The importance of an FDA drug approval cannot be denied, but it is also a fact that the event can have different effects on the stock price. The ideology of buying on the rumor and selling on the news is a major factor when it comes to stock slides after drug approvals. This is because Investors sometimes prefer taking profits after approvals and sell the stock on the approval news. This is of course only applicable to small-cap biopharmaceutical companies, where valuations are entirely dependent on a single drug approval.
Despite approval, there is still no guarantee that a specific drug will finally live up to expectations, no matter how much analysts think it will earn. Recent examples of this phenomenon are the below par sales of VIVUS, Inc. (NASDAQ:VVUS)'s Qsymia and the failure of Pfizer’s Inc. (NYSE:PFE) Exubera. These drugs were being hailed as billion dollar star products that demanded sky high valuations of their respective stocks. The reality however was different; Exubera was canceled after extremely poor sales figures, especially when analysts had predicted stellar sales of above $2 billion. However, being one of the largest biopharmaceutical companies in the world has its advantages. The loss of a multi-billion drug could have annihilated any other developer but Pfizer has not even been fazed by this loss. The company is still one of the best biopharmaceutical bets on the block and is a strong buy. Pfizer doesn’t only have a very strong pipeline and chances for capital appreciation, but also an attractive dividend yield of 3.6%.
These examples demonstrate effectively the unpredictability of actual commercial success of a drug. The most important factor at the end of the day is the willingness of insurers to provide coverage and doctors to prescribe the drug. Qsymia was being valued pretty high by analysts but the stock has depreciated significantly since FDA approval. As I mentioned above, the two primary constraints to Vivus appreciation are the insurance coverage and the willingness of doctors to prescribe the drug.
Qsymia is still fighting to penetrate the obesity market, and despite mediocre sales, it’s still too soon to write it off completely. The company is facing tough competition from its archrival and competitor Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). Belviq is a safer product as compared to Qsymia but is also less effective. Arena stock has been suspended between $8 and $12 despite stellar analyst ratings. This is because compared to Qsymia, Belviq is safer but also less effective.