A Short-Lived FDA Approval Pop

I've never been so right and so wrong so quickly.

On Monday, I predicted that Vanda Pharmaceuticals (NASDAQ: VNDA  ) would gain Food and Drug Administration approval for its sleep aid Hetlioz, but that the approval was far from a sure thing, providing for a potential pop on approval.

Sure enough, Vanda zoomed right through the closing price high it set in November after the approval was announced today, only to run right back down to where it started the day.

VNDA Chart

VNDA data by YCharts

Approval is only half the battle
The pop was short lived most likely because investors think Vanda still needs to prove it can sell Hetlioz. In and of itself, an approval isn't worth anything.

Hetlioz is approved to treat blind people who can't use light to reset their circadian rhythm, called non-24-hour sleep-wake disorder. Vanda said there are approximately 80,000 Americans with the disorder. The FDA pegged the number at "as many as 100,000."

In reality, we don't have any idea how many people might use Hetlioz. There aren't any drugs approved to treat the condition, so there's nothing to compare it to. Many people with non-24 take melatonin, which is available over the counter and will, presumably, be substantially cheaper than Hetlioz.

We also don't know how much Vanda is going to charge for the medication. When the price is announced -- potentially at the scheduled conference call on Monday -- investors will get a clue as to how many patients Vanda really thinks it can capture. The higher the price, the more likely Vanda is worried about getting patients onto the drug.

We've seen this before... with Vanda, in fact. The biotech gained FDA approval for its antipsychotic Fanapt in 2009, but its partner Novartis (NYSE: NVS  ) hasn't been able to sell it to very many patients. In the third quarter, Vanda received just $2 million in royalties from Novartis.

We've seen drugs for other diseases with large potentials fail to live up to their potential. Recently launched obesity drugs from Arena Pharmaceuticals (NASDAQ: ARNA  ) and VIVUS (NASDAQ: VVUS  ) are good examples. Despite the obesity epidemic, doctors and patients have failed to embrace Arena's Belviq and VIVUS' Qsymia in large numbers. Like Hetlioz, Belviq and Qsymia have a cheap alternative: diet and exercise.

I'm not going to doom Hetlioz to failure before it's even launched, but I think investors are right to take a wait-and-see attitude. With a market cap around $440 million, there's plenty of room to move higher. Hetlioz doesn't even have to be a blockbuster; a couple of 100 million in annual sales for Hetlioz would get a long-lived spike.

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