Roche Take-Over of InterMune A “Rebuke” to FDA

The Wall Street Journal editorial board has an interesting take on Roche’s takeover of InterMune, calling it a “rebuke” of the FDA:

Amid this summer’s M&A fever, Roche’s agreement Monday to buy the San Francisco biotech InterMune ITMN -0.05% deserves special notice. The tie-up is an $8.3 billion guided missile into the fortified bunker that is the Food and Drug Administration.

InterMune has never turned a profit in 16 years of existence and other than its clinical expertise the company holds a single asset: an idea for treating a lethal lung disorder called idiopathic pulmonary fibrosis with no known cause, cure or approved therapy — at least in the U.S. An InterMune drug called pirfenidone that slows the progression of irreversible lung scarring is on the market in Europe, Japan, Canada and even China.

But the FDA refused to approve pirfenidone in 2010, despite the 40,000 Americans who are killed annually by lung fibrosis and a positive recommendation from its outside scientific advisory committee.

I’m not quite sure how the takeover is a “guided missile” at the FDA: Corporate takeovers do not change the behavior of the FDA. Nevertheless, the editorial introduces an interesting way to look at the harm the FDA does.

It is a rule of thumb that a pharmaceutical firm cannot make money outside the U.S. That is not to say that international profits are zero, but that no investor would put capital at risk in a therapy that has no chance of approval by the FDA.

The question is: When? InterMune had a loss last quarter of $72 million on sales of $36 million. Sales, general, and administrative (SGA) expenses were $52 million, while research and development spending was $40 million. That is, InterMune’s revenues did not even cover its SGA costs, much less contribute to the R&D budget.

And yet, investors have been willing to keep risking their capital for sixteen years on this venture. They are confident that the FDA will eventually approve the new therapy. And yet the FDA continues to drag its heels.

InterMune’s investors, including Roche, have the best scientific experts at their service. The efficient-markets hypothesis tells us that the combined judgment of these investors, not the centralized FDA bureaucracy, is the best indicator of the value of InterMune’s medicines.

Can we rely on the stock market, rather than the FDA, to tell us when new medicines are ready for human use? What would such a policy look like in practice? Let us know what you think in the comment section.

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