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By Stephen D. Simpson, CFA

In the “shoot-first analyze later” world of biotechnology, NPS Pharmaceuticals (NASDAQ:NPSP) is getting shot up on potentially scary safety data about the company's late-stage GI drug Gattex (teduglutide). Although investors should not blithely dismiss the risk that this data could knock NPSP off track, the recent sharp sell-off looks harsh relative to the data available and the prospects of the company's pipeline.

Will Cancer Haunt Gattex?

NPS Pharmaceuticals released new data on Halloween from the company's Phase 3 STEPS 2 study of Gattex in short bowel syndrome. Much of the data was consistent with prior studies – Gattex significantly reduces the amount of parenteral and IV nutrition relative to placebo, and a large number of recipients respond.

The adverse effects part of the data is where the warning sirens went off. Tolerability could be an issue, as some patients elected to discontinue because of GI side-effects (though it should be noted that a large number of patients in the first STEPS trial elected to continue on).

But the biggest issue by far is a new-found cancer risk. In this study, three patients developed cancer and two died from it during the course of the study. Not surprisingly, cancer is a huge red flag to the FDA, and the agency does not take this at all lightly – as investors in Arena Pharmaceuticals (NASDAQ:ARNA), Medtronic (NYSE:MDT), and Bristol-Myers (NYSE:BMY) can attest across a range of investigational drugs and biologics.

A Dangerous Drug Or Sloppy Investigators?

Digging a little deeper, though, the cancer data on Gattex seems strange. Two of the cancer cases involved lung cancer in known smokers – so it does not necessarily seem like you can draw a direct line from a GI drug to lung cancer in smokers. What's more, one of these tumors was discovered 85 days after the start of the trial. That seems like an incredibly fast development assuming that proper screening protocols were followed, and if Gattex truly leads to such aggressive cancer, it seems odd that it wouldn't have shown up sooner or stronger in the nearly 600 patients who've taken this drug.

One of the cancer cases was a metastatic adenocarcinoma with probable GI origin – clearly a concern with a GI-active drug like Gattex. Here, though, is a question of sloppy patient enrollment. Gattex has always been contra-indicated in people with cancer, and the clinics were not supposed to enroll patients with any sign of cancer five years prior to the study. Apparently a CT scan of the adenocarcinoma patient showed some suspicious signs that should have been investigated more thoroughly. It is possible, then, that this unfortunate patient was mistakenly enrolled in the trial and misdiagnosed by the enrolling clinician.

Strong Data Otherwise

It's worth mentioning the efficacy on Gattex. Short bowel syndrome is a miserable condition that affects 10,000 to 20,000 patients a year in the U.S., typically after GI surgery. Not only can it cause pain, but it also leads to diarrhea, fatigue and malnutrition as the bowel cannot absorb all of the nutrients in regular food. As a result, patients often are forced to take parenteral nutrition and supplemental IVs – treatments that can be inconvenient, uncomfortable, and cost upwards of $100,000 a year. What's more, there is little in the way of direct therapeutic options, though some benefit from regimens like Merk KGaA's (OTCPK:MKGAY) Zorbtive.

In STEPS 2, though, Gattex showed an overall reduction of 5.2 liters in average PN/IV volume and over half of recipients reduced the number of infusion days per week by at least one. In fact, roughly one-quarter of patients were able to reduce those infusion days by three or more. And as mentioned before, over 90% of patients receiving Gattex continued to show a response after long-term use.

What Now?

Although the company still expects to file its NDA for Gattex soon, investors should brace for a longer timeline. So skittish is the FDA these days that it will not be surprising if the agency demurs on approval and asks for another safety study. The efficacy on Gattex is there, and there should be no real FDA objections to approval on that basis. But with safety so paramount at the FDA, it would be odd (though not impossible) for the FDA to accept the explanation that these patients were eccentric and that the cancer data can be excluded. So, investors should probably add 24 months to their expected approval timeline. Luckily, there is not much else on the short bowel syndrome horizon, so it is not as though NPS is losing its window of opportunity.

Worth A Shot For Risky Investors

This is not the first setback that NPS Pharmaceuticals has had to surmount. Years ago, the company's stock was quite strong on the hopes for its osteoporosis drug Preos. This one never quite lived up to expectation, though the company does collect some royalties on it. The risk now is that the FDA stymies Gattex altogether and/or that cancer fears minimize its potential. Moreover, with the disappointments in Dendreon's (NASDAQ:DNDN) Provenge, Savient's (SVNT) Krystexxa, and Human Genome Sciences's (HGSI) Benlysta, Wall Street is very much in a take-no-prisoners mindset these days.

Still, this is a company that manages to produce an operating profit (though still loses money) already and has another shot on goal in the pipeline with with NPSP-558 in hypoparathyroidism, as well as an early-stage deal with GlaxoSmithKline (NYSE:GSK). Remember, too, that Gattex is under investigation for Crohn's disease and other ailments. What's more, Salix Pharmaceuticals (NASDAQ:SLXP) has shown that specialty GI drugs can make a pretty appealing business (and Salix would not be a bad partner if Big Pharma passes on Gattex and NPS doesn't want to do it all alone in the U.S.).

Like virtually all biotechs, this is not a widows-and-orphans stock, but investors who share the belief that these cancer signals in Gattex are a product of sloppy patient recruitment and not inherent to the drug's mechanism of action may want to step up and take a chance on this name.

Source: Cancer Risks May Delay, But Shouldn't Derail, The Gattex Train