Drug Stock ABCs: Part 1

With so many technical definitions to remember, investing in the pharmaceutical and biotechnology industries can be difficult. This three-part series covers the terms and definitions that investors need to know in these industries; we hope it will both serve as a handy quick reference guide and make understanding these companies easier.

This first piece deals with general words used throughout the biotech and pharmaceutical industry in regards to the regulatory process for getting drugs approved for marketing. The second and third articles cover the clinical trial process and general terms used in the marketing of drugs.

The U.S. regulatory process
Understanding the U.S. Food and Drug Administration and the alphabet soup that pharmaceutical companies use to describe the regulatory process can be a nightmare for beginning biotech investors. Looking at the process of getting drugs to market in the U.S. is a great place to start, considering that the U.S. is the world's largest market for drugs.

FDA: The Food and Drug Administration is the U.S. regulatory agency that is charged with ensuring the safety and efficacy of new drugs and medical devices. The FDA has several other mandates as well, like ensuring the safety of the nation's food supply.

Investigational new drug (IND): Whenever a drug developer wants to start testing a compound on humans, it has to file an IND with the FDA for permission to begin testing.

When you hear that a biotech firm like Exelixis (Nasdaq: EXEL  ) filed an IND for a drug candidate, you know that it is about to begin phase 1 testing of the drug in humans.

NDA/BLA: When a pharmaceutical company wants to start selling a drug, it has to compile all the statistical data from the animal studies and human clinical trials the drug has been tested in. It then files a New Drug Application or similar Biologics License Application and waits for the FDA to respond.

Approvable letter: If the FDA finds that a drug is acceptable for marketing (except for a few conditions that still need to be met), then it will issue an approvable letter in response to the pharmaceutical firm's NDA or BLA.

After an approvable letter has been given, a drug company can correct the outstanding issues or concerns that the FDA has with the drug and file an approvable letter response. If the agency is satisfied with the response, it will fully approve the drug for marketing. This is exactly what happened to Rule Breakers pick CV Therapeutics (Nasdaq: CVTX  ) when it finally persuaded the FDA to approve its angina treatment, Ranexa, three years after receiving an approvable letter on the drug.

Once a company files a response to an approvable letter, the FDA will either grant it a class 1 (60 days) or class 2 (180 days) review period. The class 2 review is usually reserved for companies that file substantially new information about their drug in their response letter.

Fast-track designation: I'm always shocked to see shares of a pharmaceutical company up after it announces that it has received "fast-track designation" for one of its drug candidates. The FDA bestows this honor upon almost any company that asks for it and has a drug for an unmet medical need. Somehow, shares of small drug developer Pharmaxis (Nasdaq: PXSL  ) jumped 17% last year upon receiving this easily predictable designation for its cystic fibrosis treatment.

Priority review: When a drugmaker files an NDA or BLA, it will either receive a standard or priority review from the FDA. If a drugmaker receives a standard review, it has to wait up to 10 months (usually) for the FDA to decide whether it can market its drug.

Compounds for conditions with unmet medical needs like cancer or HIV, and compounds that may "be a significant improvement compared to (currently) marketed products" will usually receive a priority review in which the FDA rules on their marketability in six months or less. Dendreon's (Nasdaq: DNDN  ) cancer compound Provenge received a priority review earlier this year, since it filed a BLA to use the drug in late-stage prostate cancer -- a disease without any good treatment options at present.

It's also important to note that drugs that get fast-track designation or a priority review have no greater chance of making it to market than do other products.

PDUFA date: PDUFA stands for Prescription Drug User Fee Act. This term simply references the day by which the FDA plans on giving a response to a drugmaker's NDA or BLA filing.

Orphan drug designation: An orphan drug is a product for a disease that affects fewer than 200,000 people in the United States. An orphan product gets an extended level of patent protection (at least seven years from the date of marketing approval) as well as subsidies on the regulatory fees it has to pay to the FDA. There are also some competitive protections that come along with an orphan-drug designation. Genzyme (Nasdaq: GENZ  ) received orphan-drug status on its enzyme-replacement therapy Cerezyme back in 1994, when it was approved to treat the very rare Gaucher's disease.

Investors just getting their feet wet with drug stocks may feel intimidated by all of the new terms being thrown about. If you want a helping hand in investing in the fun biotech sector, come and take a free trial offer to our Rule Breakers newsletter service.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. Exelixis and CV Therapeutics are Rule Breakers recommendations. The Fool has a disclosure policy.


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