Cardium Therapeutics, Lannett: Dealing With Debilitating Biotech Situations

Includes: CXM, LCI
by: Spencer Knight

In a previous article, How to Maneuver the Biotech Sector, I mentioned how FDA approvals can lead to a very wealthy short term portfolio. I also discussed how biotech stocks with a strong pipeline can lead to long term growth that beats the S&P.

However, I will now follow up on those ideas with a warning to investors: Even if the FDA does not act upon an NDA in a timely manner, a company can be stuck with a financial struggle. Which leads to a company being in the dark as to what to do. For instance, companies plan on marketing a product promptly after submitting a New Drug Application, NDA, or an FDA 510(k), which is for products that already exist in the market, or are being reintroduced. Now is a good time to apply this to Cardium Therapeutics (NYSEMKT:CXM) and Lannett (NYSEMKT:LCI), since both are currently facing this problem.

Cardium Therapeutics is a small biotech company with a share price that is steady in the mid $0.30 region. According to Cardium, the company is "focused on the acquisition and strategic development of new and innovative bio medical opportunities that have the potential to address unmet medical needs." Currently Excellagen is Cardium's closest drug to being cleared by the FDA. Unfortunately for Cardium, the FDA has not acted upon the company's 510(k), filed in December 2009. A description of Excellagen from Cardium can be read below:

Excellagen™ is a highly-refined fibrillar bovine Type I collagen-based topical gel (2.6% collagen concentration) which has been evaluated in a controlled, double-blind randomized, multi-center Phase 2b clinical study at 23 U.S.-based medical centers for the treatment of chronic non-healing diabetic foot ulcers (the Matrix Study). Based on the Company's pending 510(k) FDA submission, Excellagen would be indicated for the management of wounds, including partial and full thickness wounds, pressure ulcers, diabetic ulcers, chronic vascular ulcers and certain other wounds, such as surgical and trauma wounds. The Excellagen product platform provides the opportunity to develop and introduce additional new product opportunities by incorporating other agents into the Excellagen formulation, including antimicrobials, DNA and/or other biologics, which will be designed to address particular wound healing and other tissue repair applications.

Excellagen is used for patients with foot ulcers from prolonged diabetes. Foot ulcers from diabetes can lead to amputation, paralysis in the feet and legs, and even death in severe cases. The results of Excellagen are very positive and show closure of the wounds which can save people from facing amputations. Despite the positive results, the FDA has yet to clear Excellagen. If Excellagen were to be approved, the market for the product will grow exponentially since diabetes is an epidemic that is estimated to double in 25 years.

Because the FDA has delayed the approval process for so long, Cardium has been forced to take actions it may never have planned. The most significant effect that the delay of Excellagen has had on Cardium is constant problems with the New York Stock Exchange (NYSE) listing requirements. Since Cardium has not been able to maintain the required stockholder equity, the company has been warned several times that it will be delisted from the NYSE.

The first time Cardium was warned was December 23, 2008. In order to make enough money to stay publicly listed, Cardium had to sell InnerCool Therapies for $11.25 million to make up the deficit. Even though this kept Cardium from being moved to the OTC Bulletin Board, it did cause Cardium to lose part of its business which had a bright future. Less than a year later, on November 9, 2009, Cardium received another notice that the company was noncompliant with the NYSE standards. Cardium was able to reach compliance after the company raised $11.3 million dollars through a direct equity offering. In both instances, Cardium was able to raise enough money for one year to stay publicly traded. This allowed the company extra time for the FDA to clear Excellagen. Not surprisingly, on September 30, 2010 Cardium received another notification stating that it must fulfill the requirements of the NYSE to stay listed. Currently Cardium has submitted a plan to the NYSE, but the company has yet to describe that plan.

The main point to take away from this is that Cardium is in quite a bind with the long delay by the FDA. Also, it must be noted that the 510(k) is not like a standard NDA because the FDA does not have to give an exact action date like it does for typical NDAs. This is a problem for drug companies, such as Cardium, that do not have major products available for consumers. It may come to a point where Cardium will have to decide to either sell MedPodium, or be taken off the major public offering block until Excellagen is cleared. If you do decide to invest in Cardium, or another company waiting for a 510(k), then you must be willing to deal with what could be a long waiting period. In the case of Cardium, there is very little volatility since most investors are waiting on the 510(k) to be cleared or rejected, and this pattern is seen in other companies facing the same situation.

On the other hand, Lannett has been in quite a precarious situation since it filed a standard NDA for Morphine Sulfate Oral Solution in February 2010. It has not yet heard back from the FDA and no action date is set. Lannett's Morphine Sulfate was on the market until July 24, 2010 when the FDA started a crackdown on non-FDA approved Generally Recognized as Safe and Effective (GRASE) products. The main problem that the FDA has with GRASE products is that the manufacturing facilities may not be up to par. Therefore, the FDA inspected Lannett and Cody Laboratories (a fully owned subsidiary of Lannett) for any problems. It is simple for Lannett: Once the factories are deemed safe, Morphine Sulfate will be approved. However, as of now, either Lannett has not yet corrected the problems with its factories or the FDA is still reviewing the observations. I contacted Keith Ruck, VP of Finance and CFO for Lannett, on March 30, 2011 and he stated that my guess is as good as his as to when the FDA will report the inspection results, and that the same applies as to when Lannett will hear additional news from the FDA.

Cardium is a great example for Lannett because we could see continued inspections of the Lannett properties, which would lead to longer delays. It is not uncommon for the FDA to inspect biotech properties, but due to the minor observations that have been found it will be difficult for Morphine Sulfate to get approved as soon as investors would like. Of course, due to the uncertainty of this situation, the FDA could make a ruling within the next week. That being said, I see the FDA inspecting Lannett until everything is corrected to make sure that the facilities will produce safe drugs.

The biggest note to take home is that some biotech companies can wait for long periods of time before getting a safe drug approved to be marketed. This usually leads to a price drop in the stock since short investors will eventually get frustrated and move their money elsewhere.

Disclosure: I am long LCI.