Transcept Pharmaceuticals Bulls Get Rude Awakening

By Stephen D. Simpson, CFA | July 15, 2011 AAA

FDA rejections are almost always painful for biotechnology companies, and Tuesday's press release from Transcept Pharmaceuticals (Nasdaq:TSPT) announcing that it expected another FDA rejection has certainly brought the pain. On mid-day Wednesday, the stock was down about 40% and approval of the company's middle-of-the-night sleeping pill is now looking like a more distant possibility.
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What Transcept Was Trying to Accomplish
Transcept was hoping that the FDA would sign off and approve the company's proprietary low-dose formulation of zolpidem. This is a compound that was developed and marketed by Sanofi-Aventis (NYSE:SNY) as Ambien and is now manufactured as a generic by Teva Pharmaceuticals (Nasdaq:TEVA) and many others. This new drug, called Intermezzo, is targeted for people who awaken in the middle of the night and have difficulty getting back to sleep - the first so-called middle-of-the-night insomnia pill.

Intermezzo would have been the first truly new sleeping pill on the market in quite a while. Sanofi markets a controlled release form of Ambien (called Ambien CR) and Dainippon Sumitomo markets Lunesta (which Dainippon acquired in the Sepracor deal), but those are both to be taken at the beginning of an expected night's sleep.

Beyond that, the FDA has been reticent to approve new drugs in this category - Neurocrine Biosciences (Nasdaq:NBIX) failed to get indiplon through the FDA and many companies have abandoned drugs after clinical trials failed to show an efficacy and safety profile that would get it through the agency. One of the latest such failures was the decision from Actellion and GlaxoSmithKline (NYSE:GSK) in January to drop development of almorexant due to its side-effect profile, while Sanofi killed a follow-up to Ambien a year earlier. (To learn more about the FDA, see Pharmaceutical Sector: Does The FDA Help Or Harm?)

What Is the Problem with Intermezzo?
The FDA has long had issues with sleeping pills. Part of the problem is that most of these drugs do not actually induce sleep - they induce a sedative-hypnotic state that is more like unconsciousness than true sleep. That often leaves people with some degree of "hangover" the next day and it can impair decision-making and driving. Sleeping pills have also shown to be addictive for some people and there is definite abuse potential with many of these drugs. Making matters worse, many of them cannot be taken safely with alcohol.

With that backdrop, the FDA has been rigorous in its analysis of Intermezzo. The agency rejected the drug about 18 months ago, citing concerns that Transcept had not adequately assessed the drug's impact on next-day driving, the possibility of inadvertent re-dosing (taking more than one in a night), and the ability of patients to safely and correctly use the drug as indicated. As a result of the agency's issues, the company did conduct a follow-up study pertaining to driving ability; a study which showed no particular problems when the drug was used properly and was below the required range (meaning the drug did not dangerously impair next-day ability).

Transcept released the details of its complete response letter on Friday, and the FDA still seems to be worried about the next-day effects of the drug. In a nutshell, the FDA seems to want additional studies to establish whether or not the company can identify those patients most likely to experience significant next-day effects and figure out a mitigation strategy for those patients. This is not exactly "back to the drawing board," and the FDA does acknowledge the efficacy of the drug, it will take some time for the company to resolve these issues.

A Lesson About Defying the FDA?
What Transcept did NOT do, however, was launch the patient use study that the FDA wanted. The company argued that such a study was unnecessary, as the data from prior studies showed an insignificant level of such mistakes. The FDA appeared to agree that such a study was not strictly necessary, but then seemed to take issue with the results of Transcept's driving impairment study - even though the results in the three hour driving study looked basically ok relative to the agreed-upon criteria.

There could also be a possible warning here for Arena Pharmaceuticals (Nasdaq:ARNA) - the company is going against the FDA's advice with regards to the design of a follow-up rat safety study (designed to assess cancer risk) for lorcaserin and that could ultimately give the FDA another reason for rejection as the FDA arguably has just as many issues with obesity drugs as insomnia drugs. Perhaps a page should be taken from Alexza (Nasdaq:ALXA) and its experience with its drug candidate Staccato loxapine when dealing with the FDA - patient use studies may seem ridiculous and unnecessary, but if the FDA wants them, it's probably faster to just say "yes sir, right away sir" and get on with them. After all, the FDA agreed that Transcept didn't have to do a patient use study, but the agency's decision to question those driving study results seems to have at least a bit of a "payback" aspect to it.

The Bottom Line
The good news for Transcept is that there is little competition on the horizon and the company should have sufficient cash to do the additional studies and analyses that the FDA wants. Two rejections from the FDA does not mean that Intermezzo is doomed, but it does mean that the company has to be very attentive to dealing with the agency's concerns this next time through.

Trading at nearly cash value, the market is putting basically zero value on Intermezzo. While approval is unlikely within the next twelve months, investors should at least hang on long enough to hear what the company's plans for dealing with the FDA's objections to the drug currently are. Assuming that the company does not have to start from scratch, or that the agency hasn't moved the goal posts to an unreachable distance, this could still prove to be an eventual winner for patient owners. Still, investors should not overlook a key point - the FDA is just not friendly to sleeping pills and reading the tea leaves of this latest rejection would seem to suggest a real risk that the agency just does not want to approve a middle-of-the-night pill and will keep finding new excuses to reject Transcept's application.

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