Monday, May 5, 2008

Biomed Notebook

Leerink analyst predicted Isis stock plummet

By Ryan McBride

In the high-stakes game of public biotech investing, it's important to keep track of changes in the regulatory climate at the U.S. Food and Drug Administration -- because any shift in procedure at the powerful agency can have a huge impact on the price of life sciences stocks.

Few people know this truth better than Joseph Schwartz, 35, a biotech analyst at Boston-based health-care investment banking and equities research firm Leerink Swann LLC. Last week Schwartz was a popular guy at Leerink's offices for his early call on the regulatory risks facing an anti-cholesterol drug in late-stage clinical trials called mipomersen.

Those who listened to Schwartz's bold prediction two weeks ago could have saved millions of dollars last Friday. Here's what happened ...

With Schwartz's research, Leerink on April 18 downgraded the stock of Isis Pharmaceuticals Inc., based in Carlsbad, Calif., from "market outperform" to "market perform," the firm's version of moving its recommendation from "buy" to "hold." The call was made in part because of his concern about how the FDA would regulate mipomersen, which Cambridge biotech giant Genzyme Corp. licensed from Isis in January for $325 million.

Mipomersen is a major value driver for Isis, and now Genzyme, because it's in Phase 3 clinical trials and because of the multibillion-dollar market for such drugs. Yet Schwartz said he had a hunch that the FDA would require more proof of effectiveness for mipomersen than previous cholesterol-lowering treatments had needed for approval. Why the hunch?

In March, a study presented at the American College of Cardiology conference in Chicago revealed that New Jersey pharmaceutical giants Merck & Co. Inc. and Schering-Plough Corp.'s anti-cholesterol drug, Vytorin, had not reduced plaque in the arteries of patients taking it -- which called into question its ultimate benefit for people with high cholesterol.

Because the FDA had approved Vytorin based on proof that it had reduced low-density lipoprotein (LDL) cholesterol, or bad cholesterol, Schwartz, who attended the ACC conference, said he believed the agency would raise the regulatory bar for future drugs in its class before granting market clearance. If nothing else, the Vytorin study indicated to Schwartz that the FDA would become more conservative in its handling of anti-cholesterol drugs.

Even after news of the Vytorin study hit, Schwartz believed that Isis and Genzyme executives still thought mipomersen would be approved as long as Isis could prove that the drug lowered LDL cholesterol.

"It looked like people were making a pretty simplistic assumption that the past would predict the future," he said.

His research, and the firm's decision to downgrade Isis shares on April 18, drew skepticism from some investors, he said. "We went way out on a limb on this one," Schwartz said. "People started pressing me on this one, but I stuck to it."

Schwartz was glad he did. Last week Isis and Genzyme announced that, upon guidance from the FDA, the companies planned to add measurements of the overall health outcomes for patients taking the mipomersen in clinical trials. Also, the biotech firms said the FDA would require Isis to include studies on whether the drug causes cancer in its approval filing.

The added requirements will delay the filing Isis had planned to make for approval of the drug from early 2009 to sometime in 2010, and Schwartz said the "outcome" studies would likely require thousands more patients and tens of millions of dollars more to be spent by Isis to complete the Phase 3 trials.

Isis's stock dropped from nearly $17 per share to about $12 per share, and Genzyme's stock price dipped slightly after the companies revealed the FDA study requirements last Friday.

Some of Leerink's clients trimmed their holdings of Isis stock two weeks ago, when the firm issued a report downgrading the company's shares.

"We made this call, and then a lot of the owners (of Isis stock) were concerned," said Schwartz, "and some of them trimmed their position and reduced their exposure."