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The Secret to Making Money from Bioscience's "Scariest Event"

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.

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About the Author

Ernie Tremblay has more than 25 years of experience in following and analyzing the latest developments in health, medicine, and related technologies. He understands the FDA approval process, as well as the "hard science" behind new, experimental drugs and the market demand for them - and has a comprehensive grasp of the complex dynamics that determine whether a new drug will be a breakthrough winner, or just another casualty of the FDA approval process.

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