The FDA’s Road to Biotech Riches: Part 3
The FDA’s Road to Biotech Riches: Part 3
If you’ve been following us for the past two issues, you’ve seen the first two stages of what it takes for a drug or medical device to get approved by the FDA…
… And what those steps mean when it comes to trading biotech stocks…
Today we have Ray Blanco with us once again to go over the third and final stage!
With this information on deck, you’ll be able to follow companies through the trials and tribulations they go through to get their products tested and approved.
Not only that, but you’ll know what each step means in regard to trading the company that is coming out with the therapy.
Without further ado, let’s jump into that last stage…
Dr. Patrick Gentempo
A Lifetime Love of Technology
Something you need to know about me is that I love technology — and have ever since I was a kid.
When I was 10, I spent hours in my room every night typing programming code into my Timex Sinclair 1000. When I was in the eighth grade, I built a “Wilson cloud chamber,” a delicate and complex supercooled device for detecting particles of ionizing radiation.
After earning a bachelor’s degree in information technology from Hodges University, I spent over a decade working for public and private companies as a network technician and systems analyst. In fact, I used to work for one of the most successful private wealth management firms in the country — with over $30 billion in assets under management — to design and oversee their entire network infrastructure, everything from internet connectivity to data integrity and security.
Along the way, I kept an eye on breakthroughs and developments around the world. Computers, robotics, space travel, genetics and more. If something was coming that could change life as we knew it, I was paying close attention. That included an interest in the field of medicine — the next generation of treatments and cures.
And in Stage 3 those treatments are well on their way to reaching their goal — being sold on the market and subsequently, the price of the company stock shooting up…
Stage 3: Superboom Calendar Plays
With Phase 3 test results in hand, the company can file paperwork with the FDA to allow them to sell the drug. It’s called a New Drug Application (NDA).
The company needs to consult with the FDA during the process, so it could take a few weeks or even months to complete the paperwork. But filing an NDA is a big deal — essentially the company is saying it has jumped through all the required hoops and thinks the drug is ready for the public.
Under the Prescription Drug User Fee Act (PDUFA), passed by Congress in 1992, the FDA must take action on the application in a timely manner. For most drugs, the FDA must approve or deny the NDA within 10 months. If a drug has received Fast Track status, it will be eligible for accelerated approval — meaning the decision will take no longer than six months.
The day the FDA is scheduled to give its decision is known as the PDUFA date.
Obviously the PDUFA date will mark a major turning point for the stock. If the FDA approves the company’s treatment, it can start marketing it to doctors and potential patients. Revenues won’t be far behind.
But once again the danger is that the FDA will see something in the data it doesn’t like. If it denies the NDA, it will mean years of wasted work and millions of wasted dollars. The best the company can hope for then is a chance to repeat earlier tests.
There is one way to gauge the FDA’s thinking before the PDUFA date, though. In fact, it represents a catalyst by itself. Before deciding on whether to approve the treatment or not, the FDA will ask the opinion of an advisory committee.
The advisory committee is made up of a panel of experts. They schedule a public meeting to discuss the drug. (It is usually a webcast so you can see what’s happening no matter where you are.) The biotech company and others present evidence about the drug from scientists, key opinion leaders and patients.
The panel members can ask questions about the treatment and its data.
At the end of the meeting, the committee votes on their opinion of the treatment, including whether the FDA should approve it. While the FDA does not have to follow the committee’s recommendations, the votes do carry a lot of weight.
So if a majority of the committee is in favor of the drug, we can expect the company’s stock price to rise.
If the vote is negative, expect the stock to fall. Again, the advisory committee’s opinion isn’t binding, so the FDA may still decide to approve the drug — but the odds are low.
A close vote, with a slim majority of the panel voting in favor of the drug, could also hurt the stock. The FDA has been known to accept the opinion of the minority in cases where the vote totals are close.
Again, the smart move might be to collect some profits before the committee meeting or the PDUFA date. But we may also want to keep some money on the table… because a company that gets approval likely has a very bright future in front of it.
As I said, being able to sell the drug creates revenues. The company can use that money to fund more drug and medical device research. It also puts the company on the road to profitability.
Even better, a successful NDA makes the company buyout bait. Remember, large drug companies like to let smaller ones take on all the risks of researching new medicine. Once the large company knows the drug works, it can buy out its smaller rival for virtually little risk.
The majors are often willing to pay a nice premium to the acquisition target’s current stock price — giving early investors a chance to profit handsomely from the buyout. Of course, buyouts are tough to predict. But if we hold a good-value biotech, where the market price is a lot lower than what we think it’s worth, the odds of someone acquiring the company go up.
Of course, we don’t need a buyout to see a big win. In fact, we may see even bigger profits without one. The catalyst dates we’ll look for here are the company’s earnings announcements, where we should see increasing revenue and a path toward positive cash flow.
So once again, we’ll have a good expectation of when to expect the stock to soar or fall.
I don’t know of any other industry that offers so many distinct catalysts for profits on such a relatively predictable schedule!
There You Have It…
Biotechnology and medical technology are never going away. As long as human beings exist, there’ll always be something that goes wrong with our bodies, and there will always be a market for fixing it.
Understanding the steps a company must go through to bring its treatment to market gives you an excellent opportunity to profit from it.
Best of all, the regulatory and clinical calendar events can even generate oversized profits in bear markets. A biotech company with a near-term catalyst can trade independently of the overall market — and post huge overnight gains even when the markets are sinking.
To a bright future,