Will the FDA Approve Vanda's Hetlioz?

It's easy to see how Vanda Pharmaceuticals (NASDAQ: VNDA  ) can gain Food and Drug Administration approval for its sleep aid Hetlioz by the end of the week. In briefing documents for an advisory panel, the FDA seemed to be convinced the drug works. The panel of outside experts concurred.

Normally that would make Hetlioz a shoo-in for an approval, but Vanda could still pop substantially if Hetlioz is approved. The stock trades substantially below its 52-week high, suggesting investors are being a bit cautious going into the binary event.

And for good reason
Hetlioz is up for approval in blind patients who have trouble sleeping because their circadian rhythm can't be set by light. Measuring efficacy for those patients isn't easy. Vanda changed the efficacy measurement while the clinical trial was going on. That's never a good sign, despite the company's claim that the FDA was in on the decision.

The main argument of the advisory panel seemed to be that there aren't any drugs available to treat this condition, so why not approve Hetlioz? While I fully agree with that libertarian view to drug approvals -- let doctors and their patients decide if the drug is appropriate -- the FDA believes it's smarter than than patients and has a duty to protect patients, despite their wishes.

Sarepta Therapeutics (NASDAQ: SRPT  ) is a perfect example. There's a very vocal community of patients' parents clamoring for approval of eteplirsen to treat Duchenne muscular dystrophy, but that hasn't kept the agency from asking Sarepta for more data before approving the drug.

InterMune's (NASDAQ: ITMN  ) idiopathic pulmonary fibrosis drug, pirfenidone, was in a similar situation where the advisory panel's main argument seemed to be over a lack of treatments. The FDA went against the committee's vote and asked for more data before approving the drug.

Of course, InterMune got a negative review by the FDA before the committee meeting. Vanda generally received passing marks, so an approval seems more likely.

The biggest risk at this point is that the approval decision is made by a larger contingency at the FDA than those that wrote the briefing documents. If they're a little more suspicious of the data, Vanda could get sent back to the drawing board.

Based on what we know, I think an approval is more likely than not, but nothing is guaranteed, and it's reasonable that investors are being cautious going into Friday's PDUFA date.

Be careful of the pop
Even if Vanda spikes up after an approval, I expect investors to eventually take a "show me" attitude toward Hetlioz's sales. We've seen this before, when Vanda's last schizophrenia drug Fanapt was approved in 2009.

VNDA Chart

VNDA data by YCharts

Hetlioz works on only 20% of blind patients with sleeping issues and will have to compete with cheap melatonin. Investors are going to want to see sales headed toward analysts' peak sales estimates around $500 million. Otherwise the stock might be counting sheep.

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