When biotechs get breakthrough therapy status, Mr. Market yawns
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(This post originally appeared on Forbes.com on February 23, 2019.)
As a biotech consultant, I’ve heard many CEO’s tell me that a “drumbeat of news” is critical to sustain investors’ interest during the never-ending fundraising process – but I’ve never been convinced how much it moves the needle.
Of course, investors care about pivotal trial results or a new approval. But many small firms (and some larger drug makers) issue press releases at the drop of a hat: “We published a preclinical paper! We’re presenting at a conference! We appointed a new advisor!” I’m not saying these news nuggets aren’t important to disclose. But from a financial standpoint, do they have any impact?
One relatively common news item is when companies announce the receipt of breakthrough therapy designation (BTD) from FDA. In terms of importance, BTD is sort of a “tweener.” It certainly increases the speed and intensity of regulatory interactions, and perhaps it improves the odds of approval (although that’s hard to demonstrate). But from an investor’s standpoint, one might imagine the impact of BTD on the fundamental financial reality of the company would be pretty negligible.
Sure enough, the effect of BTD on stock prices is minimal, and only transient – as my collaborators and I found in our new paper (open access – click here; or email directly for a PDF) in Nature Reviews Drug Discovery. When we stripped out gains due to the stock’s pre-event activity and those due to the market overall, we found that pre-commercial biotechs saw a small bump in excess stock returns that lasted about a week after BTD announcement, and those of commercial drug firms didn’t budge.
The paper is open access, so please check it out – but in the meantime, it’s worth making three points about it. First, event studies like this measure “excess returns,” which don’t reflect the experience of investors in real time. (For more details, see the supplemental info to our paper; the methods are pretty interesting, if you’re into that sort of thing.) Yes, biotechs’ stock prices often increase after they announce BTD – but according to our results, the increase is only negligibly more than what you would have expected to see if the BTD announcement hadn’t happened.
Second, it’s worth noting (as Derek Lowe did in his blog) some folks’complaint that besides giving drug makers a regulatory fast-pass, BTD may also provide them with extra financial benefits, like the perception of higher efficacy on the part of physicians and patients when the drug reaches the market. Our results suggest that investors aren’t as easily swayed as doctors or the public. As Jay-Z might say, BTD may provide 99 benefits, but an excess stock price boost ain’t one.
Finally, a quick note on how this paper came together. David Hoffmann, a PhD student at Vienna’s Institute of Molecular Biotechnology, emailed me last year about a possible part-time job at Pharmagellan. I didn’t have a position available, but I loved his drive, and we kept in touch. When I first started thinking about this idea, I asked him to help me think through the issues, and was thrilled that he agreed to do all of the heavy lifting to bring it to fruition. As David and I got into the weeds on event studies, we discovered a fabulous video by Shane Van Dalsem at Washburn University. We cold-emailed Shane to get some advice on methodology, and he was extremely generous with his time and insights, and graciously agreed to formally work with us on the paper. Many thanks to both David and Shane for collaborating with me on this paper – it never would have happened without them.