NitroMed

(NTMD)

takes its experimental congestive heart failure drug before a federal advisory panel today, riding a wave of endorsements from Wall Street.

The drug BiDil has attracted headlines because it's the first product to be considered specifically for an ethnic group -- African-Americans. But investors stand to benefit, too, if the advisory committee endorses the drug and the Food and Drug Administration supports the panel.

Thanks to unusual timing in the approval process, the FDA is supposed to vote on the drug June 23. Although many analysts believe the panel will vote "yes" today and that the agency will vote to approve the product next week, there's a possibility the FDA will extend its review period for 90 days.

"We believe BiDil is well-positioned to receive the panel's recommendation for approval," says Jennifer Chao of Deutsche Bank, in a research report issued Wednesday after an

FDA staff report recommended approval of BiDil. FDA staff members routinely issue reports before advisory panel meetings. These reports analyze data and propose questions for panel members to ask.

"We believe the tone of the

staff briefing documents is positive," says Maged Shenouda of UBS in a report to clients on Wednesday. Shenouda predicts the panel will support the drug and that the FDA will vote favorably on June 23.

Both Shenouda and Chao have buy ratings on NitroMed, as do three other analysts surveyed by Thomson First Call. Shenouda and Chao don't own shares. UBS is a market maker in NitroMed's stock, and Deutsche Bank has an investment-banking relationship.

Data and the Label

With all these buy recommendations, it's hard to tell how much sentiment is already built into the stock of a company that went public in November 2003. The 52-week high is $27.99, but in the last three months, the stock has been bouncing around a range of $15 to $20. The stock closed Wednesday at $19.41. Trading was halted Thursday, pending the FDA advisory panel's ruling.

The stock's progress will depend on the speed of FDA's action and the scope of the drug's label. Because the clinical trial supporting the BiDil application only shows a positive effect among African-Americans, analysts doubt the FDA would grant a broader label.

The advisory panel "is likely to stick with the data, which has demonstrated significant clinical benefit only in the African-American population," says David Moskowitz, of Friedman Billings Ramsey & Co. in a June 10 report to clients.

Ironically, a broadly worded label might hurt NitroMed's investors, because the company is basing its patent-protection claims on the drug's effectiveness in treating congestive heart failure among African-Americans, says Moskowitz. In addition, NitroMed's sales strategy "is built around the premise of an approval in this specific population group," he adds.

Moskowtiz has a buy rating on the stock. He doesn't own shares; his firm is a market maker in NitroMed's stock.

Right now, 13-year-old NitroMed has virtually no revenue except for a few bucks from licensing deals. Analysts' predictions for NitroMed's sales vary widely because of the uncertainty over the timing of FDA approval, doctors' willingness to prescribe the drug, the scope of the label and the prospects of generic competition.

UBS predicts corporate sales, virtually all of it from BiDil, will reach $71 million in 2006. Pacific Growth Equities forecasts $84 million, and Friedman Billings Ramsey sees $115 million.

Generic Competition?

BiDil is a combination pill consisting of two generic drugs: hydralazine for high blood pressure and isosorbide dinitrate for angina. The drugs are readily available, so what's to prevent doctors from prescribing both pills -- or insurance companies only reimbursing for cheaper generics -- rather than the premium-priced BiDil?

The prescribing scenario is possible, says Moskowitz, but it's also complicated and inconvenient. BiDil includes 20 millgrams of isosorbide and 37.5 milligrams of hydralazine. But hydralazine isn't sold in a 37.5-milligram dose, so a patient would need to buy one 20-milligram isosorbide pill plus 10-milligram and 25-milligram pills of hydralazine to mimic a single dose of BiDil.

In any case, Moskowitz says the inconvenience of buying three pills, plus the risk of reduced compliance from buying several pills, "could decrease the attractiveness" of this strategy. Then there's the insurance bureaucracy. Buying three generic pills requires three co-payments, while buying one BiDil requires one co-payment.

In addition, the individual generic drugs don't have congestive heart failure claims on their labels. If BiDil is approved for this indication, NitroMed's sales force would have a marketing advantage. Adding up these issues, Moskowitz concluded in a research report issued last month that the mix-and-match generic alternatives "do not pose a significant threat" to BiDil in treating congestive heart failure.

He adds that NitroMed's lawyers will need to be on alert for patent challenges to the combination drug. NitroMed has three patents on BiDil -- two lasting through 2020 and one expiring in 2007. If BiDil is approved, that 2007 expiration date would be extended to mid-2008.

Moskowitz expects generic companies to come after NitroMed. In a worst-case scenario, he says generic competition could take effect in late 2008 or early 2009. By that time, however, he hopes NitroMed will have developed an extended-release BiDil, enabling patients to take fewer pills and lengthening the company's marketing exclusivity.