Why would investors dump shares and cause pharma stock to plummet after FDA approval?
Biotech shares do tend to drop after getting FDA approval which sounds extremely counter intuitive. But there are a bunch of other factors that do go into valuations which do sort of explain this.
The most common explanation that I tend to find for a price drop is because investors tend to be more bullish on what the label will say. Generally speaking, the certainty going to FDA approval is pretty high. Most of the uncertainty will be what the approval will actually be for. Typically the most movement a stock will see isn’t around the approval date but around the advisory committee vote which occurs a few months prior to the FDA approval. A strong vote from the advisory committee gives good assurance that the drug would get approval which removes the biggest uncertainty around the company’s value.
Which brings us to the label. Once the uncertainty of the approval goes away, there is a lot of speculation on how wide the label extends. Investors will be bullish and hope that the drug can be given to nearly freaking everyone. More likely than not, the drug will be approved with certain limitations on indications, additional side effects, and certain post-market commitments to do follow-on trials to extend the label. All of those additions will decrease the value of the drug and ultimately the value of the stock.
Using one of the extreme examples let’s look at Biogen’s stock. Everyone knows about Biogen’s big drop due to the Alzheimer’s clinical trial failure. But a year earlier in July 2018, they made the announcement that they might have an Alzheimer’s drug which caused the price to pop. Their aducanumab Phase I results were presented back in 2016.
Biotech shares do tend to drop after getting FDA approval which sounds extremely counter intuitive. But there are a bunch of other factors that do go into valuations which do sort of explain this.
The most common explanation that I tend to find for a price drop is because investors tend to be more bullish on what the label will say. Generally speaking, the certainty going to FDA approval is pretty high. Most of the uncertainty will be what the approval will actually be for. Typically the most movement a stock will see isn’t around the approval date but around the advisory committee vote which occurs a few months prior to the FDA approval. A strong vote from the advisory committee gives good assurance that the drug would get approval which removes the biggest uncertainty around the company’s value.
Which brings us to the label. Once the uncertainty of the approval goes away, there is a lot of speculation on how wide the label extends. Investors will be bullish and hope that the drug can be given to nearly freaking everyone. More likely than not, the drug will be approved with certain limitations on indications, additional side effects, and certain post-market commitments to do follow-on trials to extend the label. All of those additions will decrease the value of the drug and ultimately the value of the stock.
Using one of the extreme examples let’s look at Biogen’s stock. Everyone knows about Biogen’s big drop due to the Alzheimer’s clinical trial failure. But a year earlier in July 2018, they made the announcement that they might have an Alzheimer’s drug which caused the price to pop. Their aducanumab Phase I results were presented back in 2016.
What is the true value of Biogen? Nothing practically changed about the drugs that they were selling between 2016–2019 but their stock fluctuated by nearly 50%. Everything was based on the perception of how big aducanumab and BAN2401 could be rather than how big they actually were. But these future looking evaluations are how stocks values are determined which is why they often move in opposite ways than how you would expect.
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