Will the FDA Kill Biotech?

Renowned FDA whistleblower David Graham made headlines again this week by getting permission to publish a paper he authored on the impact of Merck's (NYSE: MRK  ) erstwhile pain pill Vioxx. He concludes that it may have caused somewhere between 88,000 and 139,000 heart attacks since 1999, 30% to 40% of them fatal.

Expected to be published in the prestigious British medical journal The Lancet, Graham's research is sure to capture a lot of attention among doctors, patients, and, needless to say, lawyers. But perhaps more significant than the paper's findings is the story of the publication itself. Graham has maintained the FDA hindered him from publishing this research earlier and that the agency even urged The Lancet to suppress publication.

That claim, revealed in congressional testimony last year, was a baseball thrown firmly into a congressional hornet's nest already buzzing over the withdrawal of the drug itself. Now legislative proposals for FDA reform are coming out and it's time for investors to decide if some hopped-up legislators are a danger to their investments.

Beholden to the FDA
As the ultimate gatekeeper for all prescription drugs marketed in the U.S., FDA regulations are the rules that drug companies -- and their investors -- must play by. So far, one proposal announced this week by Sen. Chris Dodd (D-Conn.) would give the FDA authority to make drug companies continue to study drug safety after commercial launch. He would create a new FDA "Office of Patient Protection" that could yank drugs off the market, pull advertising campaigns, and impose limits on how drugs deemed dangerous are used.

That may sound like sweeping reform, but the reality may not amount to much more than a realignment of what the FDA already does -- with a proposed $100 million in new funding to beef up efforts. The problems with Vioxx, after all, were uncovered by Graham's post-marketing surveillance group within the FDA, and drug companies have long been required to report known adverse events to the FDA's Office of Drug Safety. Post-marketing studies are commonplace, and the FDA has the teeth to act on the results -- just ask AstraZeneca (NYSE: AZN  ) , which has seen its cancer drug Iressa essentially killed on the weight of a post-marketing study, just 19 months after it was approved.

The most important part of Dodd's proposal may be to formalize an arm's-length relationship between a new Patient Protection division and the drug review centers that are funded in part by industry contributions.

But perhaps more important for companies and their investors will be the atmosphere surrounding the reform debate. Already, there are hints the agency may be getting more conservative. Procter & Gamble (NYSE: PG  ) certainly felt the bite when an FDA panel demanded extensive new safety studies on a testosterone patch for female sexual dysfunction -- a move that also hurt Rule Breakers recommendation BioSante (AMEX: BPA  ) , which is developing a similar product. It's impossible to tell if the panel vote was influenced by outrage over Vioxx, but the coincidence certainly has investors on edge.

Biotech under the knife?
For old-guard drug companies, the past several months have been a sort of perfect storm of bad news. But will the malaise of the big boys spread to the high-growth biotech companies we track on our Rule Breakers investment service?

I don't think so. What's good for Big Pharma's goose is not always what's good for the biotech gander. True, biotech companies and their larger brethren have to play by the same rules, but they are playing slightly different games. Big Pharma has come to increasingly rely on me-too products with marginal distinctions from competing drugs, propped up by massive direct-to-consumer advertising. To the extent biotech companies play this game, they'll fare no better or worse than the majors. And while it may be that reform proposals will successfully limit how drugs are advertised or put new safety requirements on mass-market products, most biotech companies are not going down that road.

New cancer therapies, the primary target of many biotech companies, don't need to meet quite the same standards as pain pills and impotence treatments. Most biotech drugs are used by very sick patients, and many, while having side effects, are actually safer than the chemotherapeutics they hope to replace. Moreover, the FDA has shown it's still willing to take risks when it comes to cancer drugs. American Pharmaceutical Partners (Nasdaq: APPX  ) recently got approval for a new formulation of paclitaxel called Abraxane, because the FDA was willing to regard it as a simple reformulation of an existing drug rather than an entirely novel delivery technology in need of additional long-term safety testing.

And far from being an FDA failure, I would argue the FDA's action on Iressa shows that the accelerated approval system works. After all, the idea of an approval based on limited data but contingent on further study means there are unknowns -- and the answers won't always come out they way we'd like. It nevertheless made sense to give patients a drug that had produced some compelling clinical data. The fact that the FDA hasn't had a knee-jerk reaction to pull Iressa from pharmacy shelves indicates it also doesn't regard the approval as an embarrassing mistake it'll seek to avoid with more conservative decisions.

None of this means biotech investors should engage in Schadenfreude at the expense of Big Pharma. When Congress prepares to act, investors are right to be nervous. Dodd's legislation is just the first in what is expected to be a series of reform proposals from Sen. Ted Kennedy (D-Mass.), Sen. Charles Grassley (R-Iowa), and Rep. Edward Markey (D-Mass.).

But to the extent that FDA reform encourages drug companies to focus on novel drugs for needy patient populations, biotech -- often the innovators of such products -- is likely to benefit. Take a no-obligation free trial of Rule Breakers and learn how biotech investors can benefit, too.

Fool contributor Karl Thiel is the newest member of the Rule Breakers team, which talks about all things biotech. He does not own any stocks mentioned in this article. The Motley Fool is investors writingfor investors.


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