The Investor's Guide to the New PDUFA

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Amazing. Absolutely amazing.

The Prescription Drug and User Fee Act, commonly referred to as PDUFA, was set to expire in September, but rather than wait to the last minute, amidst the debt ceiling and practically every other issue that Congress faces, both houses passed the bill. The Senate approved the legislation 96-1 last week, and it was passed in the House by an equally wide margin of 387-5 yesterday.

PDUFA is important for the health-care industry because it provides some assurances of faster reviews in exchange for funding a large chunk of the Food and Drug Administration's budget. For investors, those assurances help with valuing the company and provide for some interesting binary events. Many, but not all, approval decisions happen on the PDUFA date, the goal set by the law for when a decision should be made.

More fees, higher fees, yeah baby
The new PDUFA includes higher fees than the previous version, which you'd think would generally be frowned upon by the companies, but making sure the FDA has proper funding is a small price to pay to ensure the agency can work at a reasonable speed. Fees in the Senate's bill for drug companies will go up 6%, while fees for medical-device makers will more than double.

Generic-drug makers joined the action in this iteration of the PDUFA to fund the reviews of their copycat medications and to fund inspections of foreign manufacturing plants. The latter could be beneficial to larger generic-drug makers such as Mylan (Nasdaq: MYL  ) , Novartis (NYSE: NVS  ) , and Teva Pharmaceuticals (Nasdaq: TEVA  ) that won't have to compete with companies like Ranbaxy, which was accused of falsifying data it submitted to the agency.

Drug shortages
The new law requires drugmakers to give the FDA a heads-up when they expect drug shortages to occur. The number of shortages has increased over the past few years.

Reducing drug shortages is obviously good news for patients who need lifesaving medicine, but drug shortages also provide niches with huge potentials. Spectrum Pharmaceuticals (Nasdaq: SPPI  ) saw sales of Fusilev increase 45% year over year in the first quarter, mostly because of manufacturing delays of a related generic, leucovorin.

Bug killers
The bill contains incentives to make antibiotics for infections with unmet medical needs. That could benefit antibiotic specialists like Cubist and Optimer Pharmaceuticals (Nasdaq: OPTR  ) . Because infections aren't chronic conditions, it's often difficult to make decent profits developing antibiotics.

What antibiotic companies would probably like more is for the FDA to relax a little. Antibiotics have had a hard time getting approved lately.

Keeping those margins up
One amendment didn't make it into the PDUFA: drug importation. Again. It seems to be proposed in nearly every bill that has anything to do with health care and some that don't.

As much as drug importation -- reimportation in many cases -- is a hotbed issue, it's not that big of a deal for drugmakers, since they control how much drug goes into each market. If a country was exporting most of its drug, the drugmaker would just limit sales to that country, forcing the country to use the drugs on its own citizens.

Not out of the woods yet
While it's impressive that the two houses took up and passed the bill well ahead of the expiration of the old PDUFA, they didn't pass the exact same bills, so the two chambers have to meet and iron out differences in the bills before the president can sign it.

Considering the strong votes for the bills in both chambers, the conference committee shouldn't be much of a struggle. But this is an election year; anything can happen.

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Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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