Have you ever thought about this question – what is the most competitive advantage that the United States has, which makes the U.S. the most advanced and richest country in the world?
You may instantly come up with the answer- capitalism, symboled by the Wall Street. Yes, capitalism, particularly “financial capitalism” is the soul of America. However, why some people in the U.S., represented by the “Occupy Wall Street” protestors hate those financial gurus so much?! They blame capitalists for the economic recession since 2008, and they claim for more jobs.
Creating more jobs can make the US people more comfortable? Maybe yes for a while, but can more jobs keep the US the richest country in the world? Possibly not. Why? Because the major chunk of the wealth of this country is created by a few people, and thanks to the capitalism, these few people become the rich people and hence, they have the stimulus to create more fortune. If this country would be shifted from “capitalism” to “creating more jobs” like socialism, it would be dragged to impoverishment.
Don’t buy my point? Well, think about what industries in the US created most wealth? Pharmaceutical and IT, both need the advanced technology fueled by huge capital. These two sectors may not create plenty of jobs directly, but the money and benefits generated from them make the Americans live a healthy and modern life. Don’t blame Chinese workers; they have to produce thousands of shirts to exchange for only one iPhone4. If you target them as the enemy, you are so wrong.
The company Transcept Pharmaceuticals, Inc. (Nasdaq: TSPT) I will talk about in this story can help you understand my points to some extent. You would be so astonished to see just several people are burning millions of dollars each month, while thousands of other normal people are struggling for a job that pay a thousand dollars a month.
The games in Biopharmaceutical industry, particularly in the early stage are always cruel and exciting. If you cannot endure the shock of evaporating millions of dollars in short time, don’t play; Even if you have that nerve but don’t have the savvies to win out in this game, don’t play.
TSPT demonstrates a typical biopharm game story happening in the Wall Street.
Back in 2006, the role in this story is called Novacea, which had already gone public then. So they had some chips at hand – millions of dollars. This company smelled the “blood” of target – identified the business prospect of “calcitriol and its analogs” in treating prostate cancer. So the game started. Scientists/institutes are the first player, Health & Science University and the University of Pittsburgh were paid $3.8 million and $1.3 million respectively to license out relative technology to Novacea. Novacea then found Schering-Plough Corporation to get more “blood”, in May 2007, an agreement with Schering earned Novacea $25 million upfront fee. Things seemed exciting. But in Nov 2007, clinical trial revealed imbalanced death rate between treatment and control group, and in Apr 2008, Schering terminated the collaboration with Novacea.
To that time point, the Novacea player, especially CEO John Walker knew the game was over. What’s the next step? They still hold big cash at hand, to liquidate and return cash to the pathetic investors or to find alternative projects, trying another shot?
They chose the second option.
It took them one year to find the target company – Transcept Pharmaceutical, Inc., who has a product candidate “Intermezzo” but not sufficient cash. In Sep 2008, Intermezzo had already completed clinical trials and submitted New Drug Application for midnight awakening insomnia. John Walker, the CEO of Novacea would step down and CEO of Transceptran, Glenne Oclassen, stepped up to the plate.
Glenne Oclassen, started as an sales representative in a pharm firm, made his career position to be a director in the dermatology branch of Allergan, Inc.. He was not satisfied with only being an upper level “bolt” in a big company. With the managerial skill, marketing sense and in-depth understanding of derm products, he would rather try himself in the cruel capital game directly-swim or sink. In 1985, he founded Oclassen Pharmaceuticals, Inc. which was acquired by Watson Pharmaceuticals in Feb 1997, then he found the NextDerm Inc., acquired by Procyte Corp. in 1999. Nice job, Glenne, except if going public would be even better.
Glenne had the chance to know the chief scientist Nikhilesh Singh, founder of Transcept. He is an expert on formulation of drugs. He had developed intermezzo which has the same active ingredient – zolpidem of Ambien, which is sold well and has well established safety and efficacy. Intermezzo is a sublingual tablet, or a dosage form that dissolves under the tongue, in five minutes after taking, the chemicals goes into the blood. This key feature make Intermezzo fit for prescription those who suffer from awakening in mid night and hard to get back to sleep.
Glenne felt excited about this product. His marketing experience told him it’s worthy to go further. He cited in the annual report , “according to Wolters Kluwer, an independent market research firm, the number of prescriptions filled in the United States to treat insomnia grew to approximately 78 million in 2010. Data from a major study conducted by the Stanford Sleep Epidemiology Center and published in 2008 indicate that middle of the night awakening is the most common form of insomnia in the United States and affects approximately one-third of the population at least three times each week.”
If you are a scientist, you might be contempt at small invention on formulation like this. However, Glenne Oclassen is a marketing guy who thinks on the profit perspective. Insomnia is a huge market, he is right, midnight insomnia is an untapped new frontier, he is right too. He successfully convinced board members in Novacea to invest huge money into this project in the beginning of 2009. In July 2009, he entered agreement with Purdue, who Pharma L.P., who paid $25 million non-refundable license fee up front.
Glenne was all right on many aspects, but he is not expert on psychiatric products. He might be expert on derm product, but did he understand procedure for psychiatric drugs? Did he understand how fast competitors in this area can catch up?
Would you also be attracted by his idea and had bought stocks of TSPT in 2009?
Well, before jumping in the pool, let’s take a look at all the players in this interesting capital game.
The key is the product Intermezzo, which was like the blood bomb, once exploded (approved by the FDA), it’s delicious (huge profits ahead). Glenne, the small shark first smelled the blood and input venture capital, he then attracted bigger/hunger shark- Novacea, then Purdue swam over too, institution/public investors are the largest shark that Glenne want to attract.
Every shark is shrewd. Who would not be shrewd if he is playing the game with his own blood? I always find it very interesting to study the terms of the collaboration agreement between small sharks like TSPT and big sharks like Purdue on license fees. The stake at table is high as tens of millions, while the future is full of uncertain. There must be some complicated financial modeling used.
Based on the agreement, on August 4, 2009, Purdue paid a $25.0 million non-refundable license fee; Purdue was obligated to pay an amount equal to $30.0 million, less $2.0 million for each 30-day period that the receipt of an NDA approval for Intermezzo is delayed beyond June 30, 2010 (for example, Purdue would be obligated to pay us $6.0 million if Intermezzo is approved on its July 14, 2011 PDUFA date);… If the FDA didn’t approve Intermezzo by Jun 2010, you would have to watch $2 million dollars flew away each month, what a sour feeling.
This unfortunate thing exactly happened. Taking the shoes of Glenne Oclassen, it’s certainly not a good feeling. In Oct 2009, the FDA rejected Intermezzo submission, indicating concern on residual effect and possibilities that the patient would overtake the drug. FDA committee thinks it’s appropriate to do test driving to clean residual effect issue, which actually means burning money on TSPT’s side. The stock price plunged from $14.98 on Oct16 to $5.16 on Nov13 like a roller coaster.
In Jan 2011, TSPT issued the second submission, the stock price gradually rose again to $10.99 on Jul01, and on Jul14, the FDA coldly rejected the second submission again. Stock dived again to $3.01, 72.6% were evaporated (so don’t get into Biopharm securities if you have sensitive nerve).
What did the FDA say in the second rejection?
Regarding to the first issue of next day impairment, the highway driving study, the primary analysis used to determine the capacity of Intermezzo ® to impair driving showed no statistically significant difference between Intermezzo ®and placebo. In a secondary analysis, the mean effect on driving ability four hours after dosing was statistically different from placebo, but below the level considered in the literature to define the threshold of potential driving impairment. The FDA stated that it cannot conclude that TSPT adequately demonstrated that Intermezzo ® can be used safely. But, the FDA further hypothesized that such patients may belong to distinct and identifiable demographic groups.
As to the second issue, the FDA confirmed that the proposed single unit dose pouch packaging adequately addressed the risk of inadvertent re-dosing of Intermezzo ® in a single night. However, the FDA remains concerned that some portion of patients will dose with less than four hours remaining in bed. The driving test result for possible misused patients was pessimistic, on which, the FDA stated that these results suggested clinically meaningful impairment.
What a big impact on poor Glenne Oclassen. He didn’t expect a psychiatric drug is so different from dermatological drug, he didn’t expect that the FDA would be so strict in the procedure of approval.
At this time point, it seemed TSPT was claimed dead, the next step would be slashing jobs and planning liquidation of assets. As was on Jul15, TSPT announced to reduce expense by decreasing staff immediately after getting the rejection response from the FDA.
However, Mr. Oclassen is really tenacious. As long as the FDA didn’t officially announce the death, there is always hope.
On Sep13, 2011, TSPT announced that it has received notice from the FDA that it generally agrees with Transcept proposals to address concerns raised in Jul 2011.
On Sep14, FDA generally agreed with a Transcept proposal to reduce the recommended Intermezzo dose for women from 3.5 mg to 1.75 mg, and to keep the recommended Intermezzo dose for men at 3.5 mg. The Transcept proposal also includes new instructions stating that Intermezzo should only be taken if patients have at least 4 hours of bedtime remaining, and that patients should refrain from driving for at least 1 hour after arising and until 5 hours after dosing Intermezzo.
On Oct04, FDA classified the recent Intermezzo New Drug Application (NDA) resubmission as a complete Class 1 response and assigned a Prescription Drug User Fee Act (PDUFA) action date of November 27, 2011, for the completion of the NDA review. This is a very positive sign, because if a drug is classified as class1, it means shorter review time (2 months) and higher chances of approval. Company shares rose as much as 34% on the news.
It is Oct16 today, a little more than a month away from the final decision date. I personally can’t see why the FDA made things so complicated and baffling. Maybe the FDA committee just enjoy performing cat-mouse game, in which the cat played the mouse almost to death, then in the last second, put the mouse back to live?
Poor Oclassen, poor Dr. Singh, you’ve seen the $30 million dollars promised by Purdue all flew away because of the FDA.
As is already so clear to anyone, reducing the dosage with clear instruction that the medicine only can be taken if there are more than 4 hours bedtime, the safety concern is clean. Why the FDA didn’t ask Allergan to approve that the physician could misuse the Botox and kill the patient?
I would say that 90% chances the FDA would approve Intermezzo and the stock price will go up. What is the final result, whether you want to bet your money in? We’ll see till the November.
Let’s take a view upper to the macro level, back to the topic of “financial capitalism” again.
Of the about 20 million outstanding stock shares of this enterprise, about 36.78% are owned by insiders, 28.70% are owned by institutions, and the remaining are owned by individual investors. The institution and individual investors, all public investors are the biggest shark in this game. They play not only by betting the drug being approved, but also can play betting it’s doomed. There are currently 353,300 shares short in the stock which must cover.
On the other side, if you think about this public company TSPT that so many capital was bet on, only several people were running the show: Glenne Oclassen, Nikhilesh Singh, Thomas Soloway, Joseph Kennedy, Sharon Sakai…, these people spent 3 years dealing with relationship to the FDA, to SEC, to partners, to CROs, and they are burning millions of dollars each month.
They work with intelligence and diligence, and they deserve to be rich once they hit the luck with the FDA.
This is a brutal cool, but mostly fair capital game. And this happens all the time in the U.S., creating prosperous biopharmaceutical industry here.