Drug Approvals Don't Always Translate Into Stock Gains: 3 Biotech Examples

I tend to get a slew of questions every week regarding the strange price movements, both immediate and near term, that small biotech and biopharma stocks can have after U.S. Food and Drug Administration (FDA) drug approvals. There are still quite a few investors in the market who believe FDA approval means their stock should continue to ascend. Unfortunately, like almost everything else is this high-beta and at times maddening space, it isn't quote so straightforward.

Here are three things that are likely to guide any small or midcap equity in this space directly after approval and in the months after that as well.

1. What did the stock do in the weeks leading up to the approval date?
2. What were certainty, impact and clarity of the FDA decision?
3. How challenging or easy is the rollout of the approved compound likely to be?

Usually a stock will get the most pop if there is little run-up in price into the decision date, the drug will have meaningful impact on the company's business prospects and there is some or considerable uncertainty whether the drug candidate will be approved. When those traits are not there, you easily can get some "buy the rumor, sell the news" trading action even when the FDA gives the green light. This recently happened to Neos Therapeutics Inc. (NEOS) , which is down about 10% since its compound NT-201 was approved on Friday. Of course, the stock ran up 30% in the month prior to the FDA action, this is third drug approval this small-cap concern has garnered in the past year and it probably has the least impact of the three compounds approved over that time span. Therefore, the slight selloff after approval.

Going the other way is the stock of Adamas Pharmaceuticals Inc. (ADMS) , which is up 50% since its drug Gocovri was approved a few weeks ago. The stock did not run up into its approval date, primarily because there were considerable concerns that the FDA would not give it the go-ahead. When a thumbs up was given, it was off to the races as Gocovri, which is likely to be Adamas' primary growth engine in the years ahead.

Then there is the difficulty of the initial rollout of the drug once approved. The easiest drugs to roll out are those for rare or ultra-rare afflictions with no current competitors on the market. Most of the potential patients that have these types of diseases are known, are seen by a relatively few number of specialists, and can be served by a small sales force. Once reimbursement coverage is achieved, sales can ramp up quickly with a relatively limited amount of investment.

The hardest drugs to garner market share are in spaces with alternatives and those aimed at the mass market. This requires significant investment or a distribution deal with a larger drug giant as well as a large sales force and numerous sales aids and education efforts. These are the challenges Synergy Pharmaceuticals Inc. SGYP has encountered in rolling out Trulance, which was approved for the treatment of chronic idiopathic constipation in January.

While Synergy's drug is superior to the market-leading drug in the space in a couple important ways, it has entered a huge market with more than 30 million potential customers who are served by tens of thousands of gastrointestinal specialists. The stock has been cut in half since approval. Trulance sales should be running at a $50 million annual rate by the end of the year. However, it has been a tough slog and the company recently did a $300 million debt deal to support long-term marketing of this drug. Investors have had to exhibit more patience that they would have thought on this name nine months ago.

So, as with most questions in this sector of the market, the answer to this sort of inquiry is usually "it depends."

This commentary originally appeared on Real Money Pro on Sept. 20. Click here to learn about this dynamic market information service for active traders.

At the time of publication, Jensen was long ADMS, NEOS and SGYP.