These Little Companies are Putty in the FDA’s Hands

Editor’s Note: Greg “Gunner” Guenthner is back with his take on the FDA. Now, I’m sure at one point or another, you’ve seen something like this. Gunner refers to an FDA approval, a production facility coming on line, or anything else of that nature as a “Profit Catalyst.” These can spur huge profits, for both the company and investors. Read on. You’ll see…

One Dangerous Game
January 15, 2008

I was watching a morning financial show the other day that featured an interview with Richard A. Miller, president and CEO of Pharmacyclics, Inc. (Nasdaq: PCYC). Miller was asked on the show to discuss the role the Food and Drug Administration plays in the drug approval process. Just a day earlier, the FDA had rejected his company’s application for a new cancer drug, a treatment for lung cancer that has spread to the brain.

Needless to say, Miller had few kind words for the FDA, at one point calling it a “fearful regulator.” Miller claims the FDA uses a one-size-fits-all formula when evaluating drug applications. Pills for headaches and serious diseases are treated the same, with no account taken that some medications are engineered for dying patients, he said.

While Miller may have been expressing his bitterness over the lung cancer medication’s rejection, I believe he made a valid point. Simply put, the FDA is scared. The regulatory body’s first goal appears to be avoiding embarrassing lawsuits. And it may be acting overly cautious in the process.

This is a problem for us. Many small pharmaceutical companies can be amazing stocks to invest in, but because of the FDA, it can be risky.

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For instance, Pozen, Inc. (POZN: NASDAQ) had a problem with the FDA this past summer. This company’s migraine drug, Trexima, was waiting approval. Unfortunately, the FDA had a slight problem with one of the clinical trials. So even without having the drug officially rejected, the company saw its shares fall 50% over the following few days:

Cortex Pharmaceuticals (COR: AMEX) made out even worse last fall, when the FDA rejected its lead ADHD drug. This is a truly tiny company that doesn’t have a whole lot on its plate. It was trading around $1.80 on October 10, but when the market opened the next day, shares fell close to 60%, dropping it down to $0.73 a share. It’s been sliding ever since:

This happens all the time to these tiny companies. So, why should we care about tiny pharmaceutical companies? Because, if you find one that does get the approval, you can see huge gains. Take a look at this…

Caraco Pharmaceutical Laboratories, Ltd (CPD: AMEX) had a diabetes drug pre-approved by the FDA back at the end of 2001. From December 27, 2001 to January 22, 2002, shares of Caraco moved 447%. That’s less than one full month!

While many institutional investors stay away from biopharms for good reason, other adventurous types can still make tons of money with these little drug developers. It’s just something else to look for…

Best,
Gunner

P.S.: With Penny Stock Fortunes, I dabble quite a bit in the pharmaceutical field. I recently picked a few that are doing quite well. We’ve already had one go through this FDA burst.

And right now, you can get in on one company that has a proven, safe obesity drug. On top of that, you’ll get another drug company that is about to expand its client base from 18 million to over 400 million.

You can believe me or not, but these companies are about to go gangbusters, just like Caraco. Check out my newsletter here…

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Greg Guenthner is the editor for Penny Stock Fortunes and has helped in developing the Million Dollar Portfolio... <click here for full bio>