UPDATED: FDA spurns Sanofi's MS drug Lemtrada on fatally flawed PhIII design

Sanofi ($SNY) has been slammed against the regulatory wall at the FDA, picking up a stinging rejection of its multiple sclerosis drug Lemtrada with orders to go back to the clinic for a major round of new trial work if the company ever expects to get the drug over the U.S. finish line.

The FDA had already clearly signaled its position in November, when a staff review highlighted the data on an increased risk of autoimmune diseases, serious infections and treatment-emergent malignancies among the patients taking Lemtrada in Sanofi's studies. To be approvable, Lemtrada would have to demonstrate substantial clinical benefits, the FDA noted, or the drug's "serious and potentially fatal safety issues" would scuttle the marketing application.

A panel review followed with a mixed vote, with a majority saying the safety issues didn't preclude an approval but that Sanofi's clinical trials were inadequate.

Sanofi fired back today, saying that it would appeal the decision. But appeals related to the FDA are generally futile, leaving Sanofi staring at a major new investment for a drug that is unlikely to carve out a very large place for itself in the MS market. Peak sales estimates hovered around $700 million and will now drop considerably as analysts assess the damage.

"Genzyme's takeover was about catching up in biologics, having a greater footprint in the United States, and also largely for Lemtrada," Eric Le Berrigaud, an analyst at Bryan Garnier & Co, told Reuters. "This is unquestionably a setback, as without a U.S. market such a product doesn't have the same potential."

Le Berrigaud wrote off his own peak sales estimate for Lemtrada as investors fled the scene.

When Sanofi set up its deal to buy Genzyme, the company created CVR certificates--traded as $GCVRZ--that could have been worth $14 a share by 2020 if the drug hit a series of goal posts along the way. But the CVRs have been trading at a deep discount as Sanofi found itself in turbulent waters at the FDA. This morning they dropped about 70% to a mere 25 cents a share.

According to the pharma giant's statement this morning, its subsidiary Genzyme was told by the FDA that its "application is not ready for approval. FDA has taken the position that Genzyme has not submitted evidence from adequate and well-controlled studies that demonstrate the benefits of Lemtrada outweigh its serious adverse effects. Genzyme understands that the conclusion is related to the design of the completed Phase III active comparator studies of Lemtrada in relapsing-remitting MS patients. FDA has also taken the position that one or more additional active comparator clinical trials of different design and execution are needed prior to the approval of Lemtrada."

Lemtrada had proved to be a major attraction to Sanofi when it bought out Genzyme for $20 billion in 2011. The drug had been in use as a treatment for leukemia, but Sanofi took it off the market in preparation for repurposing it as a treatment for MS. Lemtrada won a European approval recently. Any U.S. debut now will likely have to wait a few years as Biogen Idec ($BIIB) and Novartis ($NVS) pursue big markets for the oral drugs Tecfidera and Gilenya.

- here's the release 
- get the Reuters article