FDA Approvals and Stock Prices: How to Trade Biotech Stocks — Fact or Fantasy?

The Myth: “FDA approvals always send biotech stocks soaring.”

If you’ve spent any time on biotech forums or day-trading Twitter, you’ve probably heard it: “Get in before the FDA decision and watch your stock double overnight.” It sounds logical. A drug gets approved. The company now has a viable product. The stock should skyrocket, right?

It’s a widely held belief—especially among retail investors and biotech newcomers—that FDA approvals are golden tickets. But is this idea rooted in data or just market folklore? Let’s investigate.

Step 1: Why People Believe the Hype

Biotech is an emotional sector. It deals with life-changing therapies, cutting-edge science, and high-stakes regulatory decisions. Investors latch onto stories of small-cap stocks doubling or tripling in a day following an FDA approval. Some famous examples include:

• InterMune (ITMN): After its IPF drug Esbriet was approved in 2011, shares jumped nearly 170% in a single day.

• Biogen (BIIB): When Aduhelm got FDA nod for Alzheimer’s in 2021, the stock rose 38%, adding billions to its market cap.

Stories like these spread like wildfire. But for every InterMune, how many go quietly unnoticed—even with a green light from the FDA?

Step 2: What the Data Really Shows

Let’s turn to the evidence.

A 2019 study by Joseph Engelberg and Christopher Parsons from UC San Diego titled "The Causal Impact of FDA Drug Approvals on Firm Value" analyzed over 300 FDA drug decisions from 2000 to 2018. Here's what they found:

• Average stock return for small biotech firms upon FDA approval: ~8.6%

• Average return for already-expected approvals: only ~1.1%

• Delayed or surprise approvals tended to have larger reactions—sometimes over 20%, but these were rare.

In other words: FDA approvals do move stock prices—but not always, and rarely as much as investors expect.

A deeper dive by McKinsey & Co. into the 2020-2023 period, especially during the COVID biotech boom, further complicates the myth:

• 70% of FDA approvals were already priced in due to prior positive Phase 3 results or advisory committee outcomes.

• Stocks that rose sharply post-approval often gave back gains within 30 days, suggesting short-term exuberance, not lasting value.

Step 3: What Experts Say

To add context, we consulted biotech analyst Brad Loncar, who manages the Loncar Cancer Immunotherapy ETF:

“The market is forward-looking. If you wait until FDA approval to buy, you’re probably late. Biotech moves more on clinical trial results than approvals.”

Veteran investor John Maraganore, former CEO of Alnylam Pharmaceuticals, agrees:

“The approval is a milestone, yes—but savvy investors care more about commercialization strategy, market access, and reimbursement. That’s what drives real valuation.”

So while approvals are important, they’re often the end of the speculative cycle—not the beginning.

Step 4: Exceptions to the Rule

There are cases where FDA decisions dramatically move stocks:

1. First-in-class therapies (e.g., CRISPR gene editing).

2. Small-cap companies with a single product candidate.

3. Unexpected approvals after a negative advisory vote or regulatory delays.

4. Drugs with blockbuster commercial potential in underserved diseases.

One example is Axovant Gene Therapies (now Sio Gene Therapies). Their Alzheimer’s program created a massive hype cycle despite lackluster data. When the FDA ultimately rejected it, shares plummeted nearly 70%—a reminder that bad news moves even faster.

Step 5: So, How Should You Trade It?

Trading biotech around FDA events requires nuance:

• Before approval: Stocks often run up in anticipation, especially if prior trial results were strong.

• After approval: Gains may be limited or short-lived unless the drug’s commercial potential exceeds expectations.

• If rejected or delayed: Expect sharp drops, especially in small, single-product firms.

Risk management is key. Using options (e.g., protective puts) or trading around binary events (e.g., selling on the run-up) is often safer than chasing the hype.

✅ Final Verdict:

The myth is PARTLY TRUE—but largely overstated. FDA approvals can move biotech stocks, but:

• Most of the move is often priced in well before the announcement.

• Dramatic spikes are the exception, not the rule.

• Trading based solely on FDA decisions is high-risk and often speculative.

Did this surprise you? What’s another investing myth we should explore next?