In Sickness and Wealth will always try to identify the attendant risks that go hand in hand with investing. In general, the greater the risk, the greater reward. Nowhere is this more evident than in biotechnology.
Vast sums of money have been made (and lost) in the area of biotechnology. Given the massive increases in the prices of stocks like Amgen, Biogen, Genentech, Gilead and dozens of others, it comes as no surprise that investors want to find the next biotech wonder. The large price swings in some of the early and mid-stage biotech companies are partially the result of speculators trying to make a fast killing. On the other hand short sellers (investors who are betting that prices will decline) trying to make a quick buck on overpriced biotech will try their hardest to push stock prices lower. Early stage biotech companies usually have a very small number of shares outstanding and thus small market capitalizations (market cap is the number of shares times the price of the stock.). Hence, it doesn’t take much to send then soaring or plunging.
But perhaps the largest single contributor to volatility in this adventurous sector is the FDA clinical trial process. Recent history is replete with example of skyrocketing stock prices as a result of FDA approval of a drug. The promise of a successful drug can propel stock prices into the stratosphere. But this risk/reward is a two sided coin. No one knows this better than stockholders in a small company called Tetraphase Pharmaceuticals (Ticker: TTPH). Up until a few weeks ago, TTPH was sailing higher on the hopes that its promising new antibiotic, eravacycline, would pass phase 3 studies and obtain final FDA approval. The stock had rallied from the mid-20s all the way past $40 per share. But the folks at the FDA, always having the safety of the American public front and center, had a different idea. Turns out stage III data weren’t so convincing and the FDA put the kibosh on the drug for now. When bad news hits early stage biotech, the results can be devastating. It’s not unusual for a company to drop 30-40 percent on bad news. TTPH however was eviscerated and the stock went from $40 a share to $9.5 overnight. OUCH!
Readers, if I can tattoo one thing in your mind with this topic. Be particularly careful out there. The hopes of all of these companies lies in moving from stage to stage successfully and as quickly as possible with the ultimate goal being final approval by the FDA. If there is even a hint of ineffectiveness or serious side effects, the FDA will not allow the company to proceed and the hopes for the new drug and the firms stock price will likely lose altitude quickly—hence the term clinical trial roulette. You need ice in your veins and a huge appetite for risk to play in this area.
In light of this and in light of the importance of the FDA approval process we thought it prudent at ISAW to give a brief tutorial or outline of the FDA Clinical Trial process.
FDA Clinical Trial Process
The spiraling of prescription drugs is a hotly debated issue and poses a significant burden to individuals, families, and payers (the government and insurance companies being two of the prime payers of healthcare in the U.S. One such drug, Advate, which is used for hemophiliacs, runs at $461,000 dollars. Solvadi, one of the newer drugs used to treat Hepatitis C, costs $84,000. In the first issue of ISAW, we have a chart of the 8 most expensive drugs in the United States. Many of them cost more than a house and several exceed the average 401k balance in the U.S.. In recent years, these sharply rising drug costs led President George Bush to sign landmark legislation called the Medicare Prescription Drug Modernization and Improvement Act.—otherwise known as Medicare Part D. The act created a federally subsidized program meant to defray the costs of prescription drugs, particularly to the elderly. Though there are many contributing factors drug prices, their expense is due in part to the cost involved in completing the FDA approval process.
In order for pharmaceutical and biotech companies to market their drugs and biologics, companies must receive FDA approval, a rigorous, expensive, and time consuming process that can take over a decade to complete. Of 5000 compounds discovered in the pre-clinical stage, only a handful will make it through the entire FDA approval process. Therefore, companies have to cover not only the cost of successful development of a single drug, but of thousands of drug candidates that never make it to market.
The Phases in the FDA Approval Process
In the pre-clinical or drug discovery phase of the approval process, researchers look for potential new compounds to treat targeted diseases. Once a compound has been identified and refined to a formula that can be tolerated by humans, its toxicology is tested in several species of animals and living tissue. The process takes roughly three and a half years. During this phase researchers look for:
- how frequently it should be administered and correct dosage level
- the best delivery system (oral, topical, intravenous, etc.)
- short- and long-term survival of the animals
After pre-clinical testing is completed, the company then files an Investigational New Drug Application (IND) with the FDA. Fast Track Designation is an expedited review of a drug that is given to a company whose drug or biologic makes both a product and a marketing claim that addresses an unmet medical need. It can be granted at any point after the FDA approves an IND.
If the FDA approves the IND, the experimental drug then moves into Phase I human testing. In this phase, the drug is tested in a small number (under 100) of healthy participants. Researchers look to see how well the drug is tolerated, how it is processed by the human body, and the correct dosing. This process takes a year. The drug in testing undergoes pharmacokinetic and metabolic studies. In addition side effects are studied as well as how the drug is excreted from the body.
Once a compound is found to be well tolerated in healthy individuals, it is then tested for effectiveness for a targeted disease in a small number of patients. In this phase 100-300 people are administered the investigational drug to see if it actually works, and to determine its short-term effects. This process takes about two years. The goal is for FDA and Sponsor to communicate and gather and analyze data on disease efficacy, safety and side effects. Control groups that receive placebo’s or other drugs are compared with groups that receive the drug being tested.
Phase III is a large-scale study of the effectiveness and side effects of the drug in a larger population, usually ranging from 1000-3000 patients. If the drug is submitted to the FDA for approval, the FDA will look at the Phase III data to determine if the drug is safe and effective. They will also see examine the effects of differing dosages. Aside from testing the drug’s viability, the company producing the drug also determines the logistics involved in creating a large supply of the treatment. Phase III of the FDA approval process takes about three years. When phase III results are finished a CDER team of physicians, statisticians, chemists, pharmacologists and other scientists review all the data from the trials as well.
New Drug Application (NDA)/ Biologics License Application (BLA)
If the drug proves to be safe and effective, the company then files an NDA or BLA with the FDA. NDAs and BLAs are typically 100,000 pages long and include results of human and animal trials as well as information on how the drug is manufactured. It usually takes the FDA 1-2 years to complete the review process and approve a drug. However, there are cases when approval can be accelerated.
- At the time of application Priority Review can be granted to drugs that treat an unmet medical need.
- Orphan Drug Status is granted to drugs that treat rare diseases, or diseases that have no other available treatments.
- Since the PDUFA (Prescription Drug User Fee Act) was passed in 1992, more than 1,000 drugs and biologics have come to the market, including new medicines to treat cancer, AIDS, cardiovascular disease, and life-threatening infections. PDUFA has enabled the Food and Drug Administration to bring access to new drugs as fast or faster than anywhere in the world, all while maintaining the same thorough review process. Under PDUFA, drug companies agree to pay fees that boost FDA resources, and FDA agrees to time frames for its review of new drug applications.
- The Accelerated Approval program allows earlier approval of drugs that treat serious diseases and that fill an unmet medical need. The approval is faster because FDA can base the drug’s effectiveness on a “surrogate endpoint,” such as a blood test or X-ray result, rather than waiting for results from a clinical trial. The Fast Track program helps reduce the time for FDA’s review of products that treat serious or life-threatening diseases and those that have the potential to address an unmet medical need. Drug sponsors can submit portions of an application as the information becomes available (“rolling submission”) instead of having to wait until all information is available.
Phase IV and other considerations
Once a drug has received FDA approval it is then marketed to the general population. Short- and long-term side effects continue to be monitored and results are submitted to the FDA. Companies will also look for additional indication for the drug. In order for the drug to be approved for a new indication, it must receive approval from the FDA. Keytruda, Opdivo and Yervoy are all examples of drugs being considered for additional indications. While initital approval was for late stage melanoma, the FDA is on the verge of approving this highly effective anti-cancer agents in other cancers such as lung cancer, kidney cancer, etc.