Biotechs and the FDA

In a letter I wrote to a friend and fellow investor:

Dick,

I like your synopsis on the disconnect between pivotal event-driven biotech stocks and the overall market (which is driven by consumer demand to the tune of 70% of our economy).

One thing I would add on the 20% success rate of FDA approval--I believe that is for drugs that enter into clinical trials--all 3 phases. I believe once a drug reaches Phase III clinical stage, the probability of approval is between 50-80%, depending on who you talk to. So if we stick with Phase III drugs, our chances of approval greatly increase, because at that stage, they are toying with dosages, and hopefully, most of the safety and efficacy issues are already ironed out.

We know the cycles for biotechs are sometimes greater than 10 years. In semiconductors, product cycle times are in the months, so investing in Phase III biotechs is necessary for the impatient (which we all are). It's been said that scientists have to discover 360 molecule compounds for every approved drug, due to the high failure rate. This ratio takes into account research and development, multiple phases of clinical trials, new drug or biologic application, FDA approval and commercial launch. Each step carries potential attrition risk.

There's another reason why I like ARNA--their patent portfolio is strong so that if other pharma companies want to target a particular malady relating to the central nervous system, metabolic systems, cardiovascular, and inflammatory diseases, chances are they will need to license one of ARNA's compounds. Dr. Behan has found a way to selectively target G Protein-Coupled Receptor's (GPCR) for their desired effect. The selectivity is what makes ARNA so valuable, as it doesn't stimulate other receptors, and therefore adverse side effects are minimized. This sounds trivial, but it's the difference between a few billion dollars in annual revenue and $21 billion of lawsuit claims that Wyeth had to pay out, due to cardiac valvulopathy from the failed phen-fen 12 years ago. It's also why I think ARNA will win out over VVUS and OREX, even if their offerings are approved also.

I really want multiple partnership deals, and not an outright buyout from a big pharma. The pps will soar if ARNA remains independent.

Greg