Coulter Investors Gulp After FDA Says 'Resubmit'

The stock drops 32% after the agency tells the drug developer to resubmit its application to market Bexxar.
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What do you know?

Coulter

(CLTR)

and

SmithKline Beecham

(SBH) - Get Report

did get their application to market cancer drug

Bexxar

kicked back to them.

Two weeks ago, Wall Street

thought the

Food and Drug Administration

had to decide within 45 days of filing whether to accept the companies' biologics license application. When Coulter said then that it hadn't heard from the agency, the companies explained that the FDA really had 60 days to decide on the application for Bexxar, a radioactive antibody developed to treat non-Hodgkin's lymphoma.

On Friday -- the 60th day -- the FDA acted, telling the companies to resubmit the application. And Monday, on the 63rd day, the market reacted. Negatively.

The question now, for some Coulter investors, becomes one of management credibility. As Mike Margolies of

Avalon Research

-- which recommends shorting Coulter -- remarks in his best Watergate impression: "What did they know and when did they know it?"

Indeed, short-sellers thought the whole thing was mighty suspicious. Coulter must have had some indication earlier, the short-sellers think, but must have assumed it could clear things up before the deadline fell. Coulter says it didn't have any indication ahead of time about the FDA's resubmit order, and adds that the FDA's action doesn't represent a serious setback.

The FDA's decision to ask Coulter to resubmit the application comes on the heels of a months-long battle between shorts and longs. Some hedge funds have been pushing their short positions and buying puts, especially in the last couple of weeks. Others have been getting long, anticipating a huge short squeeze were the filing to be accepted.

Sho' nuff, Monday morning the company said that on Friday afternoon it received what's known as a "refusal-to-file" letter from the agency, requesting more information. Supportive sell-side analysts -- is there any other kind? -- said it was just a bump in the road.

The company and the sell-side analysts say Coulter will gather the data and resubmit by mid-October. If all goes well, that could mean an April approval. "In its totality,

the information requested appears modest," says Mike Bigham, Coulter's president and CEO.

Bigham said that Coulter must simply reformat some data from

Macintosh

to

Windows

-based computers. Also, the FDA wants some data on how the "noncritical" organs absorb the radiation from the treatment. And it wants a more flexible database, so that the agency can look at the data in more ways.

It could be a great buying opportunity if things turn peachy. But the stock's sharp drop -- Monday it dropped 32% to 23 1/2 in heavy volume -- suggests that investors don't think this is merely a six-week delay. The filing itself was long delayed, and investors think this could indicate there are larger problems with Bexxar.

"I operate under the cockroach theory," which states that for every problem you see there are countless unseen, says Robert Swift, a former cancer researcher and biotech analyst for the Colorado health care boutique investment bank

Bigelow & Co.

(Bigelow doesn't cover the company, and Swift doesn't have a position in the stock or in any Coulter options.)

One short-seller and two critics contended Monday that the company must have had an indication two weeks ago, when suspicions first arose, that the FDA had some problems with the filing. "Hard to believe the FDA would wait until the 60th day at the 11th hour," says a West Coast hedge fund manager who owns puts, effectively making him short the stock. (It's such a crowded short that investors can't find shares to borrow to short the stock.)

The company denies this. "We did not have any such requests earlier," says Bigham. Moreover, the FDA hasn't asked for any additional data, more trials or more patients, the company says. 'Course, this isn't the occasion for the agency to do so. That comes when the FDA makes a decision on the application. The FDA doesn't comment on drug applications as a matter of policy.

Don't worry about that, the company tells its clearly worried investors. Coulter has done sufficient trials. "Coulter and SB remain very confident in the efficacy and safety" of Bexxar, the biotech CEO says.

The shorts don't believe it. They contend that Bexxar is too toxic for approval in broad use and that the company's data are limited. The company did a single, 60-patient pivotal trial of Bexxar.

Says Swift at Bigelow & Co., "Sixty days and a short follow-up, relatively speaking, may not be long enough" for anything but approval in salvage therapy, i.e., the very last option before death. The shorts think that the salvage market is tiny, not meriting even the $400 million valuation Coulter finished with on Monday, big drop notwithstanding.