Trials & Triumphs of the FDA: What Matters? Where are We?

THE COWEN INSIGHT

Proper FDA functioning is key to getting therapies through clinical development and onto the market. Understanding regulatory interactions and their intricacies is an important aspect of the biopharma investment process. We provide a guide to the regulatory process, analyzing the impact of COVID and stock implications for key regulatory events along with investor and consultant perspectives.

REGULATORY DELAYS, CLINICAL HOLDS, & FDA REGULATION

The efficient functioning of the FDA is paramount for the timely advancement of important medicines through the clinic and onto the market. We believe that an understanding of the FDA regulatory framework from IND to approval is important for both generalist investors with healthcare exposure and biopharma sector specialists. In this report, we hope to provide not only a resource for the cadence of regulatory interactions that occur throughout the drug development process but also tackle key activities that can have important implications for approval success and stock movement.

While the FDA was instrumental in getting key therapies and vaccines to populations during the COVID pandemic, our discussions with investors and our survey results indicate that sentiment on FDA functionality is pressured. Approximately 80% of investor respondents to our sentiment survey expect that the Agency won’t return to pre-pandemic levels of functionality until at least H2:23, if at all. Regulatory delays, clinical holds, and inspection difficulties announced over the past couple of years have added to investor frustrations, leading to hesitance in investing around key regulatory events.

Our multi-year analysis indicates that the FDA showed signs of strain due to the pandemic, though increased negative investor sentiment may be slightly unwarranted. Our discussion with consultants and attendance at medical meetings over the past year suggest that staffing at the Agency is stretched; this aligns with our finding that the number of 3- month regulatory delays seen over the past couple of years is approximately double the number seen in pre-pandemic times. However, the number of CRLs has remained essentially unchanged over the past five years, the number of annual NME/BLA approvals remains at near record levels, and while the proportion may have drifted down slightly, the majority of candidates receiving a 3-month delay are still approved during the cycle. Thus, while FDA reviews are never without risk and the Agency can at times be unpredictable, we believe that products with compelling efficacy and safety data packages will continue to see approvals and that any perceived overly negative sentiment into a regulatory process could be capitalized on.

THE DEBATE AROUND ACCELERATED APPROVAL

In addition to the overall timeliness of regulatory actions and sponsor interactions, we expect that any change in body language around therapeutic designations and accelerated approval prospects over the next year will be a key investor focus. The appropriateness of the use of accelerated approval continues to be an active area of debate (notably, our survey indicated that more investors believe that the FDA should be less lenient in its use of the accelerated approval pathway compared to those that believe the Agency should be more lenient). The potential use of this pathway, especially for neurology and oncology indications with large addressable markets, can have substantial implications for patients and the underlying stock of the sponsor. The same applies to the acceptability of single-arm pivotal trials and changes to post-approval confirmatory trial requirements. Overall, we expect that the Agency may become stricter on the initiation and enrollment timing of confirmatory studies vs. historical examples. This agrees with the results from our investor survey, where ~95% of respondents believe the FDA is at least somewhat likely to move in this direction. We dive deeper into each of these themes in this report, how these events may impact stock performance, and how actions have changed over time.

TAKEAWAYS FROM OUR INVESTOR SURVEY

Our report provides not only a guide to the FDA drug approval process but also combines takeaways from our consultant conversations and independent analysis of FDA trends over the years to determine any associated impacts on Agency functionality resulting from the COVID pandemic. We use a proprietary investor survey around FDA sentiment and associated regulatory topics to guide our discussion and analysis. Overwhelmingly, 96% of respondents to our survey indicated that they believe the FDA has issued more 3- month delays or CRLs post-the COVID pandemic. We examined the number of 3-month delays from 2017-2022, demonstrating that this number has approximately doubled from pre-pandemic levels and that these events have a negative impact on the stock price. However, this same imbalance was not observed when looking at CRLs over the same time frame. The reasoning for the CRL is also essentially unchanged between the years pre- and post-the beginning of the COVID pandemic. This suggests that while the FDA may be stretched, important medicines continue to reach the market.

Our analysis also investigated the use of Breakthrough Therapy designation and its implications for approvability and program success since implementation. Interestingly, while designated and non-designated programs appear to have comparable (and high) levels of approval success once the regulatory package is submitted, BTD likely does increase the overall odds of success for a clinical candidate, potentially due to the increased interaction with the FDA throughout the development process.

An often-unfortunate surprise to investors and sponsors, we examine the number of clinical holds issued over the past several years, the associated stock movements on issuance and removal, and the average time needed to address the Agency's concerns. Perhaps unsurprisingly, our analysis indicates that the decline in stock price on the day of a hold announcement is greater than the increase seen on the day of release. As a result of the negative news event, companies with a hold in place underperform the biotech indices during the duration of remediation.

Our report ends with an analysis of Advisory Committee meetings from 2016-2022. Interestingly, AdCom results have skewed negatively over the past several years. We analyze the trading volumes and stock reactions on the days around an AdCom meeting and the odds that the FDA approval decision agrees with the panel vote.

WHAT TO WATCH

Throughout our analysis, we illustrate how key regulatory events can have implications for stock movement. In addition to monitoring the biopharma implications of the Inflation Reduction Act on the sector more broadly, we outline key upcoming regulatory catalysts in our full report. As our report highlights, trends in regulatory decisions, delays, inspections, and guidance over the next 12 months will be key in the perception of the FDA's functionality with investors. Given the results of our proprietary investor survey, FDA efficiency metrics and staffing will likely be closely monitored over the coming year.

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