The Short-Seller Who Got Amylin Right

An assortment of United States coins, includin...Image via WikipediaNEW YORK (TheStreet) -- Not all investors are shocked and upset about the decision by U.S. regulators to reject Amylin Pharmaceuticals' (AMLN) diabetes drug Bydureon. Short-sellers -- investors who bet that Amylin shares would fall -- are positively giddy and making money.

Amylin shares are down $10.35, or 50%, to $10.14 in Wednesday trading.

How did the shorts get Amylin right when a majority of investors believed Bydureon was going to be approved? I spoke with one Amylin short early Wednesday about his bear thesis. This hedge fund manager asked to remain anonymous because the rules of his fund forbid him to speak publicly about his investments.

"I always believed that Amylin and Eli Lilly (LLY) were taking shortcuts to get Bydureon through the FDA" and the agency was going to have problems with this approach, said this short seller.

Bydureon is a once-weekly version of the diabetes drug Byetta, which is currently sold by Amylin and Lilly. The two drugs share the same active ingredient, exenatide, so Amylin and Lilly relied heavily on Byetta safety data and sought FDA approval for Bydureon under the agency's so-called 505(b)(2) rules, which is designed to save time and money compared to filing for approval as a full-fledged New Drug Application, or NDA.

The hedge fund manager, short Amylin, continues:

"Amylin and Lilly consistently called Bydureon a line extension of Byetta by design because it made investors feel comfortable that approval was not going to be a big deal. But when you look back at other companies that developed new, long-acting versions of their own drugs, you see that they filed full NDAs and chose not to use the 505(b)(2) shortcut."

His short thesis, in other words, relied on a belief that FDA would fundamentally disagree with Amylin and Lilly's contention that Bydureon and Byetta were essentially the same drugs. As such, the agency would want to see more clinical data in patients treated with Bydureon.

This hedge fund manager didn't predict that FDA would ask Amylin and Lilly to conduct a new safety study testing Bydureon's effect on the electrical signaling of the heart -- a so-called thorough QT study. However, he did pick up on an artifact of the Alkermes (ALKS) technology used to create Bydureon's once-weekly dosing that worried him from a safety standpoint, and which made him feel more comfortable with his short call on Amylin.

"When a patient takes multiple doses of Byudreon, the drug accumulates in the body. Even after a patient stops taking Bydureon, the drug stays in the system at very high, therapeutic levels, which is a problem if the patients experiences side effects. I didn't guess about the QT issue, but I did think that FDA would be cautious because of Bydureon's depot [long-acting] formulation," the hedge fund manager said.

In fact, he was right. Amylin and Lilly need to spend the next year conducting a new cardiac, or QT study, because the FDA is worried about potentially damaging effects to the heart caused when extra-high levels of Bydureon build up in a patient's bloodstream. Diabetics with kidneys that don't function properly may be particularly susceptible to higher levels of Bydureon in their bloodstream.
Finally, this short seller -- he's a doctor by training -- took off his white lab coat and donned his marketing hat.

"If Amylin and Lilly were so confident about Bydureon's approval, where were the ads?" he asks, referring to teaser ads that companies routinely place in medical journals to prep doctors that a new drug is about to be approved.

"When I didn't see any 'Bydureon is coming' ads, I knew something was wrong," he adds.

In the end, this Amylin short seller was right.

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