Will the Biogen Drug Approval Be a Boon for Biotech?

Last week, the FDA approved Biogen’s Alzheimer’s drug candidate, aducanumab (marketed as Aduhelm). This approval looks likely to be a watershed moment for the biotech industry. The shares of Biogen were halted for the announcement. And as anticipated, they popped once trading resumed.

The approval was somewhat unexpected—and controversial. Some investors think it signals a change in approach for the FDA, which would affect all biotech companies. Others are more skeptical. But any way you look at it, this decision is likely to have broad repercussions on the biotech industry and investors.

First, Some Background

Alzheimer’s is a type of dementia that affects memory, thinking, and behavior. It is a progressive disease and can severely affect an individual’s quality of life. Alzheimer’s is the sixth-leading cause of death in the U.S., and it is estimated that nearly 3.5 percent of the U.S. population will have the disease by 2040. Unfortunately, no cure has yet been found, and there are very few approved drugs targeted at helping with symptoms.

Aducanumab is the first drug approved for treating the disease and comes after several years and millions of dollars of failed efforts by researchers at several companies. One reason the approval process for aducanumab has been so controversial is that doubts have been raised as to whether the FDA succumbed to pressure from friends and family of Alzheimer’s patients. Many believe the FDA has fast-tracked the drug’s approval without enough supporting clinical data on its efficacy and safety. Further, some outside experts and members of the medical community have expressed reservations about endorsing the drug, casting further doubt on its uptake.

Of course, this decision could be a one-off. On the other hand, it could be a harbinger of a more flexible FDA, especially for approving drugs with conflicting evidence for an unmet but pressing need. This change could be good for patients, as well as for drugmakers. But it would also impose new risks, and it has certainly opened the doors for many debates on the future path of clinical trials, data, and drug approval.

A Biotech Revolution?

Several drugmakers have been working on finding a cure for Alzheimer’s. A winning treatment could be revolutionary given the extent and criticality of the disease, and it is expected to generate billions in sales. Aducanumab’s approval has lifted a cloud of uncertainty for Biogen and provides a ray of hope for other companies working on their own Alzheimer’s treatment candidates.

Biogen had a lot riding on aducanumab, but its approval is also putting other irons in the fire. The future of biotech companies, especially ones with a narrow focus, is quite often a coin flip. Science is difficult, and the rigor of researching and getting a new treatment approved and commercialized can sometimes seem insurmountable. Investors in biotech companies know this well and generally assign a much higher uncertainty to the stock prices of these companies. If the recent approval is symbolic of the FDA’s future approach, it could be heartening for investors in those companies, especially for small companies with only one drug.

Should Investors Be Wary?

The aducanumab approval could be a pivotal moment for the biotech industry and a monumental step in the history of efforts to treat Alzheimer’s. But investors should be wary of extrapolating a near-term win and pop in stock prices into a longer-term trend.

If the recent FDA decision is a trendsetter, and more experimental drugs get approved, that still doesn’t mean a clear road ahead. Such drugs could be viewed with greater skepticism by scientific experts. Further, insurance carriers may not cover the drugs, which could severely impair their sales. At the same time, biotech stocks will remain susceptible to binary outcomes: they either hit a homer or strike out. A robust pipeline with drugs at different stages of development is critical for them, especially as they are constantly under pressure of losing market share to generics on existing drugs once they come off-patent. Some companies might enjoy first-mover advantages for experimental drugs, but often second-generation drugs could be an improvement and hence gain greater market share. They need to have ample financial strength or collaborative support to fund research and development of drugs with enough reserves for a long runway thereafter, as it could take years to recoup the costs.

On the other hand, the higher volatility in biotech stocks can present opportunities for stock pickers as even a well-established drugmaker could see extreme price movement in reaction to even slightly good or bad news. Smaller biotech companies are frequently gobbled up by the bigger, more established players. These mergers and acquisitions, when done right, can be additive for shareholders.

The key is to do your homework and know your risk appetite when investing in biotech stocks.

Editor’s Note: The  original version of this article appeared on the Independent Market Observer.

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