Biotech CEOs should be forgiven if they feel like the FDA has turned almost every day into Halloween. Companies ranging from Jazz Pharmaceuticals (Nasdaq:JAZZ) to Alexza Pharmaceuticals (Nasdaq:ALXA) to the obesity triumvirate of Vivus (Nasdaq:VVUS), Arena (Nasdaq:ARNA), and Orexigen (Nasdaq:OREX) have all seen the scarier side of the FDA drug approval process lately. The FDA has handed out rejections to the first two, panels have recommended against the next two, and Orexigen has been batted around by investors who wonder if the FDA (or its panel) will take out their knees next.

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All in all, it is easy to understand why shareholders of biotech Biodel (Nasdaq:BIOD) would be nervous these days. Although the company's Linjeta insulin could be a blockbuster for the company, problems with a pivotal study and an October 30 FDA PDUFA date have investors wondering if they are going to be left waiting in vain for the Great Pumpkin on Halloween.

Linjeta - The Good, The Bad
Linjeta is Biodel's recombinant fast-acting insulin, designed for faster absorption and lower risk of hypoglycemia. Fast-acting insulin is a significant market, as Lilly (NYSE:LLY), Sanofi-aventis (NYSE:SNY), and Novo Nordisk (NYSE:NVO) make upwards of $4 billion a year from these special insulin formulations.

On the plus side, Linjeta has been shown to work well in trials and features an attractive rapid absorption profile and good safety. On the down side, though, one of the company's pivotal trials had a major problem.

Heat damaged some of the blood samples from patients in the Indian arm of a Phase 3 study of Linjeta in type 1 diabetics. Because of those handling errors, the results were not comparable to the rest of the study and Linjeta appeared to fail its non-inferiority test versus Humulin R.

Now, common sense might suggest that the FDA would simply exclude the Indian data (roughly 23% of the total), and evaluate Linjeta on the basis of the clean data from the U.S. and Germany, as well as the numerous other studies that the company has conducted. Unfortunately, the FDA is taking an extraordinarily risk-averse view these days, so this "failed" Phase 3 study could be a major problem.

Hello HALO?
Biodel is not the only company working on new fast-acting insulin. Halozyme Therapeutics (Nasdaq:HALO) is in Phase 2 testing with regular and fast-acting insulin formulations that feature the company's proprietary recombinant human PH20 enzyme. The addition of this enzyme appears to increase the speed of insulin absorption, and could make these insulins significant competitors to the Lilly/Sanofi/Novo Nordisk triopoly in the market. That said, these compounds are far from approval (Biodel finished its Phase 2 study back in 2007), though investors could see a boost if the company decides to partner with a larger pharmaceutical company. (For related reading, see FDA Makes InterMune Sick.)

The Bottom Line
Biodel is facing a binary outcome with a twist. There is a chance that the FDA will view Linjeta as a modified version of an already-approved drug (which it basically is), exclude the poor Indian data, and grant approval.

Other possibilities include a rejection that only requires the company to conclude its current trials and resubmit with that data, as well as a rejection that requires a new full-blown Phase 3 study in type 1 patients. Yet another option for the FDA could be to approve Linjeta for type 2 diabetes (where the Phase 3 did not fail), but require an additional Phase 3 study in Type 1 - this would effectively be a "win" for the company, given the potential for off-label usage in type 1 patients.

Investors buying Biodel today are basically gambling on the FDA overlooking a technically failed Phase 3 study - something that seems like a risky call given the FDA's mood of late. Nevertheless, Linjeta does appear to work and eventual approval seems likely. What's more, the company has compelling partnering opportunities, as well as an interesting pipeline of additional insulin products. This gamble could end up tricking investors just in time for Halloween, but patient, risk-tolerant investors may be in for a treat over the longer term. (For related reading, see FDA To Obesity Drugs: Drop Dead.)

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