Daniel Bradbury said his company was "preparing for the anticipated approval and successful market introduction of Bydureon." Such statements fueled investor confidence.

Alkermes, which just won approval for a drug-addiction treatment last week, and Eli Lilly also fell. But San Diego-based Amylin had the most to gain and to lose with an FDA approval because of its heavy investment in the drug, a follow-up and longer-lasting version of the treatment Byetta, which had sales of $290.5 million through the first six months this year (a 13% decline).

While everyone seems to be taken aback by the FDA rejection, maybe it shouldn't come as a surprise in the post-Avandia world. Use of the GlaxoSmithKline (GSK) diabetes drug Avandia was severely limited by FDA officials last month after concerns of heart attack risk. That decision sent a strong message to drug makers about how the agency will treat safety issues going forward. Avandia has been on the market since 1999.

On the other hand, Bydureon, which was earlier rejected by the agency, seemed to be on a path for approval. The FDA didn't ask for a safety study after the first rejection so it came as a surprise that it is now asking for one. Also, a competing drug, Victoza, made by Denmark-based Novo Nordisk was cleared earlier this year for sale in the US, giving Amylin, Lilly and Alkermes investors hope Bydureon would be appoved as well. And comments by Amylin suggested a positive decision may be coming.

Investors view the latest news as a major negative surprise and one analyst questions whether Amylin simply misread the tea leaves.

Amylin "suggested the issues themselves were not brand new but that their treatment as approvability requirements was. Even granting benefit of the doubt here, this is not the first time (Amylin) has misread FDA," Robert W. Baird analyst Thomas Russo says in a note.

Russo says he's referring to an FDA action two years ago when the agency warned doctors and other health care professionals that Byetta may cause inflammation of the pancreas. Amylin shares began a steep decline in August 2008, falling from above $34 a share to around $6. In late 2007, the shares traded above $50 each.

In late morning trading, Amylin plunged 51% to just above $10 a share.

Lilly, which badly needs new drug revenue to replace flagging sales from blockbusters losing patent protection, saw its shares decline almost 5% to $35.65. Alkermes shares dropped almost 30% to $10.34. The stock climbed this year on anticipation of approvals for Bydureon and the anti-addiction drug Vivitrol.

Alkermes' plunge shows how much value the company's investors placed on the Bydureon approval (Alkermes provided the extended-release technology for the drug). Analysts predicted the stock would get a nice lift if Bydureon was ok'd. Both Alkermes and Amylin are money-losing companies and new drug approvals are critical to their success. Buyer beware.

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No positions in stocks mentioned.
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