March Madness, Biotech Style

Biotech investors are going to get their own version of March Madness starting next week, when three companies are due to hear decisions about their drugs over the course of two days.

On March 6, Astex Pharmaceuticals (NAS: ASTX) and marketing partner Eisai are hoping the FDA will approve their blood cancer drug, Dacogen, as a treatment for acute myeloid leukemia in patients over the age of 65. But an FDA advisory panel voted 10 to 3 recommending against approving the drug, which is already on the market to treat myelodysplastic syndromes.

In the clinical trial supporting the marketing application, Dacogen didn't seem to do any better than the standard of care. At least the company compared the drug to something -- Genzyme, now Sanofi, and Johnson & Johnson (NYS: JNJ) tried single-arm trials that didn't fly with the FDA -- but I have a hard time seeing the FDA going against an overwhelming majority of outside experts.

A rejection of Dacogen seems likely.

Discovery Labs
(NAS: DSCO) has had a long road to approval of Surfaxin, including four rejections (if I caught them all) since the original application in 2004, but it could be over on March 6 as the biotech goes for its fifth attempt at approval.

The company didn't give up, because most of the issues have related to manufacturing, something that's more easily correctable than a drug's efficacy.

Is the fifth time the charm for Discovery Labs? Who knows. It appears the company has fixed everything the FDA wanted since the last rejection in 2009, but I went out on a limb and suggested a likely approval after the second rejection -- and after the third. Unlike with clinical trial data, investors get little visibility into the manufacturing issues. I'll stick with a caveat-laden prediction of an approval and hope it's the last one I have to make on Surfaxin.

The next day, NeurogesX (NAS: NGSX) is scheduled to hear about expanding its pain patch, Qutenza, into HIV patients that have nerve pain because of the virus. Like Dacogen, an advisory panel recommended against approving the drug, but Qutenza's vote was an even more negative 12-to-zero vote against approval.

The FDA isn't required to follow its advisory committee. I would be stunned if it didn't.

Quetenza is already on the market and clearly works for postherpetic neuralgia, the pain associated with shingles, so a rejection just keeps NeurogesX from marketing the patch for HIV patients that have nerve pain.

Be careful day trading
It's become popular to buy shares in a company with an upcoming FDA decision, hoping for a run up as more people jump into the stock to get a piece of the binary action. The run-up crowd then jumps out, avoiding the binary event.

That works fine as long as the FDA makes its decision on that specific date (and you correctly predict that others will jump in behind you). But the FDA has handed down quite a few early decisions recently. Curis (NAS: CRIS) was due to hear about the approval of its basal-cell carcinoma drug, Erivedge, next week, but the FDA spilled the beans a month ago.

The early decisions seem to be primarily early approvals, as opposed to early rejections, which makes getting caught holding the bag fairly benign. But investors should realize that the FDA decision dates are goals -- not days set in stone. An early rejection could be very painful for the short-term trader.

Fill in your bracket
Unfortunately there are no powerhouses with easy wins here. Of the three potential Cinderella stories, Discovery Labs looks like it has the best chance at approval. Let's call it a seven or eight seed. The other two are long-shot 15 or 16 seeds going up against a strong FDA defense.

If you're looking for something a little less dependent on binary events, check out the Fool's new free report, in which Fool analyst report their top pick for 2012. Just click here to grab your free copy.

At the time thisarticle was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.