The new indication has little impact on the company’s bottom-line

Traditionally, an approval for a new indication means increased market size as new clinical information is validated and the company is allowed to market the drug directly to the new indication. Additionally, the FDA grants market exclusivity of three to seven years depending on the market size of the new indication (the orphan designation gives seven years in this case). An FDA approval for a new indication is, therefore, typically a pretty big deal for the company and the underlying share price. In Questcor’s case, however, the impact of the approval for IS should be minimal.

First, the market size as a whole. Infantile spasms affects some 1 in 3,200 to 3,500 births. In the U.S., the total number of births stands at 4.3 million as of 2007. That puts the total number of IS cases at approximately 1,300 cases per annum. This small market size is also exactly why Questcor received orphan designation for this new indication for Acthar. Even by charging an exorbitantly high price of approximately $100,000 per patient for a course of treatment, this caps the total amount of revenues at about $130 million if every case of IS in the U.S. is treated with Acthar.

You may be thinking that with a net profit margin of 33% the company may look to realize a sizable chunk of new cash flows regardless of the rarity of the disease. While the company has stated that marketing directly to pediatric neurologists should increase Acthar sales, the problem lies in the fact that Acthar is already the first-line treatment for IS and has been so for approximately 50 years. In addition, Acthar reportedly already has ~40% of the IS market and is the recommended treatment for IS by the American Academy of Neurology. Acthar isn’t exactly a treatment that would benefit from additional exposure for the treatment of IS. Additionally, with other lower cost treatments available such as vigabatrin (on-label) and prednisone (off-label), Questcor’s bottom-line will not largely benefit from the new indication.

Acthar’s market size stands on shaky ground

Even though corticotropin, the generic name for Acthar, has been used for over 50 years, Questcor has yet to face generic competition. This is likely due to the fact that, until recently, producing and selling the drug has been largely unprofitable. The Acthar franchise was sold by Aventis to Questcor for the low price of $100,000 in 2001 after failing to realize significant profits with the hormone. At the time, the cost for treatment was around $1,600 per vial. In 2007, Questcor increased the cost per vial of Acthar to $23,000, an increase of over 1,300%. At that time, Questcor turned the compound into a highly profitable franchise.

While Questcor seemed to do well on its $100,000 initial investment, with the increase of profitability also comes the real risk of generic competition. Questcor’s current Acthar sales stand around $90 million per year – not exactly a blockbuster – but if the company does realize significantly improved sales figures, especially in the multiple sclerosis and nephrotic syndrome markets, it runs the risk of a generic competitor biting into those sales. Questcor’s CEO has stated that isolation of the hormone from pig pituitary glands is a trade secret process, and therefore should allow the company to operate free of generic competition. If Momenta’s ability to produce and gain generic approval for enoxaparin – a biosimilar also isolated from pig organs – is any indication, Questcor’s trade secret may not hold forever. And if generic competition enters the scene for Acthar, the company has no pipeline to fall back on when sales of Acthar for the non-protected indications plummet.

In addition, due to the exceedingly high cost of Acthar, the therapeutic area remains extremely attractive for new IS treatments. In addition to vigabatrin, which is already approved for IS, the syndrome has been treated off-label by prednisone, topiramate, lamotrigine, and others. If any of these treatments, or a new treatment altogether, gets its own orphan designation and approval from the FDA, the resulting loss of market share of Acthar could be catastrophic.

Questcor’s troubling valuation

With the profitability of Acthar, Questcor has managed to make the important biotech leap from cash burning to cash generating. The company has even been able to initiate some share buybacks and currently has a healthy cash position. Questcor, however, lacks a traditional pipeline in order to continue to grow its business. The CEO has stated that the Acthar franchise is a pipeline in and of itself. This is already suspect for the competition reasons stated above, but sounds especially fishy when examining the company’s recent annual and quarterly reports. Net income (of which Acthar sales contributions make up an overwhelming majority) are effectively flat from the most recent quarter to that of a year ago at $9.3 million per quarter. Sales have increased by ~10%, but those revenues have been eaten up by increased SG&A expenses. At this point it’s hard to consider potential earnings growth into the value of the company.

And if the company’s earnings aren’t growing, it’s largely a value question if the share price is accurate. The current P/E ratio (ttm) of the firm is at 23.77. This means the company’s earnings are more costly than those of other mature revenue generating biotech companies (whose revenues are likely much more protected)like Biogen Idec (BIIB) at 14.32, Gilead (GILD) at 10.31, and Amgen (AMGN) at 11.24. Questcor needs to start realizing additional Acthar sales in its IS, multiple sclerosis, and nephrotic syndrome markets to justify it’s valuation – a task that it has largely failed at accomplishing over the past year.

Summary

While I largely expect Acthar to gain approval for the IS indication – and the seven years of market exclusivity that comes along with it – I don’t think the approval has a tremendous impact on the company’s fundamentals. While I may be on the more negative side on the company’s prospects – the analysts covering Questcor gives it much higher marks – don’t buy into the hype of the new indication approval. I think there will be a good opportunity to make some money on a short play if the market overreacts to this approval.

Disclosure: No positions. Planning to short an approval spike that seems excessive (>10% or so).

First, I’d like to summarize the general sentiments of the blogosphere regarding the content of the panel. The concern of the panel will likely not be over safety and efficacy – the drug appears to excel in these two areas – but rather with the potential illicit use of the drug’s main ingredient. The active ingredient in JZP-6 is sodium oxybate, a chemical that is basically gamma-hydroxybutyric acid, or GHB – a schedule 1 drug in the United States. While Jazz already markets the drug Xyrem for narcolepsy that is also basically GHB, the total market size for that drug is relatively puny. The market for fibromyalgia, however, is orders of magnitude larger than that of narcolepsy. With a whole lot more GHB floating around the potential for illicit use is much higher. There is already a REMS (Risk Evaluation and Mitigation Strategy) in place for Xyrem, and the consensus opinion seems to be that the panel will focus on whether that REMS will be adequate for the larger market. See my previous article for a more in depth analysis of my own viewpoint.

Now, generally when the panel notes are released, if the notes reflect exactly what the market expects the price tends to go up. This is because the uncertainty of whether something really scary is in those notes evaporates. If, however, something unexpected creeps in the market can mash on the panic button and the price can swing in the opposite direction. Expect people to be especially paranoid about exact wording of statements. One constant in the market is that investors tend to be risk-averse and – given the potentially huge price swing associated with the panel – investors holding JAZZ will be especially on edge. As I understand it, the panel notes usually cause a downward trend in the stock price. You should, however, be ready for a price swing in either direction.

Trading the notes

Basically, the market is going to quickly digest the notes and pick a direction. At this point you don’t even need to look at the notes. You want to wait long enough that a clear direction, up or down, has been decided upon and then either buy into the uptrend or short into the downtrend. Timing is key so you may not want to use this strategy if you aren’t near a computer all day. There are several ways to make sure you get in early. I generally follow the stock price and any big swings I check against the FDA panel website. You can also sign up for e-mail alerts from Biorunup.comand Gekkowire is usually on top of things as well (for Vivus’ panel Gekkowire was the first one I saw with the information). I’ll also publish the notes here as soon as I get word of their release. I call this price swing ‘Wave 1′. It’s made on very little real information as no one has read the release in it’s entirety; as far as I know someone mashes on the gas in a particular direction after a 15 second skim and everyone else followed.

So you’re in, you don’t know what the notes actually say, and you’re adrenaline is pumping. At this point, I suggest doing your due diligence and reading the notes. You really should be alternating between reading the notes, checking the share price, and scanning for any news released with respect to those notes. While reading the notes, look for anything especially scary sounding. In the case of JZP-6, you want to scan for where the REMS and illicit use issue is brought up and make sure the wording doesn’t look especially inflammatory. Then, check safety and efficacy to make sure there’s nothing unexpected. Finally give it good run through, scanning for anything at all that looks suspicious. What you’re doing is trying to find what the bloggers and web journalists are going to point to when they publish an article stating their opinion on the release notes. Their comments will affect ‘Wave 2′ of any price swings. It doesn’t really matter if they know what they’re talking about or not, the first bit of synthesized information the market is going to eat up. Be prepared for this. Generally, it would appear that Wave 2 follows the same direction as Wave 2, but don’t count on it.

As the day continues on, you want to keep checking the news via your favorite sites. The equity groups usually don’t issue an opinion so you’re just going to follow the main news sources. As much as I hate to say it, Adam Feuerstein will probably have a large impact on the price momentum whenever his article comes out (he will also be liveblogging, from what i understand). Try to get at it first. You may also want to use Twitter, if you don’t already, as new information tends to be tweeted and re-tweeted relatively fast. The stock will usually continue in the direction it chose in Wave 1 and 2 as day traders and late adopters pile on the trend and as long as no strong news to the contrary is released.

At this point you want to formulate an exit strategy. It’s probably three to six hours after the notes went public and you’ve probably ridden the momentum of the market to a gain of a few percentage points. I like to look for a reversal in the upward trend before I get out. How large that reversal is will be entirely up to you. Maybe 1% down or up from a relative high or low at any given point is your cue to exit your position. I personally watch the chart and if I feel that the sentiment has changed at any time I promptly leave. Keep your goals modest, as greed can crush you here. The trend will often extend to the next day as people become more certain of the potential outcome of the panel, but there are no guarantees here.

Summary

In summary, this is a relatively high-risk trading opportunity and shouldn’t be for people who don’t have the cash to keep trading costs low or the time to watch your computer all day. There is, however, what I feel is a strong and predictable momentum that builds with the release of the FDA panel notes. Furthermore, even given the high risk associated with the day trading, it beats the much riskier trade of holding through the panel. With some good timing and a bit of luck you can make somewhere around 3-5% or more return in a day or two. It’s also a great exercise in reacting to the market to those who are more comfortable trading on fundamentals. I also want to reiterate my disclaimer and say that I make no guarantees that this works every time – but I do find it to be a reasonably high probability trade. Good luck!

Also, feel free to share your own strategies in the comments. You don’t even need to leave an e-mail address if you don’t want.

adamfeuerstein: Jefferies note argues $ARNA did not meet statistical test for proving lorcaserin heart valve safety. Hold rating, lowers PT from $6 to $5

Now I haven’t found the alleged note and from what I’ve heard there was no mention on flyonthewall or anywhere else. Let’s assume he got the data from some sort of reliable source and maybe he’s privy to information before the rest of us. While I’m not suggesting this may be the only reason for ARNA’s stock swing today, it is the only piece of news I see to accompany the 7ish% drop currently going on.

I wanted to share with you some of the data I found on the valvulopathy issue as I was writing myprevious piece on the cardiac data for lorcaserin. Rather than launch into my own statistical analysis, I’ll give you the data and opinions I’ve compiled from around the web on the issue and you can make of it what you will.

First, an excerpt from the BLOOM and BLOSSOM trial press releases. First BLOOM (3,182 patients):

Using an ITT-LOCF analysis, the assessment of echocardiograms performed at baseline and after patients completed 6, 12, 18 and 24 months of dosing indicated no apparent drug-related effect on the development of FDA-defined valvulopathy (moderate or greater mitral insufficiency and/or mild or greater aortic insufficiency).

Lorcaserin met the primary safety endpoint of no significant difference in rates of valvulopathy at 12 months. Rates of valvulopathy at 6, 12, 18 and 24 months for lorcaserin versus placebo were 2.1% vs. 1.9%, 2.7% vs. 2.3%, 2.9% vs. 3.1% and 2.6% vs. 2.7%. At 18 and 24 months, rates of valvulopathy for lorcaserin patients crossing over to placebo were 3.6% and 1.9%, respectively.

The FDA has requested that Arena rule out a 1.5-fold or greater risk of valvulopathy with 80% power. Assuming similar results in BLOSSOM (Behavioral modification and Lorcaserin Second Study for Obesity Management), the integrated data set from the two trials will be more than sufficiently large to meet this requirement.

And BLOSSOM (4,008 patients):

The assessment of echocardiograms performed at baseline and after patients completed 6 and 12 months of dosing indicated that lorcaserin did not increase echocardiographic heart valve regurgitation. Lorcaserin met the primary safety endpoint that evaluated the rates of new FDA-defined valvulopathy in BLOSSOM at Week 52: lorcaserin 10 mg twice daily (2.0%), 10 mg once daily (1.4%) and placebo (2.0%). The integrated BLOOM (Behavioral modification and Lorcaserin for Overweight and Obesity Management) and BLOSSOM echocardiography data set rules out a risk of valvulopathy in lorcaserin patients according to criteria requested by the FDA.

New data demonstrate that similar numbers of mitral insufficiency and aortic insufficiency shifts were reported for patients on lorcaserin and placebo. In patients with pre-existing FDA-defined valvulopathy at baseline, changes in valvular regurgitant scores did not differ between the placebo and lorcaserin groups. The majority of patients experienced either no change or an improvement in valvular regurgitation.

The rates of valvulopathy were actually lower in the lorcaserin groups in both trials at the longest time frames. I am, of course, not suggesting lorcaserin protects against valvulopathy; this is a statistical anomaly of two things that both don’t affect valvulopathy (one being the placebo, the other being lorcaserin).

Also, from the NEJM article on the BLOOM data (bold mine):

Activation of the 5-HT2b receptor in cardiac valvular interstitial cells is thought to cause serotonin-associated valvulopathy, which is characterized by the thickening of heart valves (particularly the mitral and aortic valves) and valvular insufficiency. Serotonergic agents such as ergotamine, methysergide, pergolide, and cabergoline,24-27 andespecially the weight-loss drug fenfluramine, increase the risk of valvulopathy. Each of these agents has significant agonist activity in vitro at the 5-HT2b receptor. In contrast, agents that activate the 5-HT2a or 5-HT2c receptor, but not the 5-HT2b receptor, are not associated with valvulopathy. Lorcaserin caused no significant increase, relative to placebo, in the incidence of FDA-defined valvulopathy, a finding that supports the hypothesis that valvulopathy is not associated with activation of the 5-HT2c receptor. When the aortic and mitral valves were studied separately, the rates of increased and decreased valvular insufficiency did not differ significantly between the study groups. Variability in echocardiographic interpretation for individual readers (as measured with the use of blinded reads of “standard” echocardiograms) in the current trial comparedfavorably with that measured in other trials involving echocardiographic end points with two readers.

The sample size and power calculations in our trial were based on the assumption that FDA defined valvulopathy would develop in 5% of patients in the placebo group within 1 year, an assumption that was in turn based largely on data from a previous 3-month, phase 2 study of lorcaserin. Because only 2.3% of patients in the placebo group actually had a finding of FDA-defined valvulopathy at week 52, the statistical power to rule out a relative risk with lorcaserin of 1.5 is 60%, which is below the desired power of 80%.

ISTA Pharmaceuticals (ISTA) faces a new FDA decision with a PDUFA date of October 16 for their new eye-drop solution XiDay. New approvals (or rejections) can cause significant price swings in stocks of the underlying company – especially with micro-cap pharmaceutical firms. With that, I’d like to examine XiDay and its potential impact on ISTA’s bottom line and, therefore, ISTA’s share price.

What is XiDay?

XiDay is a once-daily version of ISTA’s currently marketed XiBrom. XiDay/XiBrom is an eye-drop solution of bromfenac used for the treatment of ocular inflammation and pain following cataract surgery. Bromfenac is an NSAID (non-steroidal anti-inflammatory drug) that was once marketed for systemic capsule administration until it was pulled by the FDA due to liver failure. It was later found that when applying the drug locally, say into the eye, all the benefits of an NSAID were realized without the pesky liver failure problem. ISTA started selling XiBrom after acquiring marketing rights from Senju Pharmaceuticals Inc. in 2002. XiBrom’s patent expired in January of 2009 and, although no generic competitors exist, ISTA will be looking for additional years of market exclusivity with the approval of XiDay. XiBrom is a 0.09% solution of bromfenac that is administered twice daily whereas XiDay is a 0.18% solution to be administered once daily – it’s really that simple.

 

Molecular structure of bromfenac

Revenue Impact of XiDay

Unfortunately, while XiDay’s similarity to XiBrom makes it as close to a sure-thing approval as I can tell, it also minimizes the potential revenue impact of XiDay. Since XiDay is a once-daily version of a twice-daily eye-drop solution, improvements in convenience and patient compliance seem marginal at best. It would therefore be unlikely that ISTA, without some sort of marketing magic, would be able to charge any sort of premium for XiDay over current XiBrom prices. In addition, overall volume of the two therapies are likely to match that of XiBrom itself, as most of XiDay’s market share will come at the cost of XiBrom’s share. So, it appears that from a revenue standpoint we aren’t looking at a significant increase. However, this approval will likely guarantee three additional years of market exclusivity for XiDay/XiBrom products. Ista currently faces no generic competition, but this approval would allow Ista to avoid any surprises from generic competitors until October of 2013.

XiBrom/XiDay and ISTA’s Outlook

While XiDay may not be an adrenaline shot to ISTA’s revenues, there still are many reasons to be excited about its approval heading towards the October PDUFA date. According to ISTA’s first quarter report, XiBrom’s total sales were $20.3 million – an increase of 29% over the same quarter the year prior. Assuming similar growth into the rest of the year, total sales for the XiBrom/XiDay family should reach somewhere between $95 and $105 million for all of 2010. Assuming similar growth in revenue over the potential market exclusivity period, revenues appear to be in the $130 million range for 2011, $170 million for 2012, and $220 million for 2013. While XiBrom is far and away the leading therapy in ISTA’s product line, the company stated in March of this year that total sales are expected in the $147 to $165 million range. Those sales figures aren’t too shabby for a company boasting a market cap of approximately $85 million. That puts the companies current price/sales ratio somewhere around 0.5 for the year – the pharmaceutical industry average (ttm) is at 4.68.

ISTA’s pipeline currently consists of four additional potential products. Bromfenac for dry eye – another potential market exclusivity play – enters phase III trials this year. Ecabet sodium, also for dry eye, has finished phase II trials and phase III trials are currently being designed. It should be noted that the dry eye market currently stands at approximately $500 million in the U.S. so it is unlikely either of the two aforementioned treatments will be blockbusters. T-Pred (tobramycin and prednisolone acetate) for treatment of inflammatory ocular conditions where risk of bacterial infection exists, appears to also be entering phase III in the near future. Finally, bepotastine nasal spray for the treatment of allergic rhinitis – a $2.2 billion market – is in pre-clinical development.

Analyst coverage is also good. Of the three analysts covering, two rank the stock a ‘buy’ while one calls it a ‘strong buy’. The three analysts put a a price target on ISTA of $6.50, a premium of 142% over the current share price of $2.69.

Summary

While it is unlikely XiDay will add much to bottom-line growth for ISTA pharmaceuticals, it does offer protection to growth already exhibited in its XiBrom product. In addition, I don’t expect the market as a whole to be as keen on the fact that XiDay is so similar to XiBrom. A lot of the market seems to believe that any binary event is a good binary event for biotechs. XiDay’s potential approval may simply cause a whole lot more people to take a look at ISTA; and with numbers that hard to ignore is likely to get a nice run-up regardless.