Will Expedited Approval Spell Fat Profits for Drug Makers?

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a move that might finally prove that a federal agency is, in fact, capable of exercising critical reasoning skills for the benefit of the population it protects, Bloomberg recently reported that the U.S. Food and Drug Administration (FDA) is considering an expedited approval process under very specific conditions.

Leading the group of drugs likely to be considered for this type of approval are those for obesity, the treatment of severe infectious disease and those cases where the potential benefit may outpace the heightened risk. The general concept is that in severe cases, patients should have the right to voluntarily assume a greater degree of risk in order to give them a chance to get better. The ramifications for the drug companies are significant, but secondary consequences are even more far-reaching. Overall were such a mechanism to be approved, drug companies, patients and society should benefit.

Obesity Drugs Approved

The FDA recently approved two drugs designed to help those with morbid obesity- Arena Pharmaceutical’s (NASDAQ: ARNA) drug Belviq and Vivus’ (NASDAQ: VVUS) drug Qsymia were each recently approved. Both drugs had been initially rejected by the FDA and were required to provide several years’ worth of additional research before the approval was granted. The FDA’s Commissioner, Margaret Hamburg recently told scientific advisers that she believes the Administration ought to have a mechanism by which it can consider the needs of those patients willing to accept higher levels of risk associated with untested drugs.

Each of the above drugs will carry special warnings and are approved for use in very limited circumstances. Neither drug may be used unless the patient is both 59 pounds or more overweight and is suffering from an additional underlying condition. The companies are conducting ongoing studies that may allow the drugs to be used for expanded uses at some point.

Fast Tracking Basics

The two most likely options that would allow the FDA to fast track drugs are special labeling and a fee-based program. The labeling requirements will almost certainly be a part of any new system, but the Administration is considering a program by which the drug companies would make financial contributions toward paying for the expedited approval. The obvious concern with this approach is that when experimental, and potentially lethal, drugs are involved, approval must be more than a rubber stamp process paid for by the companies bringing the drugs to market.

In addition to special procedures, the fast tracking option would be limited to drugs that have the potential to make a rapid difference for patients that are facing severe alternatives. Infectious disease treatments, like those made by Merck (NYSE: MRK) and Pfizer (NYSE: PFE) are the most likely to be considered. There is, of course, the concern that the approval process for consideration may be abused or that it may become an additional source of delay. In either case, major drug companies will likely be the biggest beneficiaries, considering their diverse product pipelines.

Tort Reforms

In order for such a development to have lasting success, it must become the basis for a certain degree of tort reform, which is arguably long overdue anyway. It is not hard to imagine that high-risk patients accepting untested drugs have the potential to become the basis of immediate litigation. Can a sick patient really be asked to make an informed decision about what risks he or she ought to accept from treatment? This question will predictably become the basis of many a wrongful death suit for those patients that do not get a good result.

What is so refreshing about the mere consideration of an expedited process is that it acknowledges that there are cases in which the safe course is not the best one. While we seem to have decided as a society that we deserve to be compensated for bad results instead of only negligent behavior, this means that sick patients are not even given the option to opt for the risk. Why should an individual not be able to choose a one in five chance of success over a 100% chance of death? Thus far, the answer to this question has been answered by the ambulance chasers who seem to want a sure thing.

Before I end up spending several pages focused on the need for tort reform owing to massive costs, let’s accept as a premise that the attempt to create a fast tracking procedure by the FDA is a bold and laudable move. Industry watchers will do well to follow this development and support progress whenever possible.

Trading the News

While it is almost certainly too early to make this news actionable in your investment portfolio, it is a development that should be closely monitored. The companies most likely to benefit from such an approval process are those with well-diversified products lines and those able to shoulder the cost, should that become a part of the procedure. At current levels, Merck and Pfizer each look solid and like solid additions to your core portfolio. As such, including any of these companies has great long-term potential. Arena and Vivus continue to be speculative plays, but the recent approval positions each well if early results live up to expectations.

Dig Deeper

When it comes to do-or-die businesses, the biotech industry takes the cake. Arena Pharmaceuticals is one recent success story in the industry after gaining FDA approval for its innovative obesity drug. While the future looks bright for Arena, there are still plenty of obstacles ahead. In The Fool’s brand new premium research report on Arena Pharmaceuticals, they walk investors through the must know opportunities and threats facing the company. Since key news can develop quickly, they're also including a full year of updates for those who sign up. Click here now to learn more.

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