The Basics of Biotech Investing, Part 4: Understanding Regulatory Pathways and Their Impact on Investment

In the biotech sector, regulatory approval is one of the most critical factors influencing a company’s success. Whether a company’s drug is progressing through the FDA (in the U.S.) or the European Medicines Agency (EMA) in Europe, regulatory milestones can make or break a biotech investment. Understanding how the regulatory process works, and how it impacts company valuations, is essential for investors navigating this high-stakes market.

In this article, we’ll explore the key regulatory pathways for biotech companies, explain how regulatory decisions affect stock prices, and highlight the importance of fast-track designations and other special programs designed to expedite drug development.

1. The Role of Regulatory Agencies

Biotech companies developing new drugs must navigate complex regulatory frameworks to bring their products to market. The two most prominent regulatory bodies are the FDA (Food and Drug Administration) in the U.S. and the EMA (European Medicines Agency) in Europe. These agencies are responsible for approving new drugs based on their safety and efficacy.

- FDA in the U.S.: The FDA oversees the approval of drugs through its Center for Drug Evaluation and Research (CDER) and Center for Biologics Evaluation and Research (CBER). The approval process involves reviewing clinical trial data and assessing whether a drug’s benefits outweigh its risks.

- EMA in Europe: The EMA operates similarly to the FDA but serves the European Union. It also provides centralized drug approvals across the EU, which can streamline the regulatory process for companies aiming for a broad market.

2. The Drug Approval Process: Key Steps

For investors, understanding the steps involved in the drug approval process is crucial to tracking a biotech company’s progress. Here’s an overview of the key steps:

- Investigational New Drug Application (IND): Before a company can begin clinical trials, it must submit an IND to the FDA, detailing its preclinical data and proposed trial protocols. Once approved, human trials can commence.

- New Drug Application (NDA) / Biologics License Application (BLA): After successful clinical trials, the company submits an NDA (for chemical drugs) or a BLA (for biologics) to the FDA. This submission contains all clinical trial data, manufacturing details, and proposed labeling.

- FDA Review: The FDA reviews the NDA or BLA and makes a decision. This process typically takes 6–10 months, though certain designations (like fast track or priority review) can speed up the timeline.

Case Study: Gilead Sciences submitted its NDA for remdesivir, an antiviral drug, to treat COVID-19 under emergency use authorization (EUA). The expedited review process allowed Gilead to bring the drug to market faster, significantly boosting its stock price during the pandemic.

3. Regulatory Designations That Expedite Approval

For biotech investors, one of the most exciting developments is when a drug receives special designations that expedite its regulatory review. These designations are designed to fast-track drugs that treat serious or life-threatening conditions, potentially leading to quicker approvals and earlier market entry.

- Fast Track: Drugs that treat serious conditions and fill an unmet medical need can receive Fast Track status, which allows for rolling reviews and more frequent communication with the FDA.

- Breakthrough Therapy: A drug that shows substantial improvement over existing therapies during clinical trials may receive Breakthrough Therapy designation. This results in a faster, more intensive review process.

Example: Vertex Pharmaceuticals received Breakthrough Therapy designation for its cystic fibrosis drug, Trikafta. This designation allowed for an expedited review, helping the company bring the drug to market faster and boost its stock value.

- Priority Review: If a drug is expected to offer significant improvements over existing treatments, it may qualify for Priority Review. This reduces the FDA’s review time from the standard 10 months to 6 months.

- Orphan Drug Status: Drugs that treat rare diseases affecting fewer than 200,000 people in the U.S. can receive Orphan Drug designation, which comes with tax incentives, market exclusivity, and reduced regulatory fees.

Case Study: BioMarin received Orphan Drug designation for its gene therapy to treat hemophilia. The incentives, combined with market exclusivity, made BioMarin’s drug a highly attractive investment prospect, leading to significant interest from institutional investors.

4. How Regulatory Decisions Affect Stock Prices

Regulatory approvals or rejections can have an immediate and dramatic impact on biotech stock prices. Positive outcomes, such as FDA approval, can cause a company’s stock to skyrocket, while negative news, like the rejection of a New Drug Application, can cause severe declines.

- Positive Approvals: If a biotech company receives FDA or EMA approval for a new drug, its stock price often rises substantially due to the increased likelihood of revenue generation. The market tends to reward companies that successfully navigate the regulatory process.

Example: Biogen saw a dramatic increase in its stock price after the FDA approved its controversial Alzheimer’s drug, Aduhelm, despite debate over the drug’s efficacy. The approval added billions of dollars to Biogen’s market cap overnight.

- Negative Outcomes: On the other hand, if a drug is rejected by regulators or receives a Complete Response Letter (CRL) requesting more data, the stock may drop sharply. For smaller biotech firms that rely on a single product, this can be devastating.

Example: Clovis Oncology suffered a significant decline in stock price when the FDA issued a CRL for its lung cancer drug Rociletinib due to concerns about efficacy. The company’s valuation plummeted as investor confidence was shaken.

5. How to Monitor Regulatory Developments

Investors need to keep a close eye on regulatory announcements and upcoming decision dates to stay ahead of major market moves. Regulatory calendars, which track key milestones such as advisory committee meetings or PDUFA (Prescription Drug User Fee Act) dates, can be critical tools for investors.

- PDUFA Dates: The FDA assigns a PDUFA date when it expects to make a final decision on an NDA or BLA. These dates are important for investors because they often trigger significant price movements.

- Advisory Committee Meetings: Before the FDA makes a final decision, it may convene an advisory committee of experts to review the drug’s data and make recommendations. While these committees are non-binding, their opinions can strongly influence stock prices.

Example: The FDA advisory committee for Novavax’s COVID-19 vaccine convened in 2022, and the positive recommendations from the committee led to a sharp increase in Novavax’s stock price, as investors anticipated FDA approval.

Conclusion: Regulatory Knowledge is Key to Successful Biotech Investing

The biotech investment landscape is heavily shaped by regulatory decisions. Knowing how the FDA and EMA operate, and understanding the importance of special designations and key regulatory milestones, is essential for biotech investors. Companies with fast-tracked approval paths or orphan drug designations offer exciting opportunities, but the risks of regulatory failure are just as high.

Next Up: In our next article, we’ll explore early vs. late-stage biotech investments, helping you decide which approach aligns with your risk tolerance and investment strategy.