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Science Vs. Hedge Funds: Influences On New Drug Approval Process
April 16, 2012 by: R.G.Analytics | includes: ARNA, AVNR, CHTP, DNDN, NEOP, VVUS The FDA is mandated with protecting the public by a stringent new drug review process. We all hope that FDA is impartial and highly scientific in its approach. After all companies spend hundreds of millions of dollars following scientific protocols, conduct highly scientific trials and analyze data in the utmost scientific way.
The aim of science is truth. Science comes from Philosophy which is love of truth. In the dark ages science didn't matter much. We all know the story of Galileo and the consequences of his scientific approach.
There are those who believe the FDA is not impartial and is influenced from many directions. There are those who believe it is a completely fair agency. Being a scientist, I approach this question scientifically, which is to try to observe facts and keep beliefs at bay.
Dendreon (DNDN)
The case of Dendreon is perhaps the most dramatic new drug review case in history. For the first time in its history the FDA went against the vote of its own panel of reviewers and did not approve Provenge first time around. The panel of experts overwhelmingly approved Provenge as a safe and effective therapy for men with advanced prostate cancer but Provenge was a threat to certain parties. Certainly it was a threat to the large short interest, and possibly, as immunotherapy was still very new, a threat to status quo in medicine.
What we saw before the FDA AdCom was a relentless level of bashing and negativity from analysts and journalists including Brean Murray's analyst Jonathan Aschoff who admitted to me in a phone conversation that his firm had clients who were short Dendreon.
Two doctors in the Adcom were heavily against the approval as I discussed in another Seeking Alpha article. After the strong vote for approval they lobbied the FDA and the FDA denied Provenge approval. Much has been written about allegations of conflict of interest, a legal action followed the vote, and much citizen activism because it was clear to many of us that from a scientific standpoint Provenge works and is safe. Thousands of men died while the FDA sent Dendreon away, only to approve the same drug a couple of years later.
Arena (ARNA)
The upcoming FDA decision for Arena reminds me of Dendreon's specially with regards to the behavior of short sellers. Both companies have had a very large short interest before the PDUFA dates and similar level of analyst and journalist bashing. Arena bashing has gotten so bad leading to the May 10 Adcom that Adam Feuerstein and TheStreet.com has received a legal threat from a group of Arena shareholders represented by the powerful Michigan attorney, Joseph Dedvukaj:
You have been making intentionally false, deceptive and fraudulent statements about Arena's Lorcaserin... with the plan and design to illegally scare investors out of investment and/or manipulate Arena's common stock price, all to the damage of existing shareholders.
Feuerstein's credentials for his investment commentary and biotech analysis is a bachelor's in Political Science, and of course, working for Jim Cramer (see quote below).
I deeply support this action as I observe that these bashers are out of control and have thought they can "get away with murder" for too long.
Also, I have a fundamental issue with the entire Philosophy of Jim Cramer's and his TheStreet.com for a very simple reason: As a human and a student of science and philosophy I am interested in truth but Cramer has no problem resorting to deception and lies to make money. These are Jim Cramer's own words:
What's important when you're in that hedge fund mode, is not to do anything remotely truthful, because the truth is so against your view that it's important to create a new truth, to develop a fiction.
Cramer's bashing of Dendreon went as far as him lying that Provenge had flopped. Patrick Byrne, the heroic CEO of Overstock.com (OSTK) is a crusader in the fight against naked short selling. Him and his fellow citizen journalists in Deep Capture, recap the story and what followed:
According to Cramer the treatment had just been rejected by the Food & Drug Administration. It would never go to market...
Cramer maintained that Provenge was not effective. In characteristically level-headed fashion, he announced that Dendreon shareholders were drunken, carousing, gambling Falstaffs who "might as well take their money to Vegas."...
And with every burst of good news, the company has faced waves upon waves of naked short selling - hedge funds illegally selling millions of shares that do not exist to flood the market and drive down the stock price. Along with the phantom stock, people seeking to diminish Dendreon have deployed false financial research , biased media, bogus class action lawsuits, Internet bashers...
Chelsea Therapetics (CHTP) and Neoprobe (NEOP)
Another hedge fund manager, Martin Shkreli, who used to work for Cramer responded to my email just before my first article on Arena which many believe prompted a big rally in Arena shares that Arena is a "wildly overvalued stock". Since then the shares have gone up over 50%. So hedge fund managers can be wrong no matter how much of a "fiction", to use Cramer's words, they try to create. Shkreli has been wrong on a number of bets which he vocally supported. When Chelsea Therapeutics International was $5.08 Shkreli predicted a double by year end 2011. CHTP is trading at $2.05!
Shkreli had implied he would try to influence FDA against Arena in a tweet. He had tried to influence the FDA before -- his Neoprobe case led to a major complaint being filed against Shkreli by Citizens for Responsibility and Ethics in Washington). He was proven wrong about NEOP as well when FDA acceptance the Lymphoseek application.
These are facts and not speculations that hedge funds try influence the FDA. But it doesn't end there.
Avanir (AVNR)
As the respected analyst, JMP Securities' Dr. Charles Duncan said in an investor conference recently, Avanir has an approved drug which is a big deal given what a tremendously arduous task it is to get a drug approved. Short sellers bet against Avanir's approval and then against launch and against Avanir's market but they've been consistently wrong. Still the level of distortion, as in "short and distort," is very high and you still see hedge funds trying to make the Cramer type of "fiction." By continually repeating a falsehood it does not become true.
The fact is Avanir's revenues have been growing with record sales showing last week, institutional ownership has been growing, and no sign of any dilution in the picture makes life tough for the holders of 25 million shorted shares. Shorts are still repeating their fictitious mantras hoping it manifests a reality which simply is not there. European approval can come as early as this quarter, and I believe a major partnership is in the cards. Lots of catalysts are on the horizon and shorts are simply running out of time. Truth is contradictory with the short-seller's wishful sense of reality.
Vivus (VVUS)
Vivus' Adcom's overwhelmingly positive vote for Qnexa surprised those who questioned its safety profile. Some investors speculated that Vivus is a favorite for some hedge funds and some politicians. The amount of negativity leading to the Adcom was non existent compared to Dendreon or Arena.
Vivus just announced that the FDA will have a three month delay in its decision on Qnexa. This is clearly bad news for Vivus. But Adam Feuerstein published a article calling this bad news good news (talk about making fiction). In fact this bad news for Vivus is good news for Arena, but Adam attacked Arena in the same article, saying this was bad news. I've heard of people who can stand there in sun light saying it's night time, but these people are liars, and I have none as friends. It is disconcerting however, how insignificant truth has become in journalism, but Cramer's quote might explain it perfectly. Of course the logic Adam used to justify his stance is shaky at best. His main reasoning is, if FDA wanted to reject Qnexa it would not have taken more time to look. Many believe this delay is related to demands on restrictions and further studies due to safety concerns.
Ron Paul's Take
I am not a Ron Paul follower but found his remarks on the FDA very daring and interesting. In an interview he made the accusation that the FDA and Big Pharma 'are in bed together'.
Investments and the FDA
I am not an investment advisor so please don't follow me and do your own research. For myself, I view my Avanir shares as a safe investment and my Arena shares are a speculative play. I have thought of selling some Avanir to buy more Arena but have not gotten myself to do it because I don't want to take additional risk specially seeing so many sharks and crooks in the game betting against Arena. I don't think the shorts will win but it is an all out war.
Letter By FDA Employees
This disturbing headline was in the news last week: "FDA 'Corruption' Letter Authenticated: Lawyers, Start Your Engines!"
Written by a group of scientists on FDA letter head -- but with their names blacked out for fear of retaliation -- the letter describes a nightmare of bungling and self-dealing among higher-ups at the drug safety agency.
Can FDA Be Influenced?
And just as I was working on this article I read that the husband of Margaret Hamburg, the FDA Commissioner, is a hedge fund boss. Ouch! Given the heavy attacks on Arena from some hedge funds should investors worry? It did spook me a bit when I read this, perhaps unjustifiably. According to a Wall Street Journal blog:
Margaret Hamburg will be making about $150,000 a year as the FDA's new top dog. That may seem like small change compared with her income of at least $10 million last year, most of it from her husband's role has a hedge-fund executive, WSJ reports from financial-disclosure forms.
The FDA Commissioner's husband is reportedly an executive at Renaissance Technologies LLC, a hedge fund managing some $23 Billion in assets.
More On FDA and Provenge
Reflecting on the Provenge story one of the many frustrated folks at FDA's vote against its own Adcom vote wrote in a thread that referred to "Ethics Filings Against Scher, Hussain and Pazdur":
These FDA people and consultants are paid with our tax dollars and they are empowered to represent the American people. They literally got away with murder with a calculated agenda. They were empowered by our government/FDA, but they acted for their benefit and not the majority - The American People. This is hugely undemocratic and insulting to all of us common folk and we have to reverse this decision; and/or make sure it doesn't happen again; and/or at minimal let these three people know the average American Citizen isn't as stupid as they think and we will not tolerate being manipulated in a democratic society.
Deep Capture examines FDA's Richard Pazdur's connections deeply, and his friendships with certain lobbyists:
Pazdur, the FDA official, has unusually close relationships with Milken and some of his cronies. He was a key player in the ImClone scandal, which displays remarkable similarities (such as insider information mysteriously appearing in The Cancer Letter and the involvement of hedge funds in the Milken network) to the Dendreon scandal. And Pazdur appears to have been the FDA official most responsible for derailing Dendreon's prostate cancer treatment.
The same article outlines Pazdur's link with Dr. Howard Scher and Dr. Maha Hussain:
Pazdur was not supposed to be the one who decided whether Dendreon's drug was approved. Instead, because the drug is a biologic, the decision rested with the FDA's Center for Biologics Evaluation and Research (CBER). Nonetheless, Pazdur inserted himself into the decision process. It was at Pazdur's behest that Dr. Scher and Dr. Hussain were, despite their ties to competing companies controlled by Milken's funds and friends, appointed to the advisory panel that voted on Dendreon's application.
If I recall correctly the FDA tightened up its conflict of interest rules after this debacle but how clean it presently is, is anyone's guess.
Bush Vs. Obama FDA
Have things changed much during Mr. Obama's presidency since Evelyn Pringle, a columnist for OpEd News and investigative journalist referred to "crooks in the current Bush Administration's FDA":
The steady leaking of insider information about products under review by the FDA has caused enormous losses for average American investors since the Bush Administration took control of the agency six years ago.
More On FDA's Impartiality
The more I look the more information I find on allegations of impartiality. As an investor this worries me. I expect the referee, the judge to be fair. But I read disturbing allegations that it has not always been fair. Dan Berger and Mike Adams in a satire piece compared US to China (I saw the cartoon on Horowitz's page):
The difference between China and the USA: China executed its top FDA official for accepting bribes from drug companies. In the US. such officials get promoted.
Dr. Leonard G. Horowitz, author and ex-Chief Professional Advisor for Henry Schein, Inc (HSIC) in a disturbing piece makes a number of allegations such as:
It turns out that multi-million-dollar heiress, Dr. Hamburg, married to leading hedge fund executive and "artificial intelligence" investor, Peter Fitzhugh Brown, fast-tracks FDA approvals of drugs and vaccines profiting her and her husbands partners at the expense of We The People, especially our children...
Now if these aristocratic links to special interests and her Rockefeller Foundation and Rockefeller University dual trusteeships are insufficient grounds for suspicion, Dr. Hamburg's Husband, Peter Fitzhugh Brown's leadership of one of the best performing hedge funds in the world, should raise your concern.
As a retail investor, I am indeed concerned. In another disturbing allegation, Consumers for Dental Choice, wrote a letter to U.S. Senate Finance Committee:
FDA's dental amalgam rule ... is manifestly tainted by Commissioner Margaret Hamburg's surreptitious involvement while she held a financial interest in the nation's top amalgam seller, an interest which she admits required her recusal from the issue. After participating, Commissioner Hamburg orchestrated her staff to deny this fact and cover up her involvement. She recused herself too late for the rule to be changed, then immediately initiated a scheme with Henry Schein, Inc., to undo her recusal - despite ethics rules prohibiting re-entry after recusal - so she could again start regulating (presumably regulating favorably) her million-dollar corporate benefactor. Hamburg then enlisted her hedge fund trader husband - while his fund was trading in Henry Schein stock - to participate in internal FDA deliberations and learn inside information about FDA decision-making.
Faced with the public outcry about her improper behavior, Dr. Hamburg inappropriately brought her hedge-fund trader husband into FDA's inner circle to help craft FDA's strategy to conceal her role in the amalgam rule. Peter Fitzhugh Brown was part of an e-mail round robin which included Principal Deputy Commissioner Sharfstein, the chief press aide, and FDA lawyers. Brown even advised Sharfstein and press official George Strait what to do, and in turn an FDA lawyer provided advice to the entire group, including Brown. Exh. I, Exh. N, Exh. O.
In light of this background -- a less than perfect FDA and hedge funds and lobbyists who try to influence the FDA -- it is extremely important for the Adcom members and the FDA to stick to science and not let the type of disaster that occurred with Dendreon happen with Arena.
Unfortunately, in 21st century, in the most modern country in the world, we still need to worry whether the government will side with science, or what Cramer calls "fiction."
Cartoon courtesy of Dan Berger and Mike Adams.
Disclosure: I am long AVNR, ARNA.
Disclaimer: Please bear in mind that I am not an neither an investment adviser nor an authority in the bio-pharma sector. Please do your own research before making any investment decisions.
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