FDA’s OK Isn’t Always a Happy Day for Biotech Investors

Investors should curb their enthusiasm.

In recent weeks, three closely watched Food and Drug Administration decisions came in positive for the companies—followed by their stocks going negative. While every drug has its own set of challenges, the disappointment generally came down to FDA decisions that, while giving the companies the much-needed go-ahead, may also have created unexpected hurdles, explains Jefferies healthcare strategist Will Sevush.

The best-known of the three was the decision on Biogen and Eisai’s Leqembi for Alzheimer’s disease. The FDA on Thursday granted full approval, which means that Medicare enrollees who qualify can now get fully covered treatment with the drug. The regulatory nod, along with the ensuing Medicare coverage, is a massive victory for the companies after their Aduhelm, also an anti-amyloid drug, was essentially shut down by Medicare. Eisai said Leqembi could generate $7 billion in annual sales globally by 2030, and many analysts think the figure could be higher.

Yet for investors, the incremental news last week was negative. Since investors already perceived the approval as priced in, they were instead troubled that the FDA label includes a warning that anti-amyloid drugs are linked to risks of brain swelling and bleeding while also recommending people get tested for a gene called APOE4, which is associated with Alzheimer’s. Biogen shares dropped 3.5% on Friday before partly rebounding on Monday.

“The stronger language on recommending APOE4 carrier status testing certainly comes as a surprise—the FDA is showing they are more conservative here than previously, and would prefer patients are aware if they are at elevated risk,” wrote Stifel analyst Paul Matteis. “Ultimately this makes the drug even more difficult to prescribe.”

The other two high-profile approvals in recent weeks were for gene-therapy companies. For both BioMarin Pharmaceutical’s Roctavian for hemophilia A and Sarepta Therapeutics’ Elevidys for Duchenne muscular dystrophy, approval came after an arduous regulatory process.

But when the FDA’s nod came, it made investors jittery. Sarepta shares are down 14% since Elevidys won accelerated approval in June, mainly because approval was limited to patients ages 4 to 5 who can still walk. While the company is running a confirmatory study that could open the way for use in older patients, investors worry the results may not support the expanded use.

BioMarin stock is down 6% since Roctavian was approved, due to what analysts saw as extensive-safety monitoring requirements as well as discrepancies between the FDA’s description of the drug’s effect on bleeding reduction and the company’s own analysis before approval.

Reactions to FDA approvals will always be highly specific to the story of the company. Stocks tend to gain when approval is seen as highly uncertain. That was the case with Reata Pharmaceuticals, whose stock tripled in March after it won a surprise approval for a rare-disease drug.

A May note from Evercore ISI showed that from 2017 through 2021, small and midsize biotech stocks lost ground in the months after approval, while 2022 and the first few months of 2023 were a generally positive period for new launches. Some of those recent gains were probably driven by how cheap stocks had become. The popping of a massive Covid-fueled biotech bubble in 2021 sent the sector crashing, priming individual biotechs with approved products for a good run.

“It’s possible that 2022 was a period marked by uniquely depressed valuations, giving companies more opportunity to drive outperformance after launches compared to prior years,” wrote Evercore analysts in May.

But with the SPDR S&P Biotech exchange-traded fund known as XBI now up about 25% from its May 2022 bottom, valuations are less attractive, especially with interest rates still moving higher. These days, when executives and scientists pop the bubbly, investors should exercise caution before joining the party.

Write to David Wainer at [email protected]