The actions of the FDA are very hard to predict. I can't recommend as an investment strategy betting everything you own on a single small-cap stock whose value proposition depends on the FDA approving something. Too often, the FDA surprises us all.
Case 1: Investors in small-cap OTC cold remedy maker and marketer Matrixx Initiatives (MTXX), whom you probably know better as the maker of Zicam cold remedies, got a nasty surprise from the FDA on June 16 -- and MTXX didn't even have anything pending FDA approval. Now THAT is unpredictable.
The FDA announced that it had received reports of smell loss (anosmia) for Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Gel Swab. These two products accounted for approximately 40% of MTXX net sales in fiscal 2009.
This was a particular surprise to investors because legal issues related to similar allegations were regarded as largely behind MTXX, having been either settled or, in those cases that went to trial, having the opposition expert's testimony excluded under the Daubert standard.
Although MTXX says that it disagrees with the FDA's allegations and is preparing a response which, management said on the F1Q09 earnings call August 10, it hopes will persuade the FDA to change its mind, MTXX still recalled these products from the market.
Here is a chart of MTXX share price. Note that there was not particularly high trading volume before the FDA warning letter on June 16, suggesting that not only the handful of analysts who follow MTXX were surprised, but so was just about everyone else:
Case 2: Savient Pharmaceuticals (OTC:SVNT) has a late-stage gout drug candidate called Krystexxa. Gout, a joint inflammation, is a baby boomer demographic play. It's on the rise due to an aging and increasingly overweight population, but Krystexxa would have an orphan designation.
On June 16, a non-binding but important FDA advisory panel voted 14-1 to approve Krystexxa. Since then, SVNT’s share price had leapt from almost $6 in early June to $15.59 on July 31.
Let's recap what analysts were saying about Krystexxa as it headed toward its FDA decision date (the technical term for this is "PDUFA," pronounced "Puh-DOO-fuh," date) in late July:
Cowen & Co. gave Krystexxa a 70% to 80% chance of approval, which would have been roughly in line with the 18% short interest at the time, except that the other 20% to 30% was assigned to a complete response letter "needing maybe a couple of months" to address. "Although investors have learned to exercise caution ahead of most regulatory milestones, we see little downside in SVNT shares."
Wedbush Morgan simply noted that since the FDA has missed more than 60% of its targeted decision dates, any minor delay would trigger a buying opportunity if the stock price then declined. In other words, no significant downside. They projected $400 million in peak annual Krystexxa sales, a likely acquisition of SVNT, and an acquisition price upwards of $20 a share.
These comments were in the WSJ here, and in Reuters under the headline: "Marketing, not approval, a worry for Savient gout drug."
On August 2, SVNT announced that it had received not the expected approval, but a letter from the FDA including concerns that when manufactured in larger quantities for marketing, the product could differ from that made in smaller batches for the clinical trial. The company plans to resubmit its application in early 2010, and hopes for a decision two to six months later.
Most investors counted all that as closer to a year delay than "a couple of months," and sent the stock back down to $12.80 per share – not back down around $6, but still not close to that $20 per share either.
Case 3: Many will have been following the Dendreon (NASDAQ:DNDN) story. I'm not going to rehash the whole thing, except to say that for those who are interested, there's plenty available elsewhere, starting here.
Dendreon is a small company highly dependent on its development-stage therapy for advanced prostate cancer, called Provenge. Of course, it would be -- will be -- wonderful to find a therapy for advanced prostate cancer. In March, 2007, an FDA advisory panel recommended approval of Provenge.
However, two doctors on the panel then wrote the FDA about concerns they had with the trials. In May, 2007, rather than approving Provenge, the FDA issued what's called an "approvable letter," requiring that DNDN conduct additional studies on Provenge to provide a larger sample size.
As we can see, this all caused a lot of bouncing around in the share price.
DNDN investors, cancer patients and their families (groups among whom there is likely some overlap) raised an outcry, to the point where the doctors who had raised concerns received physical threats, and some conflicts of interest were brought to light.
These three cautionary tales show us that FDA approval risk is highly unpredictable and not to be underestimated -- particularly in the case of small pharma companies whose fortunes often rise and fall on the fate of a single drug.