How to Play It When the FDA Slams Your Stock

One of the challenges in investing in the high-beta small biotech sector is dealing with FDA decisions that don't always go the way you want them to. A lot of times the actual ruling is not as bad as investors initially think, as well. I have learned over the years to not make knee-jerk reactions to these decisions. Keeping calm and analyzing the situation while others are panicking and hitting the sell button has proven to be a very profitable strategy for many, many years. Let me give you three recent examples of overreactions to FDA decisions in the market. In March, the FDA rejected giving Kangio from Eagle Pharma market exclusivity after granting the compound Fast Track status during development. This is very unusual and, as I recall, the last time I saw this happen a few years ago, the decision was overturned by the court system. That's a path I believe Eagle will pursue as well. The stock fell some 15% on the day on this news. But the key driver of Eagle's value is not Kangio, but BENDEKA, which should produce $600 million to $750 million in royalties over the next three years. Partner Teva Pharmaceuticals is doing a great job converting its Treanda population over to the more effective BENDEKA. I added to my core position on this news at around $40 a share. The stock has recovered to $60 a share since then. A couple of weeks ago, Portola Pharmaceuticals got a complete response letter from the FDA around its New Drug Application (NDA) for its compound Andexxa. The stock fell more than 25% that day as a result. But if you read through the concerns contained in the letter, they were centered on the manufacturing process of the drug, not the compound itself. It's a setback for sure, but not one that can't be overcome and probably only means a delay in approval for this important niche drug. The shares have already recovered some 10% off their lows. Ironically, management's ineptness in dotting its Is and crossing its Ts as it tries to get its first product approved might actually make the company a more likely buyout target by a larger, more experienced concern in the industry. Finally, Friday Dynavax Technologies got whacked more than 30% in one day of trading as the November Ad Comm panel for its hepatitis B vaccine Heplisav-B was unexpectedly cancelled with little in the way of detail except that the agency needed some time to address some concerns. But this seem an overreaction by the market and I added to my shares. Reading through the company's follow-up announcement Sunday, it seems the vaccine is likely to be approved for those 18 and older at the biologic's original PDUFA in mid-December. A separate supplemental Biologic License Application might then have to be filed for the diabetic subset. It's a little disappointing, but the main target population remains intact and I expect that the stock of Dynavax will recover at least half of Friday's knee-jerk selloff this week. These are just some recent examples of some of the silly short-term decisions investors make in this high-beta space by not taking the time to digest the real and perceived impacts from a FDA decision. For investors that can keep calm and logically step through the entire story behind the decision and company, there can be profit-making overreactions.

How to Play It When the FDA Slams Your Stock

Here are three recent examples of how the patient can profit.

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