In bioscience investing, binary catalysts are milestone events that signal a thumbs-up or thumbs-down for an experimental drug as it makes its way through the regulatory process.
Positive catalysts can send a share price soaring. Negative ones can send it into a nosedive.
Perhaps the least understood of these catalysts are FDA Advisory Committee (a.k.a. AdCom) recommendations.
But they're also among the most powerful.
Here's what I mean, and how to play them profitably...
Recent AdCom Boosts
The FDA Peripheral and Central Nervous System Drugs Advisory Committee (AdCom) met last November to review Vanda Pharmaceuticals Inc.'s (Nasdaq: VNDA) New Drug Application (NDA) for tasimelteon, an experimental drug for the treatment of a serious condition among blind people that radically affects their sleeping patterns: non-24-hour disorder. The panel voted overwhelmingly in favor of tasimelteon. Vanda's stock share price rocketed upward 115%.
In January 2014, FDA's Cardiovascular and Renal Drugs Advisory Committee voted 16 to 1 in favor of approval for Chelsea Therapeutics International Ltd.'s (Nasdaq: CHTP) pipeline drug Northera (droxidopa), designed to prevent dizziness and fainting among patients with neurodegenerative diseases. Chelsea's share price immediately soared 150%.
In April, MannKind Corp.'s (Nasdaq: MNKD) Afrezza, an inhalable form of insulin, passed muster in front of the Endocrinologic and Metabolic Drugs Advisory Committee, receiving a 14 to 0 vote. MNKD shares rose by more than 130% in evening trading that day.
Understanding Advisory Committees
The FDA maintains 50 different advisory committees, each of which comprises a panel of outside experts from a relevant specialized field. The agency will generally convene an AdCom in one of three situations:
- The matter at issue is of such significant interest to the public at large that voices outside of the agency should be part of the conversation;
- The matter at issue is highly controversial and would benefit by a broader public discussion; or
- The matter at issue, such as a drug for a rare disease, requires a special type of expertise for full understanding.
It's the last situation that most concerns us as investors.
During an AdCom review meeting for a new drug, a panel listens to presentations and testimony from the manufacturer, experts in the field, and members of the public. Then it holds a vote. The outcome holds a great deal of weight when the FDA convenes its own final review of the drug to determine whether or not to approve it for marketing in the U.S.
However, as the agency likes to emphasize, it is under no obligation to follow an AdCom's recommendation - and sometimes it doesn't. The agency agrees with AdCom decisions about 85% of the time.
So here's the reality: If two-thirds of an AdCom panel endorses a new drug, the product will most likely receive FDA approval within three or four months. If the panel splits more evenly, time to approval may be longer because the manufacturer may need to do more testing or further refine its data.
If two-thirds of an AdCom vote against approval, it's not uncommon for companies to go back to the drawing board and use up another two years before they have the proof they need to convince the FDA to approve their product.
AdComs Make the Market Nervous
Often, when an experimental drug approaches a catalyst date, such as when it goes before an FDA panel for marketing approval, share price will run up on positive expectations from investors.
But an upcoming AdCom often has the opposite effect. Take the three stocks I mentioned above. During the month prior to the AdCom for Hetlioz (tasmelteon), Vanda's share price fell 52%. In anticipation of the advisory committee review of Northera, Chelsea's stock was knocked down 52%. And when the FDA announced its intention to convene an AdCom for MannKind's Afrezza, shares immediately fell by 23%.
So what's going on?
Basically, the market views these review panel decisions as arbitrary and irrational. In other words, they're an unpredictable mystery to analysts and investors. That's largely because most of these folks don't really understand the science behind the drugs, and they're not really in sync with the mindset of the physicians who do the reviewing.
To be fair, each of these three drugs had gone through some previous missteps in the regulatory process, so there was some reason for pessimism.
I try to offer more insight into these matters to subscribers of my service, Bioscience Millionaire, so that AdComs are not quite so foreboding and they can make informed judgments that hedge the odds in their favor as they make investment decisions.
But there is a simple strategy you can use right now, if you're risk tolerant and want to try your hand at investing in bioscience companies with upcoming AdComs.
Here's How to Profit
First, you need to find out when AdCom dates are coming up. That's easy. The FDA lists them for you here, at the U.S. Food and Drug Administration Advisory Committee Calendar.
Once you have a list of what's on the docket, the rest is a simple numbers game.
In the years 2001 through 2010, the FDA convened an average of 19 AdComs per year to review applications for new drugs and biologics and about nine per year to consider already approved drugs and biologics for expanded use in additional medical indications.
Despite the stock market's generally cautious and somewhat pessimistic view of these events, the reality is that the AdCom panels recommended approval for nearly 80% of the drugs they reviewed.
So the road is clear: If you develop a portfolio of five bioscience stocks with upcoming AdCom reviews, the likelihood is that you'll make money with four of them.
Can you still lose money? Of course. If losses from one stock are catastrophic and gains from the other four aren't significant, you could still end up in the red.
But the odds are strongly in your favor. And as you saw with Vanda, MannKind, and Chelsea, you could realize profits other investors only dream about.