Neurocrine's FDA Nightmare

Updated from 10:13 A.M. EDT

The Food and Drug Administration delivered a crushing blow to Neurocrine Biosciences(NBIX) Tuesday, delaying final approval of one version of insomnia drug Indiplon and rejecting another version.

The FDA's ruling came as a surprise to Wall Street. Analysts had expected at least one version to get the agency's OK and provide stiff competition in a growing field. By early afternoon, Neurocrine shares had plunged 59% on 40 times its daily average trading volume.

"While we are disappointed in the FDA action, we will move forward expeditiously to address FDA's outstanding questions regarding the applications," said CEO Gary A. Lyons.

Lyons conducted a telephone conference call with analysts that lasted only a few minutes, in which he declined to answer questions or provide many details. Calling the FDA's decision "a surprise to us," he also said he believed the agency's action represented a "short-term setback."

Lyons added that he couldn't predict what impact the FDA's decision would have on financial guidance for the year. The company recently said it expected to break even during 2006 with revenue in the range of $165 million to $175 million, excluding royalty revenue from Pfizer (PFE) based on Indiplon's sales.

"There is currently a significant lack of clarity on the immediate path forward for Indiplon," says Brett Holley, of CIBC World Markets, in a research report Tuesday. He told clients he is cutting his rating to sector perform from outperform, joining three other analysts who immediately dropped their ratings on Neurocrine Biosciences.

Pfizer, which signed a marketing agreement with Neurocrine Biosciences in 2002, had no immediate comment. Pfizer and Neurocrine Biosciences plan to co-promote Indiplon in the U.S., while Pfizer will handle the marketing in other countries.

"From Pfizer's perspective, the news is only a modest negative, with at best a negligible impact to earnings in the next few years," says Barbara Ryan, of Deutsche Bank, in a brief research note. Ryan maintains a buy recommendation, adding that she is "more enthusiastic" about upcoming Pfizer launches for the inhaled insulin Exubera and the anti-smoking drug Chantix. She doesn't own shares; her firm says its does and seeks to do business with companies mentioned in research reports.

Equity analysts have been predicting that Indiplon could be a $1 billion seller. Earlier this year, Standard & Poor's credit-rating unit put Indiplon on its Top Ten list of drugs that should achieve $1 billion or more in sales. "The commercial success -- or lack thereof -- of these [Top Ten] products may have credit-rating implications," S&P says.

The Indiplon announcement flattened Neurocrine's stock, sending shares down $32.26 to $22.37. Pfizer's stock was down 15 cents to $24.74.

Wall Street Reaction

Also swept up in the action was Dov Pharmaceutical(DOVP) of Hackensack, N.J., which licenses Indiplon to Neurocrine Biosciences. Dov's stock slid $3.81, or 54%, to $3.24 on trading volume that was more than 10 times the average daily trade for the last three months. Two analysts cut their ratings, but S&P raised its rating to hold from strong sell due to the sharp drop in the stock.

The FDA granted conditional approval -- known in the agency terminology as an approvable letter -- for Indiplon capsules in strengths of 5 milligrams and 10 milligrams. Conditional approval can cause delays ranging from weeks to a few months depending on the questions that a company must answer.