Wall Street Looks Ahead: Market-Moving Events that Will Shape 2007

Wall Street analysts are confident that Congress will pass drug safety legislation this year, but in a poll conducted by The RPM Report, they didn't agree on much else. The panel was split most other questions-from whether Congress would remove the "non-interference" clause under Medicare Part D to whether FDA would approve another cox-2 inhibitor.

The change of the calendar is the perfect time to cast predictions about the year ahead. We asked top pharma and biotech analysts to weigh in on the events that will move the market in 2007.

By Kate Rawson

Congress will pass drug safety legislation in 2007 to strengthen the regulatory authority of the Food & Drug Administration. That’s the unanimous opinion of a panel of Wall Street analysts polled by The RPM Report on the regulatory and policy events that could move the market this year.

But besides drug safety—and the must-pass reauthorization of the Prescription Drug User Fee Act—the analysts who participated in our poll didn’t agree on much else. Indeed, our panel was split on most other questions—from whether Congress will remove the "non-interference" clause under Medicare Part D to whether FDA would approve another cox-2 inhibitor. (See Exhibit 1.)

That lack of consensus reflects an uncertainty in how to handicap the new Democratically controlled Congress, as well as a sneaking suspicion that politics is continuing to play a role in the FDA approval process—making it difficult for Wall Street to judge approval decisions based on science alone.

Industry should find it interesting to know what’s on the minds of their investors as they look at the year ahead. Here are some of their predictions:

PDUFA, Drug Safety Legislation Will Pass

Given the interest in drug safety on Capitol Hill, Congress is likely to pass some form of legislation this year, analysts polled by The RPM Report agree. "There’s a high probability that drug safety happens this year, especially improvements to FDA’s [Adverse Event Reporting System] database," JP Morgan pharma analyst Chris Shibutani says.

FDA has already proposed some new drug safety activities in its PDUFA reauthorization package—such as enhancements to the AERS database and other efforts to modernize the drug safety system. (See "The Power of the Purse: FDA Seeks More Money, Not More Authority," in this issue (Also see "The Power of the Purse: FDA Seeks More Money, Not More Authority" - Pink Sheet, 1 Feb, 2007.).) But Congress is likely to go beyond that and attach a full slate of drug safety measures, Prudential Securities Washington, DC health care analyst Kim Monk said on a January 19 conference call.

"The new Democratic majority will want to put their mark on it," she said. "For instance, they’d like to give FDA the authority to require Phase IV clinical trials," as well as the authority to impose "new civil monetary penalties for safety violations."

Given that user fees comprise roughly half of FDA’s budget for drug and biologic regulation, "PDUFA has to pass, and it will likely include new drug safety oversight," Monk predicted. Under the most likely scenario, "the pharmaceutical industry and their Republican allies are just going to have to accept new regulation."

But there is a possible alternative scenario, Monk suggests. Should the PDUFA reauthorization process get bogged down with too many amendments on extraneous issues like drug safety, follow-on biologics, or reimportation, the whole package could blow up, leaving Congress with no option but to pass a clean bill before the start of the next fiscal year.

"Because of the political risk of having an FDA shutdown, the Democrats will have to moderate their view," Monk says. "It is possible that at the eleventh hour the Democratic Congress could blink, and decide to strip everything off and do a straight-up, clean reauthorization. But we won’t know that until the eleventh hour, and it would have to get really bad before it gets to that point."

Freedom from HHS "Interference"

From a stock market perspective, drug safety legislation would be a definite short-term negative, but more active regulation is not the worst-case scenario for investors, Sanford C. Berstein & Co. LLC senior biotech analyst Geoffrey Porges says. So long as industry continues to have pricing freedom, he says, it can ride out other threats.

The biggest pricing threat on the horizon is the potential for Congress to remove the "non-interference" clause under the Medicare Part D drug benefit. The House passed legislation in January that would require the Department of Health & Human Services to negotiate drug prices with drug companies, but whether that measure will pass the Senate is another question. The "non-interference" question is a sticky one on Wall Street; overall, the analysts polled by The RPM Report were split on the issue.

Prudential expects an eventual compromise. "There’s a lot of support in the Senate for this whole concept of letting the government use its negotiating clout to extract discounts from the industry, and there’s a lot of discussion on a potential compromise," Monk says. (See "Putting the Bully in the Bully Pulpit: The Democrats’ Plan to Cut Drug Prices," in this issue (Also see "Putting the Bully in the Bully Pulpit: The Democrats' Plan to Cut Drug Prices" - Pink Sheet, 1 Feb, 2007.).)

"Two years is simply a long time to lock in with one view and not moderate that position," Monk declares. "There’s a lot of support for doing something." Most likely, she predicts, a compromise would give the government the discretion to negotiate prices, but would stop short of an absolute mandate.

But JP Morgan’s Shibutani disagrees with that prediction, arguing that a compromise would be too much of a "slippery slope" to mandated price negotiations for Republicans to stomach supporting it. Even legislation that would allow HHS to use its discretion to negotiate prices, he says, would have a hard time getting by the Senate and President Bush’s veto pen.

Acomplia and Arcoxia: Good News from FDA?

The analyst panel was comfortable with the approval prospects for one high-profile product: Sanofi-Aventis ’ cannabinoid-1 receptor antagonist rimonabant (Acomplia). All but one of the analysts in our poll believed Acomplia would clear FDA this year. (The one participant unsure of its prospects, Sanford Bernstein’s Porges, acknowledged that as a biotech analyst, Acomplia is not a drug he closely follows).

Notably, the same analysts believed that Acomplia would gain FDA approval in 2006, but instead, Sanofi-Aventis received an "approvable" letter for rimonabant’s weight loss indication and a "not approvable" letter for smoking cessation. (See "The Biggest Surprises of 2006," in this issue (Also see "The Biggest Surprises of 2006" - Pink Sheet, 1 Feb, 2007.).) Sanofi isn’t talking, but an increased incidence of psychiatric problems among patients on the drug has been suggested as one reason for the first-round rejection. (See "Sanofi’s Acomplia Stumbles," IN VIVO, March 2006 (Also see "Sanofi's Acomplia Stumbles" - In Vivo, 1 Mar, 2006.).)

Given the potential safety problems, the stakes are higher this time around: Acomplia is more likely to be approved with a "black box" warning, or, at the very least, a risk management program, Lehman Brothers’ Tony Butler says. While "a risk management program is a given," a black box safety warning might be more of a political decision on the part of FDA, and therefore harder to predict, he says.

"I’m not sure what a black box warning would do. Does the information around depression deserve a black box, or would that just be a way for FDA to have their own ‘risk management program’ in the label?"

It’s noteworthy that analysts are so confident of Acomplia’s approval prospects again this year, especially given that relatively little is known about the product’s benefit-risk profile—mainly because FDA chose not to hold an advisory committee to review the NDA. (See "Debunking Acomplia," The RPM Report, March 2006 (Also see "Debunking Acomplia" - Pink Sheet, 1 Mar, 2006.).)

But analysts see some positive signs from FDA. Noting that Merck and Pfizer Inc. are both in late-stage trials with compounds in the same class, Butler argues that "theoretically, FDA is going to need to get Acomplia out on the market, because it’s going to see more of them. And I don’t think companies would be given the OK to move forward on large-scale trials if the FDA was really reticent about the class."

Cox-2 inhibitors are another class of drugs that has faced safety problems; Merck & Co. Inc. ’s Vioxx and Pfizer’s Bextra were pulled from the market. The question now is whether the long-delayed coxibs waiting in the wings—Merck’s etoricoxib (Arcoxia) and Novartis AG’s lumiracoxib (Prexige)—will get the green light from FDA.

Prexige won’t be up for FDA consideration until 2008, but a decision is due on Arcoxia in April. "Intellectually, we should approve the product," Butler says. "Has the product shown itself to be safe and effective? That’s the answer to what the FDA should address, and Merck seems to have done that," he says. "It’s approved in 30 countries. What’s wrong?"

The answer to that question may be an untenable political environment. While JP Morgan’s Shibutani says his "rational self" believes in an Arcoxia approval with a restricted label this year, the current environment may make that tough to swallow: does FDA Commissioner Andrew von Eschenbach "want to make Arcoxia part of his first 100 days in office?"

Prudential Securities analyst Tim Anderson agrees that the two remaining cox-2 inhibitors will be a good "test case" for FDA, following the intense scrutiny on the agency’s drug safety activities. The added attention has "forced FDA to err on the side of caution," he said during the January conference call. "The companies are confident; it will be interesting to see how FDA comes out on this."

The Approval Outlook: Left-Overs and Hold-Overs

The overall approval outlook for 2007 is no less clear, according to the analysts polled by The RPM Report. Opinions were decidedly mixed on whether even 20 new molecular entities would clear FDA this year—a number that would actually be lower than the 22 new drugs and biologics the agency approved in 2006. (See "The Approval Drought Continues," in this issue (Also see "The Approval Drought Continues" - Pink Sheet, 1 Feb, 2007.).)

And, perhaps, even worse for industry is the quality of those 2007 NME candidates. "Last year there were higher-profile, more substantial product approvals," JP Morgan’s Shibutani says. This year, the big approvals are mostly left-overs from 2006: Acomplia, GlaxoSmithKline PLC ’s human papillomavirus vaccine Cervarix and Novartis’ DPP-4 inhibitor drug vildagliptin (Galvus).

But there is one bright spot: the mid- to late-stage pipeline seems to be getting fuller, Prudential’s Anderson says. "I know this from first-hand experience, because it’s harder for me and my team to keep on top of all the different later-stage products now in development. We didn’t have this problem a few years ago."

"To me, it signals that there is more product now making its way through the development process," Anderson says. "In R&D, like everything else, there’s a certain element of cyclicality, and it feels like we’re on the upturn from what was the trough a few years ago."

He cautions that it is difficult to gauge the riskiness of this pipeline. "When I look back over the past five or six years, the industry’s been fairly desperate, and I think they’ve been trying to show that the R&D process is alive and well. The potential consequence here is that drug companies have pushed riskier compounds in the clinic, because it’s better than having no compounds in the clinic. In healthier times, industry may have been a little more discerning in what they pursue."