FDA Applications and a Look Ahead

Investors spend a lot of time lamenting about the difficulty of gaining approvals from the Food and Drug Administration lately. The data would seem to back up their concerns, as only 21 drugs were approved last year, lower than the previous two years. Yet as easy as it is to point to Vivus' and Arena Pharmaceuticals' (Nasdaq: ARNA) anti-obesity drugs as illustrating that the FDA is taking its safety mandate to the extreme, the low approval count may not be completely the agency's fault.

Source: FDA. NMEs = new molecular entities.

91% approval rate?
Don't get too excited about the 2010 application and approval numbers. Many of the 21 approvals were in the first half of the year -- Acorda Therapeutics' Amypra and Novo Nordisk's Victoza, for example -- and those applications were made in 2009. Likewise, some of the 23 applications made in 2010 have been or will be acted on this year -- Orexigen's Contrave and Human Genome Sciences (Nasdaq: HGSI) and GlaxoSmithKline's Benlysta, for instance.

Those 23 applications last year are something to get excited about -- though not in an industry-making-lots-of-money way. In fact, if you look back over the past 15 years, you find that the trend is quite disturbing. There's a clear downward trend in the number of applications. In 1996 through 1998, the application numbers topped 40 each year.

On the surface, it looks as though drugmakers aren't being as productive at getting drugs through the clinic -- and that's certainly not good news for investors. A closer look paints a better picture, though.

New molecular entities
The stats from the FDA include only NMEs, compounds that aren't already approved for some other use.

But many drugs are approved for multiple indications, and the second application, filed as a supplementary approval, won't show up as an application in the FDA's stats.

Getting these secondary indications tends to be safer than developing an NME. There's less worry that safety or manufacturing issues will derail the approval, since the FDA has already signed off on the drug once and the drug's target is already validated.

Keep in mind, though, that getting a compound that's already on the market approved for a new indication isn't guaranteed. Salix Pharmaceuticals, for example, just announced that it doesn't think it will get approval to expand the use of Xifaxan to treat irritable bowel syndrome.

Fewer big moves
The decrease in NME applications could mean fewer big moves in the drug space, which would be a shame for drug investors who count on those moves for their oversized returns.

The only solace that investors can take is that sometimes it's the second indication that results in the greatest monetary value. As a treatment for kidney and liver cancer, Bayer and Onyx Pharmaceuticals' (Nasdaq: ONXX) Nexavar is nearly a $1 billion drug, but its second indication in liver cancer has been a huge contributor to its growth. Amgen's (Nasdaq: AMGN) denosumab will almost certainly provide more revenue as a cancer treatment than as a treatment for osteoporosis.

A couple to watch in 2011
On the approval side, watch Human Genome's lupus drug Benlysta and Vertex Pharmaceuticals' (Nasdaq: VRTX) hepatitis C drug telaprevir. Both are highly likely to gain FDA approval and be quick out of the gate, given the unmet needs they address. Although you should be careful on the companies' valuations, I don't seem to be the only one who has high hopes for the drugs.

On the application side, look for moves on two cancer drugs: Seattle Genetics (Nasdaq: SGEN), for brentuximab vedotin this quarter, and Exelixis (Nasdaq: EXEL), for cabozantinib in the second half of the year. Both have the potential to be game-changers.

David and Tom Gardner have six more stocks that think you should be watching.