Economic historian Gary North famously, or perhaps not so famously coined North's Three Laws of Bureaucracy. They are:
- Some bureaucrat will inevitably enforce an official rule to the point of imbecility.
- To fix the mess which this causes, the bureaucracy will write at least two new rules.
- Law #1 applies to each of the new rules.
I was reminded of these laws while perusing a recent article by Seeking Alpha contributor David Sobek. The article concerns pSivida's (PSDV) and Alimera's (ALIM) recent double debacle with the FDA which has now twice rejected the two partnering companys' flagship drug candidate Iluvien. Iluvien is designed to treat diabetic macular edema (DME) which causes blood vessels to swell in the back of the eye on the fovea and can lead to serious vision problems in diabetics. Iluvien helps fix the problem with a tiny ocular implant loaded with time released drugs.
While approved in Austria, the United Kingdom, Portugal, France, Germany and Spain, with a recommendation for marketing authorization in Italy, Iluvien has not passed FDA muster for marketing authorization in the US because of side effects, including cataracts and eye pressure. In the words of the FDA, "Alimera will need to conduct two additional clinical trials to demonstrate that the product is safe and effective for the proposed indication." (Emphasis mine.)
Sobek writes that, despite this rejection and banishment back to hard labor in phase III, the companies are nevertheless moving forward with a third new drug application despite having conducted no such new phase III trial. Why and how? Sobek theorizes that the key is in the words "proposed indication". The theory goes that while the drug is approved for use in Europe, it is only approved for "chronic" DME patients, or in other words patients who do not respond to any other medication and to whom side effects are less relevant.
Sobek concedes that while he may be "reading into the wording too much," Alimera's latest submission to the FDA includes the word "chronic" whereas the two previously rejected submissions did not. While I believe the general point Sobek is getting at-namely that pSivida and Alimera are rewording their NDA submission in the hopes of passing through FDA bureaucrats without going back to phase III-is basically correct, his theory is slightly off. In his article, Sobek links to two Alimera releases in 2010 and 2011 he calls "submissions to the FDA", saying that there is no mention of the word "chronic" in these documents, while a third 2013 release does indeed mention the word "chronic", and therefore the company has a shot at getting FDA approval despite not redoing phase III trials.
The problem with this is that the releases linked to are not the actual FDA submissions, but rather press releases about the FDA submissions. The 2011 submission which was rejected did indeed mention and emphasize the chronic DME subset. From Alimera's most recent 10-K:
We submitted our response to the CRL to the FDA in May 2011, including additional safety and efficacy data through month 36 of the FAME Study with an emphasis on the chronic DME subgroup. In November 2011, the FDA issued a second CRL to communicate that the NDA could not be approved in its then current form stating that the NDA did not provide sufficient data to support that ILUVIEN is safe and effective in the treatment of patients with DME. The FDA stated that the risks of adverse reactions shown for ILUVIEN in the FAME Study were significant and were not offset by the benefits demonstrated by ILUVIEN in these clinical trials. In its second CRL, the FDA indicated that we would need to conduct two additional clinical trials to demonstrate that ILUVIEN is safe and effective for the proposed indication. During the second quarter of 2012, we met with the FDA in an effort to gain a better understanding of the regulatory path for ILUVIEN in the U.S. Based upon this meeting, we submitted a response to the second CRL to the FDA in the first quarter of 2013, which included additional analysis of the benefits and risks of ILUVIEN based upon clinical data available from the FAME Study. We do not plan to conduct additional trials for DME at this time.
According to these filings, the only differences between the 2011 and 2013 CRL response letters is "additional analysis of benefits and risks," and the fact that this latest response by Alimera comes after a lengthy meeting with the FDA.
While it is true that Alimera and pSivida are really trying to emphasize the chronic DME subset by putting the word "chronic" even in their press releases, the question is will this really help squeeze Iluvien past the bureaucrats? Given the nature of bureaucracies and North's three laws, I wouldn't discount the possiblity, but it's not as clear cut as Sobek's tone intimates. Maybe at that meeting one of the FDA bureaucrats told the Alimera representative exactly how to word the latest response so as to trigger FDA approval, something like how to perfectly flatten a dollar bill before putting it in a vending machine so the scanner can recognize it and drop a Coke.
But when it comes down to it, the "chronic" wording debate is a moot point. Both pSivida and Alimera are oversold due to this FDA debacle. ALIM dropped from $7.31 to $1.96 in the space of a week back in November 2011 because of that letter and has not yet recovered, now trading at $3. PSDV dropped from $4.14 down to $2 in the same timeframe and now trades at $2.28.
The way I see it, investors overreacted to the latest FDA rejection, and this presents a buying opportunity. Why? The answer is Lucentis. Lucentis is Iluvien's competitor drug marketed in Europe by Novartis (NVS). Lucentis sales in 2012 were $2.4B (page 114), making Lucentis Novartis' third biggest blockbuster. Zero of that blockbuster figure came from the US. Granted, much of it comes from wet macular degeneration treatment rather than DME, much less chronic DME, but since Iluvien is approved in the EU for patients that do not respond to Lucentis, sales could be quite healthy. Besides, pSivida and Alimera combined are 8.29 x 10-4 times the size of Novartis, so they don't need anything close to $2.4B annual sales to justify and vastly increase their market caps.
PSDV and ALIM may drop down further if the FDA rejects Iluvien yet again, so don't buy assuming that approval is in the bag because of the "chronic" thing. But if they do drop down it will be even more of a buying opportunity, as sales from Europe should start coming in this year and if successful, investors will wake up and forget about the FDA, and the stocks will come snapping back, probably to pre-November 2011 levels.