An Investor's Guide to the New PDUFA

It's important for investors in drug companies to keep up with the latest clinical trial news, but policy changes in Washington can affect companies' bottom lines just as much. Last week the House passed a bill reauthorizing the Prescription Drug User Fee Act (PDUFA); let's take a look at how it will affect drugmakers.

The Senate passed a similar reauthorization bill in May. Now the two houses will get together in a conference committee to hash out the differences between the two bills -- mainly the capping of fines at $2 million and setting lower drugmaker fees. They better hurry -- the old PDUFA expires in September.

A little history
This will be the third reauthorization of the PDUFA, with each of the new versions building upon the previous edition. The original 1992 version was designed to decrease review times, while the 1997 reauthorization moved a step forward and attempted to decrease development times for drugs. Finally, the 2002 version expanded the contact between drugmakers and the FDA during the clinical trial stage so that the trials are designed in the ways the FDA prefers -- theoretically increasing the likelihood of approval.

Under the PDUFA, drugmakers pay fees for review of applications that covers about half of the FDA's budget. Pharmaceutical and biotech companies generally don't complain about the increased fees, since the increased budget results in more manpower to review applications.

Perhaps the most important part of the PDUFA for investors is that the increased money allows for faster review times for drug applications. The FDA attempts to review and act on at least 90% of the New Drug Applications and Biologic License Applications within 10 months of the date of filing and within six months for drugs given priority review -- that's where the term "PDUFA date" comes from. Of course, as Dendreon (NASDAQ:DNDN) investors know, that's an estimated time and the FDA can release its decision early. That's one of many reasons why drug company investors should evaluate the long-term prospects for a company and not day trade.

The new PDUFA
Most of the new additions to the PDUFA involve the FDA's ability to increase drug safety. With Merck's (NYSE:MRK) Vioxx issues still fresh in their minds, lawmakers want to make sure that the FDA has more power over drugs after it has approved them.

The House bill gives the FDA power to order companies to run additional clinical trials after the drugs have been approved for marketing. While this won't be a problem for giants like GlaxoSmithKline (NYSE:GSK), it might be hard for companies such as Onyx Pharmaceuticals (NASDAQ:ONXX), which only has one approved drug and hasn't yet become profitable.

Fortunately for pharmaceutical companies that make drugs conducive to advertisements -- Pfizer's (NYSE:PFE) Celebrex, for instance -- the bill doesn't outlaw direct-to-consumer advertisements, as was discussed during early debate on the bill. It does however give the FDA the ability to levy up to $250,000 fines for false or misleading advertisements.

The bill requires drug companies to make much of their clinical trial data available to the public. Depending on when the data becomes available, that could help investors immensely. Drug companies often publish clinical trial results in peer-reviewed journals, but the data usually comes out months after the companies' press releases. Quicker access to the data would certainly help investors evaluate drugs in the pipeline without the companies' spin.

Follow-on biologics
Last month, a group of senators reached a bipartisan agreement to allow the FDA to approve follow-on biologics after 12 years of exclusive marketing by the biotech companies. Neither the House nor Senate versions of the bill contain the provision, but Senator Edward Kennedy has indicated that he would like to add the amendment as part of the conference committee.

Since the topic hasn't been thoroughly debated in the House, I think it's unlikely to end up in the final bill that comes out of the conference, but it should set the stage for the battle between generic drugmakers and biotech companies. House legislators haven't seemed as receptive to the compromise as senators have been, citing safety concerns with the follow-on biologics. Putting off a decision on the bill would certainly help biotech giants Amgen (NASDAQ:AMGN) and Genentech (NYSE:DNA) keep their monopoly on the biotech drugs they currently produce.

While politics isn't something that investors are necessarily interested in, it's important for us to keep our ear tuned for news that might affect the bottom lines of the companies we invest in. You can count on The Fool to give you an investor's slant on the news -- or head to our message boards and let everyone know your opinion.

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Fool contributor Brian Orelli, Ph.D., prefers science to politics but realizes that both affect his portfolio. He doesn't own shares of any company mentioned in this article. Pfizer is an Inside Value recommendation. GlaxoSmithKline is an Income Investor selection. The Fool's disclosure policy aced all its law classes.