Maximizing Opportunity and Minimizing Risk With Trading FDA Decisions

by: Sheff Station

There are different ways to increase the odds of your success when looking to buy and hold through a decision. FDA approval success and what the SheffStation looks for when choosing to hold through a decision or not has been vitally important to our success. Many investors look at technicals and other indicators when assessing the risk vs. benefit of a company. I look for one of four items for a company, in order of importance, when holding a stock through an FDA approval:

1) A Special Protocol Assessment (SPA) that covers efficacy and safety [Dendreon (NASDAQ:DNDN) and Pozen (NASDAQ:POZN)]. Vivus (NASDAQ:VVUS) has an SPA for Qnexa but it only covered efficacy. VVUS is working on obtaining thorough safety data to the FDA for Qnexa. I believe that with an SPA the FDA will give them more detailed attention in sharing what they are looking for before they approve their drug. Avanir (NASDAQ:AVNR) had an SPA that eventually (after an initial CRL) covered both efficacy and safety. Their drug, Nuedexta, for pseudobulbar affect was approved in late October of 2010.

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2) Past Complete Response Letters: This is where companies have the opportunity to address issues with the FDA. I have more confidence in a positive decision for a company after they have received a CRL from the FDA. I am heavily in favor of companies that either have an SPA prior to a CRL or establish one with the FDA afterwards. I know that with an SPA the company works closely with the FDA to establish parameters & clinical endpoints for trials that they believe if successful will strong help yield a positive result for that particular company.

3) Positive/Negative Advisory Panel Meeting : Salix (NASDAQ:SLXP) and Questcor (QCOR) are a few examples where I held these companies through their FDA approval dates. I steer clear of negative panels when investing in companies into their PDUFA dates. Examples are Arena (NASDAQ:ARNA), VVUS, and JAZZ (NASDAQ:JAZZ). Favorable panel decisions are not the panacea to an approval. The latest example was last week with Orexigen (NASDAQ:OREX) and the CRL for their weight-loss drug. It is very important to watch the follow-up that the FDA gives a company in terms of what they need to do to help to navigate the approval process. When the FDA helps in the design of a trial & is actively involved, it instills more confidence in an investor that the company's probability for success becomes much greater. Advisory panels can provide transparency to what the FDA needs from a company before granting approval. Issues are addressed that might not be if not for an advisory panel.

4) 505(b)2 applications. A 505(b)(2) application might then offer an appealing regulatory pathway alternative. This route permits companies to obtain FDA approval of NDAs by relying, in part, on the agency’s findings for a previously approved drug. An example of this scenario was in October w/ the approval of AVNR. AVNR had the first two of the four situations occur that I describe above.

AVNR had an approvable letter in 2006 (CRL) and then conducted an SPA with the FDA. The only thing they were missing was an advisory panel meeting which the FDA chose not to convene. These are the same paths that Dendreon and Pozen followed with both an SPA and CRLs initially before eventually obtaining approval.

Two companies in 2011 with SPAs are Protalix (NYSEMKT:PLX) and Human Genome Sciences (HGSI). PLX has their product, Uplyso, which will be up for approval for Gaucher’s disease. HGSI is awaiting their March 10 PDUFA date for the approval of Benlysta for lupus. If approved, Benlysta would be the first new drug for lupus patients in 50 years. The FDA’s approval decision date was pushed back three months from the original PDUFA date of Dec. 9th, 2010. Many analysts believe that the drug will be approved soon.

The goal for an investor is to maximize opportunity and minimize risk. The four items above are key to think about as more FDA decisions will arise in 2011.

Disclosure: I am long PLX.

Additional disclosure: My position in a stock can change at any time