Tough Talk From the FDA Batters BioMimetic

 |  Includes: BMTI, JNJ, MDT, SNN, SYK, ZBH
by: Stephen Simpson, CFA

By Stephen D. Simpson

These are difficult times for any company trying to get through the FDA approval process with anything less than 100% perfect data, and BioMimetic Therapeutics (NASDAQ:BMTI) is the latest stock to suffer. In response to FDA concerns posted on Tuesday ahead of the company's Thursday panel meeting, BioMimetic's stock is down about one-third on the fear that the company will panel rejection and/or FDA rejection for its new bone-graft substitute.

That said, investors with patience and a healthy appetite for risk might want to consider buying in ahead of the panel recommendation and FDA decision. While BioMimetic's Augment product is not perfect, it does seem to be a safe and efficacious product with a multi-hundred-million dollar market potential.

FDA Playing The Devil's Advocate

In almost all cases, the FDA plays the role of devil's advocate during panel meetings – questioning the safety and efficacy of data and challenging the company at every turn. It is not unusual, then, for the FDA's pre-meeting review to be challenging and adversarial. That said, the FDA was more negative than usual and certainly more negative than most investors expected.

The FDA cited particular issues relating both to efficacy and safety. Curiously, the agency raised issues with the design of the trial and the use of CT to evaluate efficacy – curious because the FDA signed off on the trial design long ago. The agency also questioned the fact that long-term follow up failed to show inferiority.

Last and by no means least, the FDA pointed to risks about the “potential” for cancer formation in patients receiving Augment; a risk factor that the FDA has used in the past to reject applications. Cancer has been an issue with tissue growth products before – Medtronic's (NYSE:MDT) Amplify was rejected in large part because of cancer risks, and it has been a concern with Medtronic's other bone graft product InFuse, as well as Johnson & Johnson's (NYSE:JNJ) Regranex.

BioMimetic Has A Good Product

Investors should not forget that the FDA views it is as their responsibility to take a “show me” stance on applications and look for the flaws. That said, the data seen to date for Augment and Augment Injectable has been solid. Over 500 patients have been treated with Augment and there have been no significant safety issues and the efficacy has been quite solid compared to the standard of care (autograft, which is using the patient's own bone).

In a pivotal study of just under 400 patients, six-month data showed that Augment was non-inferior to autografts in healing foot and ankle fractures. What's more, patients experienced less pain and fewer infections with Augment, and the risk of cancer at 12-month follow up was actually slightly lower.

The data is not perfect, though, and that makes Thursday's panel meeting less than a slam-dunk. Augment failed to show non-inferiority at the 36-week and 52-week follow-up points. The results were close and hurt by the unavailability of some patients for follow-up, but the FDA does not care about “close”. Ironically, surveys of surgeons suggest that they view this as an effective and promising product (and that the data is good enough), but it may not be good enough for the FDA.

There are other issues that factor into the quality of the data. Twenty patients were randomized into the study but not treated, while 17 were treated and not available for follow-up. Post-hoc analysis suggests that these patients do not alter the signals of the data, but the FDA hates post-hoc analysis and deviations from protocol.

A Largely Binary Outcome For BioMimetic

I am a biased observer (as I own shares of BMTI), but I do believe that the data on Augment warrants approval. If approved, BioMimetic and its investors are looking at a foot-and-ankle market worth around $500 million every year. Beyond that, hundreds of millions more could be up for grabs in markets like spinal fusion, long bone procedures, and other reconstructive surgeries on an off-label and follow-on indication basis.

FDA approval also makes BioMimetic an attractive acquisition target in orthopedics. Stryker (NYSE:SYK) basically abandoned its bone growth products a little while ago, but may be interested in taking another shot on an approved product – especially now that J&J is acquiring Synthes and becoming a very large player in trauma. Likewise, other ortho companies like Smith & Nephew (NYSE:SNN) and Zimmer (ZMH) could find this to be a valuable add-on product to their existing franchises.

BioMimetic will have competition. Medtronic has its own products and is used to having this market niche mostly to itself. There is also competition from conventional therapies like autograft and allograft (which uses donated bone), and other companies are working on their own growth factors (including Australia's Mesoblast, which is working on adult stem cell products).

Of course, there is the risk that the FDA says no. The agency could force BioMimetic to do more expensive studies and even those studies may prove insufficient to gain approval. If that's the case, that leaves BioMimetic with its soft tissue and sports medicine prospects – product candidates that are years away from potential approval.

The Bottom Line

The FDA is taking its mandate to protect the health and safety of the public very seriously these days. That is laudable so long as it does not come at the expense of valuable new therapies for patients who really need them. In the case of BioMimetic, there is definitely a risk that the FDA will convince the panel that the risks of Augment outweigh the benefits or even that the FDA will ignore a positive panel recommendation. After all, one of the most significant features of Augment is that it spares patients the pain and inconvenience of an autograft harvesting procedure, but the FDA has not often been that worried about patient pain and inconvenience (or at least not when it is part of the standard of care).

I bought BioMimetic stock on the idea that Augment works and can become a very successful product in the orthopedic market. If I'm right and the FDA can be convinced to approval Augment, Tuesday will be a bad memory and BioMimetic should trade for something around $19 a share. The data is there – the product is good enough and safe enough, and surgeons are interested in using the product.

The FDA is no pushover these days, though, and BioMimetic does not have a perfect data package. I believe that the benefits outweigh the risks here, but this is not a widow's-and-orphan's stock and anybody buying today needs to be able to accept the risk that the FDA will say no and that the stock will have significant downside risk from here.

Disclosure: I am long BMTI.