The FDA Waits for a New Head to Take the Heat

Is the Food and Drug Administration afraid to approve new drugs?

That's the bleak picture being painted by biotech and drug industry observers, who fear the absence of a chief drug regulator has played a role in a spate of recent rejections and delays. This should have investors on edge because nothing hurts drug and biotech stocks more than bad news from the FDA.

The FDA has been leaderless since Commissioner Jane Heaney resigned the day after President Bush's inauguration. With no one sitting in the FDA's big chair to make policy or to take the heat for controversial decisions, drug regulators appear to be in extra-strength career-preservation mode. With few exceptions, tough decisions on new drug approvals are being delayed or sent back to the companies for further study.

A Growing List of Applicants

In May, TheStreet.com examined the drug approval slowdown at the FDA, but the chatter over the issue is getting louder because of recent events.

In the past month, biotech firms AmgenAMGN, Praecis PRCS and Swiss drug firm NovartisNVS were hit with FDA rejection letters for drugs that were expected to get the green light. Novartis also owns one of the exceptions to the slowdown. Its leukemia treatment Gleevec was approved in May after three months of FDA review, something close to a record. Still, the reality is closer to the experience of Eli LillyLLY, which was surprised in the past month or so to learn that approval for one of its highly anticipated drugs was delayed.

"FDA employees are sitting on their hands, waiting for a new commissioner," says Jim Czaban, a partner in the FDA regulatory practice of Heller Ehrman White & McCauliffe. "As a result, there's been a slowdown in policy decisions, especially controversial policies, because no one wants to make a decision that will be second-guessed by the new boss."

As an example, Czaban points to the controversy about switching popular prescription allergy drugs like Schering-Plough's SGP Claritin to over-the-counter status. In May, an FDA advisory panel recommended the switch, over the intense opposition of the drug companies. Congressional hearings followed soon after, injecting a healthy dose of politics into the process.

"I'd be very surprised to see the FDA making a decision on this before a new commissioner is named," says Czaban. "The agency seems inclined to make the switch and believes it has the regulatory power to do so, but a new commissioner might decide against it."

Playing It a Little Too Safe?

Drug makers seeking the FDA blessing for new products also are finding the agency to be a hostile environment these days. Novartis executives were red-faced when the FDA rejected Zelnorm, a drug to treat irritable bowel syndrome, because of safety concerns. The setback was especially hurtful because Novartis CEO Dan Vasella earlier predicted an 80% chance of approval, based on the company's dealings with the agency.

Sanford Bernstein analyst Catherine Arnold believes the FDA was hypersensitive to safety issues with Zelnorm because a similar drug from GlaxoSmithKlineGSK, Lotronex, was approved in early 2000 but pulled off the market about 10 months later. Still, she believes the Zelnorm rejection was unwarranted because the company seemed to have adequate answers to the FDA's safety questions.

"There's a faction at the FDA that was already burned by Lotronex, so they weren't going to get egg on their face twice," she says. "You want the FDA to be concerned with safety, but I think the pendulum is swinging too far." Arnold rates Novartis an outperform, and her firm doesn't do underwriting.

Would a commissioner at the top of the FDA made a difference? "The lack of a commissioner has to be having an impact," answers Arnold. "There isn't a leader willing to turn the tide, to say that the agency needs to evaluate its consistency and the criteria upon which it makes decisions, or that it's business as usual, albeit with a heightened concern for safety."

Investors take note: There are plenty of biotech and pharmaceutical companies -- Eli Lilly, Schering-Plough, GenentechDNA, Amgen, Transkaryotic TherapiesTKTX, GenzymeGENZ, Idec Pharmaceuticals IDEC and CorixaCRXA -- that have drugs waiting for approval at the FDA. Many of these drugs are first-of-their-kind treatments for diseases, which makes safety issues even more important.

It is easy to blame everything on the FDA, especially because the agency has only recently lifted the veil of secrecy from its dealings with drug companies. But it's also important to remember that the onus is on drug companies to develop drugs that work and that are safe.

Says Czaban, "The FDA is not a rubber-stamp agency. Just because a drug company submits an application, doesn't mean it is automatically approved." But it seems clear that the FDA works better when there is someone making decisions and otherwise leading the agency in its dealings with drug companies and lawmakers that oversee it.

"The FDA is overwhelmed and understaffed. The agency needs someone in charge who will be accountable for decisions, but also to find more resources," says Jon Alsenas, a portfolio manager with ING Furman Selz Asset Management. "Just like no one pays attention in class when there's a substitute teacher, no one is going to paying attention to the FDA until the president appoints a commissioner."