Neurocrine's FDA Nightmare

If the conditions relate to discussions between the company and the agency on what a label will say, the delay shouldn't take very long. But if the agency wants more data, then the delay could take many months. Lyons provided no details Tuesday, saying he was "still trying to digest" the information from the FDA.

The agency also rejected the company's application for a 15-milligram extended release version of the drug. "The FDA indicated that they did not have an opportunity to review all of the information submitted during the [application] review cycles," Neurocrine said. The company added that it will talk to the agency "to clarify and determine the next steps required to move Indiplon towards full approval."

Analysts say the 15-milligram dose is the key to Indiplon's success. The FDA's rejection of this dose "raises questions regarding the viability of the Indiplon program for Pfizer, given that it was expected to be the better-performing product," says Albert L. Rauch, of A.G. Edwards, in a report to clients in which he maintains his hold rating on Pfizer.

If the extended-release tablet isn't approved, "Pfizer's incentive to remain in the relationship with Neurocrine on Indiplon is greatly diminished," he says. "We are therefore removing Indiplon from our estimates." Rauch doesn't own shares; his firm has had a noninvestment banking relationship with Pfizer.

CIBC analyst Holley says he talked with Neurocrine executives, who told him the FDA wants more information about preclinical trials and statistical analyses for the lower-dose, immediate-release versions of Indiplon that received conditional approval. "There were no specific requests for additional clinical trials," says Holley. Extra testing could add at least a year to regulatory review.

Holley also pointed out that Neurocrine Biosciences and Pfizer "do not plan to launch" the immediate-release sleeping pills without having secured FDA approval for the extended-release product.

Noting that the FDA hasn't reviewed crucial clinical data for the extended-release drug, Holley said "it is unclear" if more clinical trials will be needed. Although he says Neurocrine officials estimate that a mid-2007 launch is possible, he is betting on 2008. Holley doesn't own shares. His firm is a market maker and says it expects to receive or seek investment-banking compensation in the next three months.

The company's comments about regulatory delays prompted criticism from analyst Steve Brozak. "I'm no longer giving the FDA the benefit of the doubt," says Brozak, of WBB Securities, in Westfield, N.J.

The announcement that the FDA didn't have enough time to review the Indiplon application "is not an acceptable answer," says Brozak, who doesn't own shares of Neurocrine or Pfizer and who doesn't produce research reports on them. Brozak says the Indiplon delay reinforces his negative opinion of the FDA's review process, adding that all biotechnology investors lose when applications are stalled.

A Chain Reaction

The Indiplon announcement set off big trading in several companies that had feared competition from the drug and from Pfizer's marketing clout. Analysts had been predicting the medical-advertising equivalent of an arms race once Indiplon hit the market.

Based on their review of clinical trials, analysts had expected Indiplon to provide a strong challenge to a market now dominated by Ambien and a new extended-release version Ambien CR from Sanofi-Aventis(SNY). Ambien loses U.S. patent protection in October.

In second place is Lunesta from Sepracor(SEPR). Other players include an older drug, Sonata, from King Pharmaceuticals(KG), and a newer drug, Rozerem, from Japan's Takeda Pharmaceuticals.

Stocks of the Indiplon competitors benefitted from the bad news. Sepracor was up $5.58, or 12.9%, to $50.60 on heavy trading; Sanofi-Aventis gained $1.43, or 3%, to $48.64; and King advanced 30 cents, or 1.7%, to $18.46.

The Indiplon news "is a benefit to Sepracor and its stock," says Adam Greene, of JP Morgan, in a Tuesday research report, as he maintained an overweight rating. "We believe the burden is now with Sepracor to drive share gains." He doesn't own shares; his firm is a market maker.

Sepracor recently added 450 sales representatives, and although some analysts say Sepracor would benefit from working with a deep-pockets partner, the company is still handling all the marketing work.

The Indiplon setback "will likely lead to upward revisions" in Sepracor's 2006 guidance for Lunesta, says Lawrence H. Neibor, of Robert W. Baird. He had been predicting an Indiplon launch later this year. Now, he says, the launch won't occur until "well into 2007." He has an outperform rating on Sepracor and a neutral rating on Neurocrine. He doesn't own shares, and his firm is a market maker for both stocks.

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