FDA Decision Postmortem: Genelabs

• June 28, 2001
• Paul Ruggieri

If you have any comments, questions, or
thoughts on this article or on anything to do on biotechnology or medical
technology feel free to email me at prugg@tradingmarkets.com.

Genelabs
Technologies
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hard-to-treat diseases, was given the bad news June 26 by the FDA on its new
drug application. The company had
been waiting for the FDA to render a decision on its potentially first
revenue-generating drug. Unfortunately,
like so many before them, the FDA decision was not positive and the company’s
future suddenly became very bleak as the stock lost close to half its value. The FDA did not approve the application for the drug Aslera to treat the
very difficult disease, systemic lupus erythematosus. The agency had serious concerns about its effectiveness and safety, based
on the data it reviewed. 

Lupus — a growing
market — is
very common in women and classified as an auto-immune disease
(same class as rheumatoid arthritis).  The
disease involves the production of antibodies in the blood that attack many
organs in the body. There is no
cure for it and in fact, today’s treatments are very inadequate and carry many
unwanted side effects. The best
doctors can do is ameliorate the flare-ups while the disease slowly progresses.
There has not been a new drug developed to treat lupus for the past 40 years.
Genelabs (and its investors) hoped that Aslera would be the first to
break the drought. Unfortunately,
investors again realized how cruel the FDA can be.

Could
investors have seen this negative decision coming? Several months prior to this decision, the FDA advisory committee met to
discuss the company’s new drug application. A smaller advisory committee normally meets several months before the
full FDA to initially vote on a new drug’s application. If the advisory committee says no, then that is the end of the story.
If the committee votes yes, then the full FDA has the final vote several
months down the line. 

Most of the
time, if the advisory committee does approve a new drug application, the full
FDA usually gives its stamp of approval and investors become very happy. However, this is not an absolute and Scios Corporation
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the FDA’s unpredictable will. Scios
recently had its new drug to treat congestive heart failure approved by the full
FDA. It took two more years,
many millions of dollars, and another vote by the FDA to get Scios’ first new
product approved for clinical use. Now
the company has new life.

When the
advisory committee met with Genelabs several months ago, it decided not vote
on its lupus drug. There were
concerns about some side effects and whether or not the drug actually worked in
the clinical data presented. Sometimes,
the appropriate advisory committee will not vote on a drug and passes the buck to
the full FDA so it can make the hard decisions.
My own feeling is that the FDA really wanted to approve this drug because
lupus is a very difficult disease to treat and, as I mentioned, the drugs on the
market today are fraught with problems.Lupus is one of those large virgin disease markets up for
grabs and whatever company comes up with a decent effective drug with minimal
side effects will richly reward its investors. Companies with drugs in these virgin disease markets up for FDA approval
can be very volatile for investors. It
is also one of those big-market diseases that doctors do not understand. As the saying goes in medicine, if you can’t understand the science of
a disease, how can you develop an effective treatment for it? 

I believe
the FDA is dying to approve a new drug to treat lupus if the clinical data is
somewhat convincing. In addition,

lupus patients hunger for an alternative drug to what is currently available, and
the FDA knows this. However, they
just could not bring themselves to give the nod to Genelabs’ new drug because
they had serious doubts about its effectiveness after interpreting the data.
If this had not been the first new drug for lupus to come along in 40 years, the advisory committee would have shelved this drug several months ago.

Could Genelabs’ stock activity before the decision
have yielded some insight on the FDA’s
looming hatchet? The stock price
had been on a slow decline weeks before the final FDA meeting. On the day of
the decision, it opened up 25% on the downside. However, by the end of the day, it had recovered enough to close down
only slightly. The FDA’s decision
was not released until after the markets closed. 
Were the sellers at the beginning of the day trying to tell the rest of
us what the FDA was thinking?

Where does
Genelabs go from here? It will
probably dwindle for a while, but I suspect ultimate survival may be difficult. The company does not have a drug pipeline to fall back on and it was
banking on this breakthrough drug for future revenue.
It will try to meet with — and obtain guidance from — the FDA, in the hopes
of resurrecting its drug for a future vote. However, complete resurrection will take years and many millions of
dollars.  

Until my next
update,

Paul

I have been
investing/trading in medical and biotechnology stocks for years. The one common
theme is that this is a high risk/reward endeavor. When you are correct, many
times you are richly rewarded. When you are wrong, you can be badly punished.
Please keep this in mind and hedge/protect yourself appropriately when
trading/investing in these stocks.