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Fewer Drug Approvals? Buy!

A report released earlier this week stated that the number of new drugs approved by the FDA is down by nearly one-third for the year. Unfortunately, investors in drugmakers already know that all too well.

According to the report by Friedman, Billings, Ramsey, only 38 new drugs secured FDA approval through July of this year, down 31% from the year-ago 55 drugs. Of those, there were only seven new molecular entities -- drugs with a completely different mechanism of action than those currently on the market. New molecular entities often get additional scrutiny from the FDA, because there's less known about the new class of drugs.

Much of the increased scrutiny probably stems from the backlash over the deadly side effects seen in Merck's (NYSE: MRK  ) Vioxx. The FDA would rather be cautious and get more information about potential side effects before a large number of patients start taking the drug. The agency claims that there hasn't been a systemwide tightening of requirements, but the number of approvals clearly tells another story. As a drug consumer, I can understand its caution, but as a drug investor and scientist, I'd prefer to see the science advance.

Examples galore
In June, Sanofi-Aventis (NYSE: SNY  ) pulled the application for its obesity drug Zimulti, after a FDA advisory panel recommended that the drug not be approved because it was worried about Zimulti doubling the rate of suicidal thoughts and behavior. The drug is already approved in Europe under the name Acomplia, so the FDA is clearly being more cautious than its European counterpart.

Earlier this month, Pozen (Nasdaq: POZN  ) received its second approvable letter for the company's migraine drug, Trexima. The first approvable letter was for potential cardiovascular side effects from the combination of the two drugs that make up Trexima. The second regarded an abnormality in a pre-clinical test that checks the potential of the drug to cause cancer. I'm sure Pozen and marketing partner GlaxoSmithKline (NYSE: GSK  ) were more than a little miffed that the abnormality wasn't brought up in the first letter.

Just last week, the FDA rejected Wyeth (NYSE: WYE  ) and Solvay Pharmaceuticals' schizophrenia drug, bifeprunox. Reasons for the drug's failure inlcuded one complex case of a patient who died while participating in one of the trials. While it could be an indication of a larger problem, it was still just one serious adverse event in a rather large clinical trial.

Not just the FDA's fault
The FDA's increased scrutiny certainly helps to explain the decreased approvals, but it's not completely the agency's fault. In quite a few instances this year, the drug companies have tried to sneak one past the FDA.

In June, Encysive Pharmaceuticals (Nasdaq: ENCY  ) received its third approvable letter after essentially refusing to do another clinical trial recommended in the first approvable letter a year earlier. The FDA was worried about the accuracy of the data involved, and Encysive tried to convince the FDA that its existing data was OK, rather than just running another trial. It's generally unwise for a drugmaker to ignore the FDA's recommendations.

Last month, GPC Biotech (Nasdaq: GPCB  ) got an unfavorable recommendation from an FDA advisory committee after it tried to accelerate the approval of its lead prostate cancer treatment, satraplatin. The company tried to gain approval before the planned completion of its phase 3 clinical trial, because it felt the data was good enough for approval. I guess the FDA disagreed.

The other problem contributing to the lack of new drug approvals is a dearth of drugs in the pipeline, especially at large pharmaceutical companies. Some companies have replenished their pipelines by purchasing marketing rights to compounds in the clinic right now, but I would guess that a lower level of New Drug Applications last year at least partly led to this year's the lack of approvals.

What goes around, comes around
Over the last few years, Congress and patient advocacy groups have been hammering the FDA to increase its scrutiny of drugs, in hopes of avoiding another Vioxx situation. But in a few years, after a dearth of approvals, those same groups will be clamoring to get the FDA to lighten up its requirements and spur innovation. In my opinion, it's a seemingly perpetual cycle.

The downturn in approvals makes this the perfect time to start investing in pharmaceutical or biotech companies. There's plenty of value out there; investors just need to find the companies with the best chances of turning approvable letters into approved, marketable drugs.

The Fool's market-beatingRule Breakers newsletter has picked quite a few drugmakers. Click here to take a look at all our recommendations with a free 30-day trial.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article.  Glaxo was picked by the Income Investor team. The Fool's disclosure policy has no side effects, unless you count an increased sense of well-being.

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