Last week, the New England Journal of Medicine published a letter from directors at the Food and Drug Administration clarifying some of the intricacies of its new breakthrough designation for drugs in clinical development. Let's examine how this new designation fits in the context of other expedited approval designations. The differences might seem subtle, but it's important to understand how these labels can impact your investment in a health care company.

Fast-track designation
This designation focuses on therapies that address a serious unmet medical need and allows trial sponsors to interact closely with the FDA in trial design, data analysis, and program development. More importantly, a New Drug Application can be filed in pieces as development progresses, decreasing the time it takes for the drug to reach patients.

One of the most-recent fast-tracked drugs is Alnylam Pharmaceuticals' (NASDAQ:ALNY) Patisiran for the treatment of TTR amyloidosis. Patisiran works by blocking production of the protein that aggregates to cause neuronal and organ failure in patients as young as 2. To date, organ transplants are the only approved treatment, so a pharmacological agent could drastically improve treatment options for this unmet medical need. After a promising phase 2 trial, the FDA hopes that close collaboration with Alnylam will speed phase 3 trials and regulatory filing.

Breakthrough-therapy designation
Breakthrough designation is granted when early stage clinical evidence suggests that the therapy provides a significant improvement in safety or efficacy compared to current standard of care. Like the fast-track designation, this grants drug makers unparalleled access to FDA logistical support as early as phase 1. The goal here is to design trials that expose a minimum number of patients to standard of care therapy in the control group, while maximizing the collection of safety and efficacy data.

According to the letter, 22 drugs received breakthrough designation as of September 30. One drug, Pharmacyclics' (NASDAQ: PCYC) Ibrutinib, gained approval earlier this month. Ibrutinib showed an overall response rate of 68% in an early trial of 111 patients with mantle cell lymphomawho had already been treated with Millenium's Velcade.

Those results prompted the FDA to grant breakthrough designation to promote collaboration, and inevitably to approve the drug after only a phase 2 clinical trial. Analysts estimate that the drugs' improved safety and efficacy profile could make it a $6 billion blockbuster at its peak.

Accelerated approval designation
Accelerated approval is likely the FDA's riskiest undertaking, as it allows a company to file an NDA without long term clinical outcomes studies. Rather, a drug maker may be considered for accelerated approval after trials show a substantial improvement to some surrogate biomarker that is likely to predict clinical benefit. For example, a statin drug might gain accelerated approval after demonstrating a reduction in LDL cholesterol without also showing a reduction in long term cardiovascular risk. This can drastically cut down on the time and cost of clinical development -- if all goes well. 

Sarepta Therapeutics (NASDAQ:SRPT) fell victim to the accelerated approval blues last week, when the FDA announced that it would not consider Duchenne muscular dystrophy drug eteplirsen for the special status. Sarepta had considered submitting an NDA in support of etiplersen after a phase 2 trial with only surrogate marker data in 12 patients demonstrating improvements in walking distance and production of the protein dystrophin.

The FDA, however, doubted the validity of that data as a surrogate marker after GlaxoSmithKline and Prosensa's drisapersen failed a late-stage trial. Now Sarepta may be forced to undertake a more robust placebo-controlled study -- a revelation which sent the stock crashing 60%.

Priority review designation
Priority review is granted only after the submission of a NDA to the FDA. The typical time from NDA filing to PDUFA date, or the deadline for an FDA decision, is 10 months; priority review cuts that time to 6 months. This status can be granted to drugs with expedited development under other designations, and is awarded to treatments for serious conditions that dramatically improve upon the standard of care in efficacy and safety clinical trials.

Two of the most discussed drugs of 2013 were granted priority review designation, bumping their PDUFA dates up to early December. These drugs, Gilead Sciences(NASDAQ:GILD) sofosbuvir and Johnson & Johnsons' (NYSE:JNJ) simeprevir have been widely regarded as revolutions in the treatment of hepatitis C. Both touted as future blockbusters, sofosbuvir has been a major growth driver in Gilead's 87% run year to date, and simeprevir will take the reins in Johnson & Johnson's renewed focus on pharmaceutical growth. More importantly, priority review will allow drugs with sustained viral response rates as high as 100% to reach patients quickly.

The bottom line
It is important to remember that these designations do not guarantee FDA approval, and are based more on getting patients the most promising drugs as quickly as possible. For small unprofitable companies, timing can be critical in the race against cash burn, but be weary of the impact these designations have on long-term growth prospects. Then of course, there is the risks involved in hastily completing development programs. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.