Making money with biotech stocks — Understanding the pre- and post effect of a FDA drug approval on stock movement? Testing theory with the stock Gamida Cell Ltd.

The Food and Drug Administration (FDA) approval of a new drug can have a significant impact on the stock price of the corresponding biotech firm. This impact can occur both before and after FDA approval, and it is influenced by a number of factors such as the nature of the drug, the strength of the clinical trial data, and the potential market size. When we look at some research the following can be said:

Chen, Feng and Huan (2020) find for example “that new drug approvals released by the US FDA lead to significantly positive stock price cumulative abnormal returns (CARs) in most stages of the new drug approval process, in particular, for the phase 3 stage. This implies that public investors are more willing to invest in the later stages of the US FDA approval process due to the high failure rate of drug verification.”

Vedd, Fountaine, Liu and Wu (2018) found: “When the approved drugs present material new benefits over existing available alternatives, FDA approval announcements do have impact on companies’ market share price.”

Donovan (2018) further found that “the type of disease a drug treats has little impact on its stock price return, while more novel drug application types have a positive effect on returns. Other variables have effects that vary depending on the time-period analyzed. Based on these findings, to maximize expected short-term returns, investors should only buy and hold a drug company stock before the FDA decision is announced. Investors should prioritize investing in companies that have not generated revenue and whose drug applications are Type 1 and have orphan designation.”

A bit an older study from found Rothenstein, Tomlinson, Tannock and Detsky (2011) found “that the mean stock price for the 120 trading days before a phase III clinical trial announcement increased by 13.7% (95% confidence interval = −2.2% to 29.6%) for companies that reported positive trials and decreased by 0.7% (95% confidence interval = −13.8% to 12.3%) for companies that reported negative trials (P = .09). In a post hoc analysis comparing the stock price averaged over 60 trading days before and after day −60 relative to the clinical trial announcement, the mean stock price increased by 9.4% for companies that reported positive trials and decreased by 4.5% for companies that reported negative trials (P = .03). Changes in company stock prices before FDA regulatory decisions did not differ statistically between companies with positive decision and companies with negative decisions.”

Summarized: There appears to be an impact on FDA approval and stock markets, thus there appears to be an opportunity to make money!

Note: A biotech company’s stock price may fluctuate prior to FDA approval based on expectations of approval or rejection. If the drug’s clinical trial data is strong and there is hope for approval, the stock price may rise in anticipation. If the data is lacking or there are concerns about safety or efficacy, the stock price may fall in anticipation of a negative FDA decision. Following FDA approval, the biotech company’s stock price can be influenced by a variety of factors. One of the most important is the drug’s potential market size. If the drug is expected to address a significant unmet medical need and has a large market potential, the stock price may rise as investors anticipate strong sales and revenue growth.

Market competition is another factor that can influence stock prices. If many other drugs that treat the same medical condition are already available, the stock price may not rise as much because investors may expect lower market share and revenue growth.

Furthermore, the timing of FDA approval can have an impact. If the approval process takes longer than expected, the stock price may fall as investors become frustrated and concerned about revenue growth delays. If, on the other hand, the approval process takes less time than expected, the stock price may rise as investors are pleasantly surprised by the earlier-than-expected approval. Finally, post-approval events like safety concerns or unexpected competition can have an effect on the stock price. If safety concerns arise after approval, the stock price may fall as investors worry about the potential impact on sales and future regulatory actions. Similarly, if unexpected competition enters the market, the stock price may fall as investors reconsider the drug’s potential market share and revenue growth.

How to make money out of this know?

One potential strategy is to conduct thorough research and analysis of biotech companies and their pipeline of drugs. This may involve examining clinical trial data, assessing the potential market size for the drugs, and evaluating the competitive landscape. With this information, an investor can make informed decisions about which biotech companies are most likely to receive FDA approval for their drugs, and which ones are likely to experience significant stock price increases after approval.

Another strategy is to keep a close eye on the FDA approval process and related news. This may entail following FDA announcements and press releases, as well as industry news and events that may have an impact on the biotech sector. An investor can make timely decisions about buying or selling biotech stocks based on the potential impact of FDA approval by staying up to date on these developments. I also recommend to keep a close eye on news releases on the SEC EDGAR database.

It is important to note that investing in biotech stocks can be risky, as there is no guarantee that a drug will be approved by the FDA or that a company will be successful in the market. As with any investment, it is important to carefully evaluate the risks and potential rewards before making any decisions. It is also important to diversify your portfolio and not rely solely on one investment or sector. Consulting with a financial advisor may also be beneficial in making informed investment decisions.

During the time of writing this article, a potential candidate for achieving gains might Gamida Cell Ltd. (GMDA). The closing price for the stock was $1.67 (06.03.2023). FDA approval is due 1. May 2023, thus prior gains might be possible. Another company might be Sangamo BioSciences, Inc. ($2.55, 06.03.2023). Let’s see what the future holds. I’ll keep you updated on this.

Note: These are personal opinions and other individuals should build their own perspective on this strategies and stocks.