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Clinical Data: The FDA Bear Thesis Explained

NEWTON, Mass. ( TheStreet) -- A Wall Street hedge fund source who happens to be one of the smartest neuro-pyschiatric drug analysts I know is shorting Clinical Data (CLDA) on the belief that U.S. regulators will reject the company's antidepressant vilazodone on or before a key Jan. 22, 2011 approval decision date.

"Vilazodone is a marginally effective antidepressant that is trying to gain approval into a crowded, genericized class of drugs in which many of the generics are, in fact, better," said the analyst, who works for a fund that doesn't allow its employees to be quoted by name in the media.

Clinical Data conducted two, phase III studies of vilazodone, both of which successfully met their primary endpoints. Isn't that enough to get the drug approved by FDA?

"Clinical Data did the bare minimum clinical work necessary to get vilazodone approved," the analyst says, adding that the lack of a robust data package including marginal efficacy data and no studies comparing vilazodone to active, currently marketed antidepressants will give FDA reviewers the clinical justification needed to reject the drug and request at least one additional pre-approval study.

"I give vilazodone a 35-40% chance for first-pass approval," the analyst says. His short position is predicated on the low probability of a vilazodone approval as well as a fully diluted market value for Clinical Data of around $750 million when convertible debt and stock warrants are included.

Sell-side analysts are taking a much more optimistic view of vilazodone's chances with FDA. Wedbush's Greg Wade advised clients in a Nov. 10 research note that, "Based upon the strong trial data, promising safety/tolerability profile, precedent for the two mechanisms of action, and the fact that vilazodone is the first drug for depression to have success in its first 2 Phase III trials, we believe the drug has an excellent likelihood of approval, and the stock at $18.85 a share has a favorable risk-reward profile to our $28 price target."

The U.S. antidepressant market is worth about $12 billion in annual sales, so the stakes are high for vilazodone.

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