Playing FDA Approval is often a risky play. Mainly because it can either shoot up with approval, or tank with rejection. There are also some special cases where the approval date is delayed and the stock goes down due to uncertainty in the stock, case and point Forestry Biotech (FBIO). On April 12th, the set approval date, no approval ever came. Then, the following day on April 13th the company announced the FDA was still reviewing their application, and the stock has been in a slow bleed ever since. Overall, you have to expect the unexpected with FDA approvals, and we’re gonna explore some strategies you can take.
History of FDA Approvals
First, lets take a look at how certain stocks have reacted to approvals and rejections in the past. The first stock we’ll take a look at Evoke Pharma (EVOK) when the FDA approved their Gimoti (metoclopramide) nasal spray.
Prior to FDA approval, EVOK closed at a share price of $2.35 on June 19th, 2020. The next day when the FDA approval hit, the stock skyrocketed to a high of $5, which is approximately a 213% increase in price, and closed at $3.80, which is still a 61.70% increase. The day after, the stock dropped 6.05% to $3.57 and consolidated around that price level for the coming days.
Now we take a look at a biopharmaceutical company that was not so lucky with their FDA approval. This not so fortunate company is BioMarin Pharma (BMRN), and their application for hemophilia A gene therapy.
BMRN ultimately dropped to a low of $74.56 on the day of rejection (August 19th, 2020) and closed at $76.72. This was a 35.28% drop from the previous close of $118.54 the day prior. Like EVOK, the price then consolidated for several days afterwards.
Now comes the question of how to actually play these FDA approval dates. First, I will mention that a site I find to be extremely helpful in finding upcoming FDA approval is biopharmcatalyst.com. With these plays being so risky, it is good to go in with a plan and to know your risk tolerance.
Buy the Hype, Sell the News
This strategy is pretty self explanatory. Often there will be excitement in the days prior to approval, and can be a good time to buy in. Thus, buy the hype. After the approval is released, you will see people taking profits and the price go down. Thus, sell the news. Pretty simple, right?
Placing Calls and Puts
If you’re bullish on a company’s drug approval, a potentially good thing to do would be buying a call option for the targeted stock, and selling the call option once the price passes the strike price. The stock price will almost always go down, in most cases, after the initial excitement of FDA approval, which is where buying a put option comes into play. Like a call option, sell it when the strike price has been passed. This can also be used if you are bearish on a company’s drug approval. As always, beware of the risk and be sure you have an exit strategy.
The dreaded shorting of a stock is not something I am particularly a fan of, but there is money to be made with this strategy on FDA plays. If you are bearish on the approval, short the stock prior to approval date. An alternative would be waiting until the excitement cools down after approval and shorting the stock on its way back down.
I will reiterate this as I have many times before, FDA approval plays are risky and it is highly recommended that you have a plan before making any sort of move. Make sure you know what you are willing to lose, and where you want to take profits, this will greatly benefit you in any type of investing, FDA plays or not.
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*Disclaimer* I have no positions in any of the stocks previously mentioned and do not plan to take any within the near and far future