Amylin, Alkermes Shares Crash on Surprise FDA Smackdown

Xconomy San Diego — 

Investors are fuming today about the surprise rejection of the once-weekly diabetes drug developed by San Diego-based Amylin Pharmaceuticals (NASDAQ: AMLN), drug giant Eli Lilly, and Waltham, MA-based Alkermes (NASDAQ: ALKS).

Amylin has the most at stake, and is taking the biggest hit today after news broke about the FDA’s refusal to approval exenatide once-weekly (Bydureon) for sale in the U.S. to diabetes patients. Amylin shares fell by 50 percent at 10:26 am Eastern time, to $10.17 a share. Lilly, a more diversified drug giant, took a lesser body blow, falling 4.8 percent. Alkermes, which stands to collect an 8 percent royalty on sales of the product, dropped by 29 percent to $10.32.

The fallout is entirely predictable, given that many investors were banking on the FDA to grant the green light. Back in March, when the application was first delayed by regulators, Amylin said it needed to iron out some manufacturing questions and work on a risk-mitigation strategy that the FDA has increasingly started demanding from drugmakers. Last night, the companies said the FDA’s concerns were more significant than that—regulators want to see results from a thorough study of whether the diabetes drug is linked to heart rhythm irregularities. Based on the latest regulatory questions, the companies said they hope to gather all the data for a re-submission “by the end of 2011.”

Failing to win FDA approval on time means these companies will miss out on big potential sales. JP Morgan analyst Cory Kasimov has forecasted that the drug-which seeks to replace a twice-daily injection with a once-weekly shot-has potential to generate peak worldwide sales of about $2 billion in 2017. Demand for new diabetes treatments is surging as an estimated 25 million people in the U.S. suffer from the disease, and incidence is expected to climb for years as more and more people develop complications from obesity.

Analysts today are going back to the drawing board, and erasing some of the most bullish timelines and sales projections mapped out for the drug.

“The news comes as a major surprise,” Kasimov said in a note to clients today. “Indeed, investor controversy had been around Bydureon’s potential to meet the seemingly aggressive sales estimates and not whether approval was at risk. It seems we all got ahead of ourselves.”

Kasimov downgraded Amylin shares from “overweight” to “neutral” and lowered his December 2011 price target for the stock to $11. Alkermes is maintaining an “overweight” recommendation largely because it is diversified enough to withstand this setback from the FDA, Kasimov wrote.

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