Biotech Values

[steveporsche]

FDA's Fast Track designation more help to investors than patients
by Joel Rutchick and Brie Zeltner Saturday December 01, 2007, 10:34 PM

<from Teddyboy post on IV DNDN>

• For a searchable database of products that were Fast Track approved:

• For a searchable database of publicly traded companies that announced Fast Track designation:

• How we researched this story

• The drug industry pushed for Fast Track

• A fast track designation doesn't mean much

• COMING MONDAY: Fast Track has created another opportunity for insider trading.

By Joel Rutchick and Brie Zeltner
Plain Dealer reporters

A decade ago, the Food and Drug Administration introduced a Fast Track designation for drugs in development that was intended to speed the availability of medical treatments for serious diseases.

However, a seven-month investigation by The Plain Dealer shows that this government blessing has not increased the number of drugs approved or moved them to market faster.

Instead, Fast Track has given the drug industry, which came up with the idea for the designation and lobbied for its passage, a device that promises a lot but delivers little to anyone but investors. The news of Fast Track designation creates a boon for day traders, hedge
funds and others looking to make quick money off biotech stocks.

Some biotech executives also have tried to turn the FDA's Fast Track designation into personal gain.

Top managers and directors have received stock option grants that coincided with announcements that the FDA had put their firms' drugs on the regulatory Fast Track, according to federal securities records. That news usually increases the value of the stock
immediately.

Overall, since 1998, Fast Track announcements for nearly 200 drug treatments triggered one-day stock price increases that averaged 10 percent for biotechs and pharmaceutical companies, according to The Plain Dealer's analysis of publicly traded firms.

The announcements also frequently set off trading binges for the same stocks, one-day increases in shares bought and sold that average almost 1,300 percent. A Fast Track announcement from one Silicon Valley biotech firm in 2003 generated a one-day increase in trading volume of more than 52,000 percent.

That's a lot of wheeling and dealing to be sparked by a non-event.

The Fast Track designation is not an indication that a drug willbe proven safe and effective. In fact, half of these drugs have been scrapped by developers or have had serious setbacks. Most will never win FDA approval.

Those outcomes also can be disappointing for patients who believe that Fast Track status gives hope of a promising treatment. And the few time-saving advantages of the designation were available five years before the FDA introduced it. They are still available to drug makers without the designation.

Many companies didn't use the Fast Track tag en route to quick approvals for breakthrough drugs that treat life-threatening conditions, such as advanced kidney cancer and a rare form of stomach cancer.

Dr. John Jenkins, director of the FDA's Office of New Drugs, acknowledged that the Fast Track designation only gives companies the same access to FDA programs that was already in place when they lobbied Congress for the provision in 1997.

"There's really not much other, if any, benefit for Fast Track," he said.

"Fast Track designation is simply an indication that the drug under development has the potential to meet a serious unmet need," Jenkins said.


Some companies also have benefited from Fast Track designation in ways that have nothing to do with speeding up drug development.

In some cases, companies have done little or nothing to develop drug candidates after obtaining Fast Track status for them. But the designations bumped up the stock price shortly before their acquisition by larger firms.

In the unusual world of biotechs, it's all about the news.

An announcement of a biotech company's partnership with a major firm to develop a drug or the disclosure of the results of a pivotal clinical trial can alter the prospects for a drug's approval, said Reni Benjamin, senior biotech analyst with Rodman & Renshaw, a New York investment banking firm. But Fast Track designation is another matter.

"It doesn't change the process of the drug, the potential of the drug or the probability of the drug's success. On a fundamental basis, Fast Track designation means absolutely nothing to me as an analyst," Benjamin said. "A Fast Track designation, frankly, is noise and an opportunity to take some profit."

Generating "good news"
a primary benefit

In the 1980s, the FDA was under intense pressure to move experimental drugs forward to treat people with terminal medical conditions - first AIDS and then cancer. The agency enacted a series of reforms, culminating in 1992 with the introduction of two significant programs to accelerate drug approvals.

Still, in 1997, the drug industry successfully lobbied Congress for the stand-alone Fast Track designation. The FDA's Jenkins said the main difference between Fast Track and what already existed "is that there is an affirmative response from the agency saying, 'Yes, you
have been granted Fast Track designation,' and then the companies can utilize that however they choose to utilize that for their purposes for their investment community or communicating to the public."

From the start, the drug industry acknowledged in medical journals and other forums that generating "good news" - perhaps coverage in the trade press or attention from financial analysts - is a principal benefit of the designation.

News can establish the value of biotech companies, particularly ones that have no earnings because they do not yet have a product.

Fast Track announcements typically convey the idea of a milestone - an indication that a product has an edge with the FDA.

"It sounds like Fast Track is kind of the FDA's 'wink-wink, nudge-nudge,' this drug is going to be approved," said David Miller, co-founder and CEO of Seattle-based Biotech Stock
Research. "They make it look like the FDA only chooses for Fast Track those drugs that are important and have a good chance, and that's just not the case because the FDA will Fast Track most anything."

Fast Track status has become so routine that Adam Feuerstein, senior columnist for TheStreet.com, an online financial news service, calls the designation a "box checker."

Feuerstein, who covers the biotech industry, said in an interview that Fast Track releases are "the most oversold and over-hyped announcements that a drug company puts out." He added that the announcements often "exploit" the public's lack of understanding about drug development.


Fast Track announcement
a sales opportunity

Some Fast Track announcements cite dates the company projects for securing FDA approval, and many quote company CEOs selling their products.


"In my 40-plus years of experience in this industry, it is often one product that transforms a company to the next level," Paul Freiman, president and CEO of Neurobiologial Technologies Inc. said in a Jan. 28, 2005, release announcing Fast Track designation for an anti-stroke treatment. "I believe that Viprinex ... has this potential for NTI."

The share price of the small San Francisco Bay-area biotech rose 16 percent that day to close at $4.41, and the number of shares bought and sold increased about 700 percent from the previous day. For NTI, it has been mostly downhill since then.

The company's advanced-stage clinical trial for Viprinex - so named because it is derived from the venom of the Malayan pit viper - is running significantly behind schedule. NTI's stock has steadily declined to the equivalent of 42 cents a share, as of Friday.

A company representative acknowledged that Fast Track designation doesn't increase the likelihood of FDA approval but didn't know why that wasn't explicit in the announcement.

"I don't know who wrote the press release," said Karl G. Trass, a vice president.

In contrast to NTI, when Protein Design Labs publicized its Fast Track status in September 2004, it was easy to miss the news. The FDA's approval of the designation for a drug to treat a severe inflammatory bowel condition, buried in a company news release about
interim results of a clinical study, included this cautionary statement: "Fast Track designation does not mean that the FDA will expedite approval of any application.¤.¤.¤or guarantee approval of the product."


The announcement had no effect on the company's stock price or trading volume.

PDL's candor was rare. A review of almost 200 Fast Track announcements shows that PDL is one of only four companies to explicitly state what the designation doesn't mean. The others were Myogen, New River Pharmaceuticals and Matrix Pharmaceutical.

Unfortunately for Fremont, Calif.-based PDL, the announcement was also prophetic. Two months ago, PDL revealed that its advanced clinical trial had failed and that it was scrapping the product's development.

Neither the FDA nor the Securities and Exchange Commission, which is charged with protecting investors, has encouraged companies to make it clear that Fast Track status does not better the odds for drug approval.


"I'm not aware that we have specifically discussed with any sponsor what they may say in their press release," the FDA's Jenkins said, adding that it is normally the SEC's responsibility to regulate how public companies communicate with investors.

SEC spokesman John Nester said in an e-mail that companies are required to explain the significance of Fast Track if used in registration statements filed with the commission. However, he said the SEC does not regulate news releases unless they contain fraudulent
statements.


A bad day
for stockholders

A Fast Track designation can be obtained quickly.

According to an FDA estimate, the average preparation time is 40 to 80 hours, but in one survey, a handful of companies indicated they completed the application in under five hours. Over the last 10 years, the FDA has approved more than 70 percent of requests.

The agency is supposed to rule on applications within 60 days and typically does.
The biotech companies that seek Fast Track designation are often fledgling concerns that are short on cash and may lack the experience needed to run complex advanced clinical trials.

Half of the drugs sponsored by public companies that announced Fast Track designations through 2004 are either no longer being developed, are no longer listed to shareholders as under development or have encountered significant setbacks, The Plain Dealer found.

Many of these trips down the Fast Track end very badly for shareholders, with stock prices falling precipitously on the news of clinical study failures. When Nuvelo Inc., a Silicon Valley biotech, announced last December that its drug candidate to dissolve blood clots
didn't meet objectives, company stock fell nearly 80 percent in one day, and the firm is still reeling.

feels abandoned

The designation can contribute to false hopes of a new wonder drug.

Ted Girgus of Bellingham, Wash., was encouraged when he learned in November 2005 that the FDA had Fast-Tracked Provenge for advanced prostate cancer. Girgus, 64, had prostate cancer diagnosed 12 years ago and refuses chemotherapy and steroids because of their side effects.

"The Fast Track meant everything," Girgus said. "It meant that the FDA recognized this product, this science, as something notable. Otherwise, why would they Fast Track it?"

Girgus believed in the product so much that he invested in the company. His optimism grew this past March, when an FDA advisory panel voted overwhelmingly that Provenge was safe and effective.


Six weeks later, Dendreon Corp., of Seattle, the developer of Provenge, revealed that the FDA had advised the company that it needed more data to gain approval, which could take a year or more.

"I feel like I've been tossed to the side, and they [the FDA] said, 'Sorry, Ted, we're going to let you die because we have to look at some more statistics,'¤" Girgus said.


"The stock
was going to fly"

Many scientists and AIDS activists were skeptical in 2002 as to whether a well-publicized AIDS vaccine would work. Still, investors thought they were about to hit the jackpot when the FDA placed the product on the Fast Track that December.

"That was the whole key to it," said James Reinschmidt, a 62-year-old computer chip designer who lives in California. "The stock was going to fly."


VaxGen's price soared with the news, but it was a brief flight. Two months later, the stock plunged with the disclosure that three injections of its AIDSVAX gave study participants no more protection against the AIDS virus than doing nothing.

According to a shareholder lawsuit, the vaccine's problems led to millions in losses among VaxGen's investors, including $70,000 for Reinschmidt.

Mike Bauman of Hudson has invested in other biotech companies for several years. His view of the significance of Fast Track designation has changed, as he has become more seasoned. "You find out the hard way that it didn't really help at all," he said. "It does
not improve your odds."

Day traders swarm
after Fast Track approval

Unlike investors who buy stock hoping that the company's success increases its value, people who buy and sell stock rapidly don't care whether a Fast-Tracked drug succeeds.

What day traders and hedge funds care about is a big swing in price, triggered by a setback or an advancement.

"They love Fast Track because there's an opportunity for additional volatility, and that means money for them," biotech investment analyst Miller said.

BioCryst Pharmaceuticals had given up on an influenza vaccine in 2002 but revived it three years later amid concern over bird flu and the need to stockpile anti-virals. Publicity about the drug in the fall of 2005 gave BioCryst stock momentum before the FDA put the company's flu
vaccine on the Fast Track in January 2006.

When BioCryst announced its Fast Track designation before 8 a.m., day traders piled on.
Web sites like Tradermike.net put BioCryst on its Watch List for day-trade profits, noting that the stock was already up 7 percent.

BioCryst rose more that day, closing at $22.41 a share, up nearly 18 percent from the previous day. The number of shares bought and sold topped 19 million, more than 26 times the volume on the previous day, with day traders responsible for much of the surge.

"Most day traders have never heard of the stock or knew nothing about it until their computer flags it as a stock with X percent of volume or price increase. That's when the day traders come in," Miller said. "They may be in and out of a stock a couple dozen times a
day."

That kind of frenzied trading occurs regularly when companies announce Fast Track status. The number of shares bought and sold more than doubled on 49 percent of days that companies announced Fast Track designations. Trading was 10 times higher than the day before in 22 percent of instances.

Trading volume up
over 52,000 percent

When Pharmacyclics announced its Fast Track status for the treatment of patients with non-small-cell lung cancer that has spread to the brain, the number of shares bought and sold that day topped 10.5 million, an increase of more than 52,000 percent from the previous day's 20,000 shares.

The volatile, event-sensitive biotech industry is a niche well suited to the growth and popularity of Internet trading.

"With the advent of the Internet and online brokerages, anybody and their mother can open an account, so the stock market has turned a little bit into a casino. It's not much different than online poker for some people," said Tom Mowry of Sharon, Pa., a long-term
investor in Delcath Systems, a New York biotech. "With biotechs, you can double your money overnight."


Some of the biggest biotech bets are placed by hedge funds, largely unregulated vehicles that manage investments for wealthy individuals and institutions. Hedge funds, many of which are based offshore, make large "bets" on stocks that are subject to sudden price change. Their managers have wide latitude to use aggressive strategies unavailable to other types of funds.

One of the techniques involves the sale of stock they don't own, with the anticipation of buying it in the future at a reduced price. With "short-selling," hedge funds and others who use the strategy bet that the price of a stock will fall - and it often does after the initial jump a company receives from Fast Track designation.

Fewer drugs approved
after Fast Track

It's not clear what Fast Track designation has accomplished for consumers, if anything.

A study published in 2003 by the Tufts Center for the Study of Drug Development at Tufts University comparing the development time of approved Fast Track drugs with other drugs concluded that Fast-Tracked drugs were developed 2½ years quicker.

The FDA and representatives of the drug industry have cited this analysis as evidence of the designation's success, but the early numbers looked so good because many of the Fast Track approvals were for drugs to treat HIV, which generally have a shorter development time.

In revisiting the subject early last year, the Tufts center found the total development time for drugs that were Fast Tracked through 2005 to be the same as for other drugs - about eight years, on average.

Tufts drug center officials interpret those results to mean that the Fast Track designation is helping save time, given that the Fast Track drugs are "highly innovative products," according to the U.S. Drug Approval Trends and Yearbook.

The center acknowledges that it receives 55 percent of its funding from the drug industry.

Since the designation took effect in 1998, the FDA has approved fewer drugs than it had in the past. In the five years preceding Fast Track, the FDA approved an average of 33 new drugs annually. The average since 1998 is 26 per year, according to FDA records. Approval rates can
be affected by many factors, including research and development costs, market influences and the regulatory climate.

In what is a sobering reckoning for small biotechs, major drug companies tend to be the firms that gain approval for their drugs. Of 70 Fast-Tracked drugs listed as having gained FDA approval, no more than 10 came from small or midsize biotechs and nine others had large partners, according to The Plain Dealer's analysis.

Yet, small and midsize firms have stood to gain the most from public exposure generated by Fast Track announcements - and the resulting surge in stock price and shares traded.

Stock prices of companies that trade on the New York Stock Exchange rose just 1 percent after Fast Track announcements, The Plain Dealer found. Excluding these companies, most of which are major pharmaceutical firms, Fast Track announcements boosted stock prices 11.5 percent.

Like many of these companies, Synsorb Biotech appeared to have a promising future early on. Synsorb secured Fast Track status in 1999 for a treatment to combat E. coli infections and a year later for a product designed to prevent the recurrence of an intestinal condition often associated with extended use of antibiotics.

The FDA allowed Synsorb to supply emergency doses of its experimental product for an E. coli outbreak in Milwaukee. The results of a preliminary trial for the company's other drug were so good that the testing was scrapped early to move on to an advanced study.

By the end of 2001, Synsorb's development of all drugs had ended. One Phase III trial failed, and Synsorb halted the other because patient participation was inadequate. In another year, Synsorb had been renamed Hawker Resources and went into the oil and gas business in
western Canada.


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