It's a good thing the shorts largely stayed away from Alimera (Nasdaq: ALIM), or these last two days of skyrocketing shares would have been particularly painful. Of course, getting a first drug approved tends to have that effect.
Shares were up 35% yesterday and another 70% today as news broke that its eye drug Iluvien received approval to treat diabetic macular edema (DME) in seven major European countries.
To understand why approval caused a 70% pop (or a two-day double for those with the foresight to invest on Monday morning) it's important to look at Alimera's rocky history. Iluvien has been twice rejected by the FDA, once in 2010 citing manufacturing concerns and access to additional trial data, and again last November. In fact, the November denial was worse, since the agency doubted the drug's risks were worth the benefits to patients and requested two additional trials from the cash-strapped drug maker. The company lost 82% over the course of that month -- quite an accomplishment, even in the land of biotech.
The damage didn't stay with Alimera either. pSivida (Nasdaq: PSDV), which licensed technology to Alimera, saw its shares slashed in half. Fortunately for investors who stuck it out, shares have doubled since late last week, undoing some of the damage from the earlier FDA rejection.
What does approval mean for Alimera? Most importantly (besides revenue), it gives them options. They can try to set up a licensing deal with a Big Pharma company, likely with a nice upfront payment combined with a royalty stream. Or Alimera could potentially be attractive enough, with its $125 million market cap (and even smaller enterprise value), that instead of bothering with a deal, a larger player could just scoop them up. Pfizer (NYSE: PFE) is often mentioned here since it has a stake in pSividia and is working on its own eye implant. Iluvien is never going to be a European-only blockbuster, but analysts expect peak sales from just the seven countries alone to be about twice its market cap. If it expands into the rest of the continent, that will double again. Finally, if no one comes knocking, Alimera could go it alone. This is the least-attractive option for investors – it's fraught with risk, and we've seen small biotech Savient Pharmaceuticals (Nasdaq: SVNT) struggle to effectively market its gout drug Krystexxa when their "for sale" sign failed to attract any deep-pocketed players.
Also, I don't want investors to think that European approval is an automatic pathway to U.S. approval. For example, Cell Therapeutics (Nasdaq: CTIC), which recently received a CHMP endorsement for non-Hodgkin's lymphoma drug Pixuvri -- meaning European approval is fairly likely -- has struggled mightily with the FDA. Pixuvri received a unanimous 9-0 vote against it from an FDA advisory panel, and after negotiating a resubmission after receiving its official rejection, pulled Pixuvri's marketing application before facing another panel of experts. The FDA dances to its own beat, and if it has safety concerns, only positive trial results are likely to allay them.
The best approach
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