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Trading The FDA, Part I

  • August 11, 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.

The fundamental key to any trading strategy is knowing when
to take a position in a stock — and knowing when to abdicate that position. 
Unfortunately, most companies never help you in perfecting this basic
strategy, except of course those in the biotechnology sector. This is what I love about investing in
biotech companies,
among
other things, and this is what separates them from the rest of the pack. 

There is an inherent presence influencing the life of every
biotechnology company and this presence is called the Food and Drug
Administration, the FDA. As an
investor in the biotech industry, I thank the FDA for being there because
its guidance and timelines allow me to plan my trading strategies. No
other industry has such a unique entity watching over its individual companies
the way the FDA does for the biotechnology industry.  

In this two-part
lesson, I hope to show you how, as a trader, you can take advantage of the FDA’s influence on individual companies.
I will also provide insight as to how the FDA thinks when it is
deciding the fate of a new drug application, and guide you around FDA new drug
decisions. However, it is up to me to correctly interpret the legend of that map
before committing to any trade. With
this lesson, and my next, I will help you understand how this map is put
together and how to use it to maximize your trading strategies. 

First Stop:
Investigational
New Drug Application (IND)

Any biotechnology company with a potential new drug starts
the entire process in the laboratory. It
takes several years for a company to produce or identify a new compound in the
lab and continue through preclinical testing in animals. Once the testing has been completed, often the company will publicize the
animal data at a scientific meeting. Even
at this early stage of the drug development process, investors can take
advantage of this opportunity by knowing the dates of the key scientific
meetings that grab investors’ attention.   

For instance, the American Association
for Cancer Research (AACR)
is the showcase meeting in April for the presentation of raw scientific data in
the field of cancer research. Positive
preclinical data presented at this meeting on a potentially new cancer-fighting
drug will move a company’s stock price, despite the fact that human clinical
trials are several years from completion. Most
of the time, the abstracts for the papers being presented at this and other
meetings arrive in physicians’ offices a month before the meeting. Interestingly enough, many of the companies presenting, especially at the
major cancer meetings in April and May will make their move four to six weeks

before the start of the meeting. 

Any
drug showing efficacy against cancer cells in a test tube, lab animal
or human being, will get a reaction from investors.Once a company has put together convincing preclinical
animal data, it will approach the FDA and file for permission to begin human
clinical trials.  This asking for
permission takes the form of an Investigational New Drug
Application, or IND. This
represents the first hurdle for a company to negotiate along the road to
ultimate FDA approval. Most company
filings for IND applications occur several months after data was presented at a
major medical meeting. The company
usually hopes to build upon the momentum from the meeting as it approaches the
FDA for the first time. If an IND
is granted, it allows the company to begin human clinical Phase I trials.
Approximately 85% of INDs will get approved by the FDA and often the news
causes a short-term gain for the stock, particularly if the targeted disease
market is large.

Clinical Trial Phase

Once the FDA approves an
investigational new drug application, then the real work for a company begins. Phase
I human trials are designed to study the safety of a new drug and determine the
potential side effects at specific doses. Phase
I studies are not designed to determine whether or not a new drug actually
works. 

Once Phase I data is obtained, a company then will begin a
Phase II study to actually look at whether their new drug is effective against
the targeted disease. Often
companies will present positive Phase II data at clinical medical meetings
because their presentation will add momentum to the stock price. 
When I look at the results of Phase II clinical trials, particularly
those testing cancer drugs, I want to see clear-cut results in the new drug’s
ability to decrease the tumor burden and increase patient survival.
Many times, the new cancer drugs being tested are aimed at those patients
with advanced disease. If Phase II
clinical trials hint at increasing survival in this type of patient population,
then this may be an indication of good things to come for investors in the all-important
Phase III trials.

The next step a new drug needs to go through before it gets
the privilege of coming before the FDA is the final stage of human clinical
testing.  Phase III clinical trials
are carried out to show that the new drug is more effective and safer than the
current treatment available. This
is where the money is for most companies. Convincing
Phase III clinical trials are absolutely necessary for a company to be
successful in lobbying the FDA for approval of a new drug. Most companies today must carry out two, large-scale
(1,000 patients or
more), double blind Phase III clinical trials that show the new drug’s
effectiveness and safety in a large population of patients, before getting a date
with the FDA.  

Be leery of a small
patient number in presented Phase III clinical trials, because the FDA will take
notice when it is time to vote. Small-number trials usually result in the FDA wanting more data, a request that stocks
do not react well to. In addition,
make sure the company’s Phase III data supports the endpoint of the clinical
trial. The endpoint is stated at the beginning of the trial in the protocol to
the FDA. 

Convincing positive Phase
III trial results will undoubtedly move a company’s stock price, and this move
is compounded if the drug being tested falls into a high-profile market such as
cancer or diabetes. The move by a
stock will be even greater if the new drug is aimed at a virgin disease market,
one where there are currently no effective treatments.
I consider the following diseases as virgin markets and huge
opportunities for companies: 
spinal
cord trauma, irritable bowel disease, systemic lupus, hepatitis, AIDS, stomach
and pancreatic cancer, and blood product substitutes. 

Just a quick note
regarding Phase IV clinical trials. A Phase IV clinical trial is carried out
after a drug has been approved. This type of trial revisits safety and monitors reported side effects, once the drug has been
used by thousands of patients. Phase IV trials usually offer investors no
opportunity to take advantage of stock price movements and have no substantial
influence on the stock price of a company. Unless, of course the data collected
leads to a drug recall.

Again, the
showcases most companies use to present their data are the major medical
meetings throughout the year. For
cancer drugs, these meetings include the American Association For Cancer
Research (AACR) in April and the American Society of Clinical Oncology (ASCO) in
May.  For diabetes drugs, the
American Diabetes Association meeting in June is the premier showcase for Phase
III trial data. For heart-disease
drugs, the American Heart Association (AHA) meeting in November is very high-profile for the presentation of
Phase III clinical data, as well as the meeting
of the American College of Cardiology in March.

New Drug Application
(NDA): Inching Closer to the FDA

Once a company has presented convincing data from two large-scale
Phase
III trials on the efficacy and safety of their new drug, then it’s time to
approach the FDA. The vehicle used
by companies when approaching the FDA for approval is the New Drug
Application or NDA. The
filing of a NDA starts the process toward a final date with the FDA advisory
board. It has become a pattern to
watch companies present positive Phase III data on a new drug at a major medical
meeting and then, one to two months later, file for a new drug application with the FDA. This approach is truly a one-two punch for investors and provides two
opportunities for traders to be active.  

Often
investors do reward the company with the filing of a new drug application,
particularly if the new drug targets a large market.
Two recent examples of this involve ImClone Systems

(
IMCL |
Quote |
Chart |
News |
PowerRating) and Icos
Corporation
(
ICOS |
Quote |
Chart |
News |
PowerRating). Both companies
announced the filing of new drug applications on June
28, 2001.  ImClone Systems filed just over one month after presenting its data at
the biggest cancer meeting of the year, on behalf of its new monoclonal antibody
drug C225 to treat metastatic colorectal cancer. The stock was up 5% for the day. 

Icos
filed less than one month after presenting data at the year’s largest meeting of
urologists. It
filed on behalf of its new drug to treat impotence and rose close to 7% for the
day.

Now, filing for a new drug application with FDA doesn’t
necessarily guarantee acceptance. The
FDA will ultimately approve approximately 85% of new drug applications for
clinical use. In addition, the FDA
usually takes at least one year to evaluate the application data and decide
whether or not to approve the drug. There
is one exception to this timetable and that involves the “fast track”
designation. After an initial
review of the new drug application, the FDA may conclude that the new drug being
presented can serve an unmet medical need if it does get approved. New drugs with potential to treat patients who have no effective
alternative, such as those with metastatic pancreatic cancer or Lupus, can be
given “fast track” status. 

A
fast-track designation for a new drug means the FDA will shorten its application
process to six months, and facilitate the process toward potential approval with
what is known as a “rolling NDA.” A rolling NDA allows the company the luxury to submit portions of the
Phase III clinical data as it becomes available, and not have to wait for the
entire trial to end before submitting the supporting data.
The designation does not guarantee approval. This was clearly evident when the FDA granted fast-track status to MGI
Pharma’s
(
MOGN |
Quote |
Chart |
News |
PowerRating) new drug to treat pancreatic cancer refractory to current
chemotherapy on June 28. The stock
rose 14% on the announcement. 

One final FDA designation that investors do reward is when
a new drug is designated as “orphan status.” The orphan status is given to drugs designed to treat rare medical
diseases, and conveys seven years of market exclusivity if the FDA does approve
it. The
classic example of this is Biogen’s
(
BGEN |
Quote |
Chart |
News |
PowerRating) main revenue-producing drug to
treat multiple sclerosis. 

Final Thoughts

The road to getting a new drug approved is an arduous one
at best, and the FDA has laid down the ground rules for all companies. It does offer several stops along the
way as opportunities for investors to take advantage of potential movement in
stock prices. In
Part II, I will focus on the biggest prize of all, the FDA approval meeting
date, and will provide insight as to what to look for in stock price movement leading
up to this meeting.



Good luck.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.

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