Biotech Optimists Throw In the Towel

It's a grim fact of life for drug development: A drugmaker will sometimes get a complete response letter from the Food and Drug Administration, asking for more clinical trials. Without any other form of revenue, that drugmaker has no choice but to cut its workforce and hunker down for the long haul.

Yesterday, MannKind (Nasdaq: MNKD) said it was cutting 41% of its employees to lower expenses as it waits to complete two clinical trials the FDA is requiring prior to approval of its inhaled insulin product.

Earlier in the week, Orexigen Therapeutics (Nasdaq: OREX) announced that it was cutting 40% of its staff, after the FDA said it would have to run a cardiovascular study before approving its obesity drug.

Before that, the same fate befell Arena Pharmaceuticals (Nasdaq: ARNA), A.P. Pharma, XenoPort (Nasdaq: XNPT), and GTx (Nasdaq: GTXI). Different names, different drugs, same story.

Investors should be cheering. Surviving to the finish line is goal No. 1.

Instead, they sent MannKind down 11% in after-hours trading. Continued selling led to a 25% collapse today. Orexigen was down 6% the day after its announcement.

I'm guessing that the price reaction stems from investors' sudden realization that they can't expect any quick fixes. Such remedies do exist; Forest Laboratories (NYSE: FRX) and Mylan (Nasdaq: MYL) once responded to the FDA and got an approval less than three weeks after an initial rejection. But MannKind and Orexigen didn't get one of those easy-fix rejections.

Of course, investors should have known that already. Alas, some biotech investors are eternal optimists. Do these share price plunges mean eternity is coming to an end?

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