The news from Tuesday night that the FDA had rejected BioMimetic Therapeutics' (BMTI) application to market its Augment product for bone healing was not really news in and of itself. During the panel meeting, the FDA representative basically said “over my dead body,” the panel members' votes were not uniformly supportive, and the general risk-averse nature of the FDA today meant rejection was almost certain.
What was less certain, though, was the tenor and details of that rejection. Would the FDA demand a brand new pivotal trial? Would the agency be content with just new analyses or a supplemental PK study? As it turns out, the FDA pursued a middle path, but one that leaves massive uncertainties for the company and its investors.
FDA Says “Not Yet ...”
Although the FDA did not demand new clinical trials (yet ...) from the company, it did lay out some fairly significant demands for a resubmission on the Augment bone growth product.
First, the relatively minor demands. The FDA wants the company to stratify the patient population by various sub-groups with an eye toward seeing whether certain patient characteristics (age, sex, etc.) or risk factors (smoking, degenerative disease) impact the efficacy of the treatment. This is clearly aimed at how the label will be written.
The agency also wants a human pharmokinetics study (the company has already completed an 11-patient study in Canada), a protocol for following all patients for signs of cancer, and a cell-based assay to test for neutralizing antibodies.
Now for the bigger issues. The FDA wants the original radiologist to re-read all of the six-month trial CT scans, as well as having an additional radiologist review them. Here we have another example of the FDA changing the game on a company. The FDA originally went along with the company's trial design, which included assessing bone healing by CT scan, but now complains that CT scan is not the standard way to evaluate such things. Unfortunately, the FDA has not told the company what degree of consistency it expects/demands between the initial reading and the re-read, nor between the different reviewers. This is the most surprising and arguably most risky part of the FDA's demands.
Last and not least, the FDA wants all secondary surgeries to be re-categorized as treatment/therapy failures. So, even something seemingly unrelated to Augment (like treating a broken screw) will be counted as a failure for Augment (it's unsure if the same rule applies to the control arm of the study). Remember that while the original endpoint was 50% or better bone bridging, the pivotal study showed that Augment just barely met the standard for non-inferiority versus autograft. It's not likely, then, that the data can withstand too many “new failures” and it almost feels like a back-door attempt by the FDA to undermine the data package.
It looks like it's going to take about six months for the company to get this data and re-submit it to the FDA. Unfortunately, the company would not commit to whether it would release any data with that re-filing. Assuming a second round of questions from the FDA, management believes a final decision could come between the spring of 2013 and early 2014 (15 to 24 months).
In the meantime, it looks like the company is moving into survival mode. The company did announce the European approval of its GEMS 21S product (for dental indications), but this only matters in that it triggers a $10 million milestone from Luitpold – the company that bought this indication from BioMimetic years ago. With this extra cash, the company believes it has the resources to continue on to the final FDA decision without additional capital raises.
The question, though, is what the company does with studies in additional applications like injectable Augment and sports medicine applications. At this point, it sounds like the company will put these studies on ice. Although this is no doubt frustrating (the revenue potential of these indications was actually larger than original Augment), it makes sense – if the FDA refuses to accept the safety/efficacy of the product, these trials would likely be fruitless. What's more, it makes little sense to subject shareholders to the significant dilution that would be required at these prices to raise enough capital to fund all of those studies.
How Should Investors Feel About This?
Although BioMimetic clearly avoided the worst-case scenario for now, there is still very much a risk that the FDA will not accept the revised submission and will eventually demand a new trial anyway. On the other hand, investors can look at recent examples like MELA Sciences (MELA) and Transcept Pharmaceuticals (TSPT) where the FDA seemed adamantly against approval and then ultimately relented.
There are definitely risks in this new “road map”. Again, it was clear from the company's panel meeting that the FDA representative is an absolute bulldog on this issue; refusing to give any ground at all and appearing borderline unprofessional in her assessments of the product and the studies. It's also worth noting that the company ran a study that was too small and invited the risk of equivocal statistical power.
Unfortunately, BioMimetic is also paying for other companies' sins. During the summer, The Spine Journal devoted an entire issue to the problems with Medtronic's (MDT) InFuse. InFuse is the only FDA-approved orthobiologic of note out in the market and had been selling close to $1 billion a year. It now appears, though, that there were major issues of under-reporting complications (including nerve problems) and that the study authors all had major final interests in the outcome. Now, because Medtronic humiliated the FDA, BioMimetic is going through a much more rigorous wringer when it comes to establishing safety and efficacy.
But there's more. Stryker's (SYK) OP-1 never received FDA approval and showed some significant immune reactions. This is way the agency is demanding a cell-based assay from BioMimetic. Luckily, Augment has never shown that sort of reaction – there have been some small immune responses, but they seem to go away fairly quickly.
The Bottom Line
BioMimetic has little choice in this but to try to comply with the FDA's demands. Luckily, the company's license with Novartis (NVS) is firm and the patents are in place until 2025. Still, a two-year delay with an uncertain outcome will be painful for investors.
What is BioMimetic worth today? For starters, remember that there are no other trials of note currently underway in new orthbiologics, this is still a product with $1 billion potential, and could (eventually) be worth quite a lot to major orthopedic companies like Stryker, Johnson & Johnson (JNJ), Biomet, or Zimmer (ZMH). Also remember that Stryker was able to off-load its OP-1 product to Olympus last year for a price that is almost 4x BMTI's current enterprise value … and OP-1 never got FDA approval!
If BioMimetic can get Augment on the market without overly restrictive labeling, the company could see $200 million in sales in 2015. Assign a multiple of five to that revenue, a discount rate of 30%, and no cash and you get a price target of about $16. Give the company a 50/50 chance of approval or abject failure and that suggests a target price of $8 – a large multiple from today's price.