Investors Display Allergic Reaction to Sepracor

Now that shares of Sepracor have been crushed because U.S. drug regulators rejected its highly anticipated allergy drug Soltara on Thursday, shell-shocked investors and analysts are trying to figure out whom to blame.

Is the Soltara fiasco the fault of a way-too-cautious Food and Drug Administration? Or has Sepracor been misleading investors all along about potential safety problems with its drug?

Shares of Sepracor plummeted $27.63, or 58%, on Thursday, closing at $19.64.

On a conference call, Sepracor executives expressed shock and disappointment over the FDA's decision, suggesting that the agency's concerns came out of left field.

"We were anticipating an approvable letter coming over our fax machine on Friday afternoon," said Sepracor CEO Timothy Barberich. "But instead, at 4:30 p.m. yesterday, we received an urgent message from the FDA asking to set up a conference call. We were then told that they would be issuing a nonapprovable letter for Soltara."

The FDA rejected Soltara because it said Sepracor's application didn't contain sufficient safety data to warrant approval. As a result, the drug will be delayed for at least a year, the company said. Investors fled the stock because the company expected Soltara sales to make up a large part of 2002 revenue, as much as $100 million.

Sepracor Slugged Expensive one-day tumble

Soltara is actually a re-engineered version of an older drug, Hismanal, from Johnson & Johnson. But Hismanal was yanked off the market because some people experienced an irregular heartbeat, a condition known as QTc prolongation.

The FDA rejected Soltara mainly because it said Sepracor didn't test the drug's safety for a long enough period of time. Specifically, the agency is concerned that small amounts of the drug can accumulate in a person's tissues and cause potential heart problems.

But Sepracor executives said the safety tests they did conduct indicated that QTc prolongation was not an issue with Soltara. They conceded that they could have done the lengthier safety testing, but that at no point during the approval process did the FDA express enough concerns to warrant it.

"The first time we heard about this issue was during our [Wednesday] conference call," said Barberich.

One analyst at a large Wall Street asset management firm says he's inclined to believe Sepracor management, and sees the whole flare-up as another example of the FDA getting overobsessed with safety concerns. This analyst's firm holds long positions in Sepracor.

"The nature of this issue is pretty damn obscure," he says. "The safety data compiled by Sepracor was pretty clean, but the FDA is rejecting this drug because they're concerned about a theoretical problem."

Still other analysts suggest that the FDA, stung by the recall of several drugs in the last few years, is not inclined to look past any safety risks -- real or potential -- for a drug that treats a rather pedestrian health problem like seasonal allergies. Hay fever sufferers already have a slew of prescription drugs to choose from, including Claritin, Allegra and Zyrtec.

By comparison, last year, the FDA approved Pfizer's new schizophrenia drug, Geodon, despite the fact that it, too, causes QTc prolongation. Some FDA regulators recommended against Geodon's approval, but the agency gave it the green light because schizophrenia is a serious disease with relatively few treatment options.

But other fund managers suggest that Sepracor is not blameless here because there is ample precedent that could have led the company to conduct more stringent safety testing. French drug firm Aventis did exactly this before getting Allegra approved by the FDA. The reason: Allegra is also a reworked version of an older allergy drug, Seldane, which was pulled from the market for the same irregular heartbeat concerns.

The FDA rejection letter today also mentioned safety concerns that cropped up in two clinical studies conducted on animals, but Sepracor has never made these studies public.

It seems certain that Thursday's Soltara setback will further feed the debate over the FDA's performance. Industry critics of the agency believe regulators have become too timid -- obsessed with drug safety to the point that the review process has slowed to a crawl, or worse, worthy drugs are being unfairly rejected.

But FDA supporters argue that recent drug recalls bolster the need for even more safety reviews. Drug companies are the real culprits because they insist on filing sloppy or incomplete drug applications, they say.

But this is no comfort to Sepracor investors, who watched, helpless, as more than $2 billion in market value vanished in one trading session.