Seeking Alpha

Zachary Prensky's  Instablog

Zachary Prensky
Send Message
Zachary Prensky is a Managing Member of Little Bear Investments LLC. Little Bear Investments, located in the heart of Midtown Manhattan, is a merchant bank that focuses on investing in both public and private companies. Our broad range of investment products includes: short & medium term... More
  • Insomniacs Need Not Apply (2 of 2) 0 comments
    Dec 15, 2009 12:03 PM
               Somaxon’s disappointment should not be too surprising to those who closely follow the FDA. It’s a well known fact within the pharmaceutical industry that the FDA has long applied a high degree of skepticism towards any potentially new treatment for sleep-related symptoms. Why this is isn’t entirely clear. I’ve spoken to numerous doctors, researchers and analysts on this subject. Some feel that that the Division of Neurology Products, which oversees this area, takes the approach that insomnia is an over-diagnosed illness and therefore overprescribed. Others feel as if the Division is satisfied with the few products on the market and doesn’t want to see new entrants. Lastly, some feel as if insomnia is looked down upon at the agency and not taken seriously, unlike more serious illnesses such as cancer or heart disease. Overall, most people I speak with in the industry chalk it up to a straightforward bias against the medical sleep industry.
                Whatever the reason, it’s clear FDA plays favorites. The last sleep drug approved by the FDA, Rozerum, (sponsored by Takeda Pharmaceuticals) failed to show subjective improvement for adults suffering with insomnia, although it did well with the elderly. What did the FDA do? It approved the drug anyway, and slapped the failure to show subjective sleep improvement in a one-sentence addition to the prescribing label, describing the 18-64 year old population as “younger adults… (who failed to) replicate this finding of reduced patient-reported sleep latency compared to placebo”. You now know more about Rozerum than most patients taking the medication; the FDA conveniently left out this nugget of information on the 3 page FDA approved medication guide provided to those who purchase Rozerum.
                On the other extreme of surprising FDA actions lies another insomnia treatment, Intermezzo, (zolipedem tartrate) sponsored by Transcept Pharmaceuticals (Nasdaq: TSPT). Transcept has been working on getting Intermezzo approved as a drug to be taken by insomniacs in the middle of the night upon early awakening. The efficacy data showed statistical significance as compared to the placebo, and there were no adverse effects or other safety issues to be concerned about. The data looked so good in fact, that Purdue Pharmaceuticals invested $25 million up front to secure the rights to Intermezzo, less than three months in advance of the FDA decision’s on its application for approval. Purdue, the manufacturer of both OxyContin and Ryzolt – two pain relieving compounds that are no strangers to controversy – supposedly knew a thing or two about the FDA approval process enough to plunk down a large amount money to secure the rights to Intermezzo.
                Once again, the FDA surprised everyone, when in early November it declined to approve Intermezzo. The reason? For the first time in years of ongoing communication with Transcept regarding Intermezzo, it announced that it would like to see how taking Intermezzo in the middle of the night would impact one’s ability to drive. As an aside, it also wanted to know how Transcept intended to package the drug to ensure patients don’t overdose and forget how many pills were taken should someone waken up multiple times during one night’s sleep. Why the FDA waited to disclose this new request, which it hadn’t made of other sleep aids, at this late stage in the game was left unanswered.
                This lack of predictability on how the FDA decides to proceed should be of extreme concern to all of us. Government decisions on policy are never black and white, and anyone attempting to make a business decision based upon one or more of them knows to expect the unexpected. But common sense dictates that, of all the types of decisions government makes, approving or disapproving a drug candidate should be one of the most predictable kinds. This is precisely because of the years of study, analysis and review all drug candidates get before being opined upon by the FDA. Voluminous amounts of data are collected and reported upon. Things like how effective the drug is over time, at various dosage levels, difference of effect by sex and age, among countless items, are all collected by the drug sponsoring company and reported on, both to the scientific community at large and to the FDA. If the standards of ensuring safety and efficacy were uniformly followed throughout the FDA, then both the investment community and the public at large would have little problem in predicting with a wide degree of certainty, which promising drugs would be approved and which would be relegated to the waste basket.
                Why should the lack of predictability at the FDA concern us? For two reasons. First, promising treatments are left to wither because the of the risk the FDA decides to set an artificially high hurdle to gain approval, and in the meantime the drug’s sponsor runs out of cash. A good example of this would be XERECEPT, targeting brain edema (swelling), which should be used to replace the debilitating dexamethasone in patients with brain tumors. Dexamethasone is currently taken by patients with brain tumors but has enormously harmful side effects, including in many cases leading to the death of the patient. XERECEPT showed clinically significant reductions in steroid usage amongst patients taking it, but because the patients taking the placebo couldn’t tolerate dexamethasone there was a strong placebo effect. XERECEPT’s two owners, Neurobiological Technologies (Nasdaq: NTII) and Celtic Pharmaceutics, weren’t willing to waste the millions of dollars and the year or two necessary to even get in front of the FDA and hope for approval. Rather, Neurobiological chose to wind itself down and return its existing cash to shareholders while Celtic Pharmaceutics has been mulling its options for the better part of a year. Families who have a loved one suffering from the debilitating side effects of dexamethasone shouldn’t expect to get their hands of XERECEPT anytime soon; with the cost of undertaking additional trials and related expenses potentially in the tens of millions of dollars and the privately held Celtic reportedly running low on capital, XERECEPT most likely will never see the light of day.
                The second unintended consequence of an unpredictable FDA becomes the high cost of new drugs that are approved. Again, investors know the true risks of going before the FDA, and demand exceedingly high returns to take that risk. Last week, an official from United Health Group grumbled publically in an article in the New York Times regarding the high price tag of newly approved FOLOTYN. Developed by Allos Therapeutics (Nasdaq: ALTH), FOLOTYN targets the extremely fatal t-cell lymphoma. For many patients it will shrink lymphoma tumors, although they can and do return. For a lucky few, the tumors shrink completely. Priced at $30,000 a month and expected to be dispensed for two, three or four months per patient, the health insurer compared that expected cost of treatment to entire annual cost of currently treating a t-cell lymphoma patient, currently pegged at slightly more than $80,000.
                What neither the United Health Group (NYSE: UNH) official nor the author of the article failed to mention is that over its’ 16 year history, Allos Therapeutics racked up over $350,000,000 in losses over the 17 years of its existence. If you bought stock in Allos 8 or more years ago you’d be sitting on losses approaching 50%. Even if Allos charges $30,000 a month and garners every t-cell patient in the country, it is questionable whether the profit from FOLOTYN will overtake the present value of all the funding Allos has received from inception to the present, along with an appropriate return. And that’s before you take into account the possible likelihood of either a newer drug eclipsing FOLOTYN or the eventual expiration of FOLOTYN’s patent and exclusivity period. And lastly, that fails to take into account all the hundreds of millions of dollars dropped by the industry on other failed t-cell lymphoma treatments that never made it past the FDA.
                Increasingly, investors financing new drug development are recognizing the realities of gambling on FDA approval. Valuations of early stage and medium stage biotech companies remain depressed. Even after spending the tens of millions and in some cases hundreds of millions of dollars on drug development, companies can find it hard to attract a decent enough valuation to both reward early backers and attract new capital. More and more professional investors recognize that the only way to consistently make money in the sector is by participating in deeply discounted secondary offerings of distressed or cash poor companies who use small brokerage firms like Rodman & Renchaw (Nasdaq: RODM) to peddle their deals. Existing shareholders are almost always poorer for the effort, most often companies doing such financing find themselves with valuations even lower than that at which they raised money. But even the stock placement wizards at Rodman can’t find enough takers for many deals, and good alternative treatments like XERECEPT sit on the shelves. And ultimately it’s the sick of our country who suffer the greatest as novel treatments to illnesses fail to materialize.
    The answer to all of the above is fairly straightforward : end the guessing game at FDA. When companies walk into the FDA with a new compound, the goals of proving safety and efficacy should be clearly laid out. Well trodden statistical models for proving facts should be accepted beforehand; companies and their investors shouldn’t have wonder if the goalposts are going to get moved on them at the 1 yard line. If we want to continue incentivizing people and institutions to supply capital for such risky ventures they ought to know what the parameters for success or failure are at the outset.
    I would also add two more items for consideration : First, if the data is too close to call, then absent any serious concerns over safety the scale should be tipped in the company’s favor. After all, if the facts are too close to call, then ought not the product be put on the market and let the patients and doctors who treat them decide its’ fate? If there was a treatment that could improve your health but the studies were too close to call in definitively proving its effectiveness, wouldn’t you want the final say? In the case of those families living with chronic insomnia or know a loved one with brain edema I’m pretty sure the answer would be yes.
    Secondly, if the FDA were forced to release the text of its communications with sponsoring companies, the public would be able to evaluate on its own whether or not the FDA was either playing by the rules or moving the goalposts mid-game. With so much at stake and no effective way for companies to challenge the decisions made the FDA, only by shining the light of day on how the FDA goes about its decision making process can we realistically hope to remove the capricious and arbitrary way the FDA sometimes makes its decisions..
                Medication makes up a large and growing piece of the health care pie. If we as a society want to lower the overall price tag for high quality care, then the way we go about approving medication for use needs to change in a way that reduces the uncertainty of the process. No one is saying that government shouldn’t have a very strong role in protecting society from harmful or ineffective medication but we need to be clear about what standards we hold the medical industry to. If we can accomplish this by insisting the FDA adhere to clearly defined parameters for every drug that attempts to get approved, then we can go a long way towards lowering the risk of investing in new drug development.
                At the end of the day, medicine, like any other business, responds very well to economic stimuli. If we lower the risk involved we can both cut down on the cost of funding the capital necessary to continue development of life saving medication, directly contributing to our quality of life as well as grow the employment of an industry critical to our nation’s economic well being.
                 Somaxon announced that it has requested a meeting with “senior FDA leadership” to review the reasons behind the failure to approve doxepin. One can only hope, for Somaxon’s sake, that this includes the commissioner of the FDA, Dr. Margaret Hamburg. Dr. Hamberg was herself a neuroscience researcher at Rockefeller University, and brought a no-nonsense, results oriented approach as Commissioner of the New York City Department of Health from 1991-97. She is the perfect choice to bring some much-needed adult supervision to the Department’s Division of Neurology Products. Transcept has over $80 million in the bank thanks partially to Purdue’s over-eagerness to get in the game and will undoubtedly burn a significant portion of its’ shareholders money trying to please the FDA’s. As for XERECEPT one can only hope that a large pharmaceutical company picks up the ball and takes a crack at getting it past the FDA. But don’t hold your breath.
                On a larger scale, the legislative branch needs to reexamine how effectively the FDA is going about its mission. By leveling the playing field, setting clearly defined standards as to how to go about approving medications and ensuring an adequate degree of public scrutiny along the way, we can ensure that the FDA does its job to both protect the public and shepherd an industry crucial to all of us. And lastly, as we as a nation contemplate handing over a large portion of control over the delivery of health care in this country, we should carefully consider how effective of a neutral arbiter government has been in balancing the needs of patients, the marketplace, and those who continue to innovate and improve the delivery of health care on behalf of us all.


    Disclosure: Long TSPT SOMX

    Disclosure: Long SOMX TSPT
    Themes: Biotech
Back To Zachary Prensky's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

Latest Comments


Most Commented
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.