The Food and Drug Administration seems to be giving out more "refuse to file" letters these days than in years past.
In January, Gilead Sciences
Last week, Delcath Systems
Some pundits think the increase is a sign that the FDA is getting more stringent. I completely agree, but I figure it means the agency is also getting nicer.
Better than a rejection?
Absolutely. A "refuse to file" letter, which comes about two months after filing a marketing application, details what else needs to go into an application before the agency will accept it. It's not a rejection letter and can often be cleared up relatively easily. Gilead, for instance, has already refilled its application.
The math clearly plays out in drugmakers' favor. By having the drug issued a "refuse to file" letter rather than waiting for a complete response letter at the end of the review cycle, the company finds out four to eight months earlier -- depending on whether the drug gets a standard or priority review -- that its drug isn't going to be approved this time around.
Sure, it's not as good as getting it right the first time, but if you're going to be sent back to the drawing board, it's better to know earlier.
Sometimes it really is a rejection
As an investor, you have to read carefully and sometimes between the lines. While some "refuse to file" letters can be cleared up relatively easily, others are a clear signal of a bigger problem.
When Roche and ImmunoGen
Delcath fell 38% the day it received a "refuse to file" notice. Investors are rightfully worried that the company may have trouble answering the agency's questions.
In the case of Santarus' Rhucin, the agency doesn't seem to be satisfied with the clinical trial data. There's an ongoing clinical trial that might be able to satisfy the agency, but the data won't be available for a while.
The new binary event
If the FDA is increasing its issuance of "refuse to file" letters, the cursory scrutiny before the application is accepted will become a new inflection point for companies' shares.
Most small drug companies will let investors know when they've filed their applications. Add 60 days to that and mark it on the calendar as the date the company should have heard back from the FDA about its application being accepted. Keep in mind that the 60 days is a deadline, so the agency can and will let companies know earlier than that. Day trading is never recommended, but that goes double here.
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