Blockbuster Drugs Bound for Extinction?

The most headache-inducing aspect of investing in the pharmaceutical sector is that the rules and requirements to bring a new drug onto market can change dramatically in a blink of the eye.

Last week, the FDA convened a meeting that likely will spell longer and larger clinical trials, and tougher approval hurdles, for future diabetes treatments. Any investor considering shares of drugmakers with such compounds in late-stage testing, like MannKind (NASDAQ:MNKD), Eli Lilly (NYSE:LLY), or Sanofi-Aventis (NYSE:SNY) should take notice.

What's at stake?
With $24 billion in worldwide sales last year, compounds to treat type 1 and type 2 diabetes are one of the top therapeutic classes of drugs, according to IMS Health. This figure will only grow, since the number of diabetics in the U.S. and worldwide is expected to soar to almost unfathomable levels in the coming years.

Diabetes compounds are many drugmakers' most important drugs, and there are many such candidates in the pipeline. Here is how the sales of diabetes compounds for most of the market's top players fared last year:

*As reported.
** Januvia approved in late 2006.
***At at a krona-to-dollar exchange rate of 0.18.

If you strip out Glaxo's performance, nearly every large-cap pharma's diabetes-care units are growing rapidly.

Avandia adversity
Glaxo's problems began last year, owing to safety concerns with its type 2 diabetes treatment Avandia. A New England Journal of Medicine article looking at a pooled set of data from Avandia studies showed that patients taking the drug may be at a higher risk of some heart-related ailments. Since diabetes drugs are supposed to reduce a patient's incidence of many long-term adverse events, these potential Avandia safety issues pushed the FDA to ask an advisory panel to debate whether new diabetes drugs should be subjected to much more testing for long-term and hard-to-see adverse events.

What's changing
While the FDA often seems like a mercurial beast, approving and rejecting drugs at random, the agency does issue concrete guidelines on what drug candidates for the most common therapeutic categories, like cancer and diabetes, must demonstrate in clinical testing in order to win marketing approval.

In the case of new type 2 diabetes drugs (the most common type), the FDA generally requires drugmakers to prove that their compound helps to lower a patient's blood sugar levels, and that the compound is tested in "at least" 2,500 patients in phase 3 studies. More than half of these patients must take the drug for one year or more, and 300 to 500 of these patients must take the drug at least 18 months.

Unfortunately for drugmakers, testing a drug for cardiovascular-related safety issues, like whether it increases a patient's risk of a heart attack, usually requires several thousand more patients in clinical testing, not to mention longer clinical studies than even the above guidelines call for.

Therefore, if the FDA wants to spot more instances of rare adverse events, it needs to up the patient numbers and study length requirements for new diabetes drugs. That's where last week's advisory panel came in.

To help avoid another potential Avandia-type instance, the advisory panel recommended in a 14-2 vote that the FDA should require long-term safety studies of at least five years for all new potential diabetes drugs.

Fortunately, the advisory panel also threw drugmakers a small bone. It recommended that the FDA require that these long-term studies (which will take longer than five years to complete under nearly any circumstance, accounting for the time it takes to set up the study and complete patient enrollment) simply be under way, not completed, when a new diabetes drug is up for approval. Had the panel recommended otherwise, it could have spelled disaster for most drugmakers' pipelines.

Who is affected?
It's easiest to say that every potential diabetes treatment in development will be affected by the new guidelines, if the FDA adopts the panel's recommendations in their current form. These new guidelines could definitely cost many drugmakers hundreds of millions of dollars more in clinical trial expenses.

The guidelines will also likely be the kiss of death for any diabetes drug that shows even small hints of cardiovascular-related side effects in clinical testing, unless it's also finished the sort of long-term safety study the FDA now demands. (The agency is understandably harder on compounds with potential safety issues than on those with no apparent risks.)

Like all things at the FDA, the agency is sure to treat some compounds in development differently, depending on a range of variables. Compounds from some classes of diabetes treatments, such as thiazolidinediones (Avandia's class of drug), where safety issues have been a problem in the past, will likely have these new guidelines applied more harshly. Some new and unproven classes of diabetes treatments under development from companies like Bristol-Myers Squibb (NYSE:BMY) could also face a harder path to FDA approval.

Companies with potential blockbuster drugs already deep into (or past) phase 3 testing could suffer most, though. Potential new diabetes drugs that these guidelines might hurt (or, in a few rare cases, help) include:

• CV Therapeutics' (NASDAQ:CVTX) Ranexa, scheduled for a July 27 PDUFA.
• Sanofi's Acomplia, for which the company hoped to file an FDA marketing application next year. It has a huge safety study under way, but the study covers only three years.
• Novo Nordisk's promising GLP-1 analogue liraglutide, currently under FDA review.

Changes to the FDA guidelines won't entirely quash the development of new diabetes drug candidates. But in many cases, they will raise the regulatory hurdles that new potential therapies must overcome to get approved, while making even approved diabetes and pre-diabetes drug candidates less profitable. Some less promising treatments will also likely have their testing discontinued, if drugmakers don't see a large enough potential market for them. Stricter safety testing may ultimately benefit patients, but for now, it seems like bad news for everyone else.