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Biotech shares continue to fall on FDA uncertainty

The biotech sector is on pace for its worst weekly decline since December, weighed down in part by uncertainty following this week’s surprise announcement from Food And Drug Administration Commissioner Scott Gottlieb that he will be stepping down next month.

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“I think people are a little bit shocked, and taking a step back and saying, ‘what does this mean for those innovative small biotechs'” explained Michael Yee, biotech analyst at Jefferies.

The widely traded iShares Nasdaq Biotech Index ETF fell by about 1 percent in midday trading Thursday, down about 5 percent over the last three days following Gottlieb’s announcement. The large cap, NYSE Arca Biotech Index is down nearly 4 percent since Tuesday.

Biotech investors surveyed by analysts at Mizuho Securities seemed concerned that without Gottlieb’s leadership, the agency will lose momentum on its efforts to pressure pharmaceutical manufacturers to open up the process for earlier introduction of biosimilar drugs, which are the generic equivalents of novel therapies.

“He seemed to be very sensible in his approach of really pushing for biosimilars… which I think will be critical for the industry to remain viable–costs will be focused on newer drugs, not 20-year old ones, ” wrote one respondent.

Under Gottlieb’s tenure the FDA approved 59 new drugs last year, and a record 971 generic drugs, including a generic version of Mylan’s EpiPen and a generic version of GlaxoSmithKline’s blockbuster inhaled asthma treatment Advair.

“I am confident that innovative new gene therapy and cell therapy (drugs) we’ve seen get approved, can continue,” after Gottlieb leaves, said Yee. “The question is whether or not generic approvals could slow down — whether or not there’s an issue there.”

But the fast pace of drug approvals under Gottlieb has been a double-edged sword for the industry, according to credit analysts at S&P Global Ratings.

“The increased pace of generic drug approvals and launches over the past two years was a contributing factor to significant price and margin erosion and operating underperformance in the U.S. generic drug sector,” S&P analysts wrote in a research note.

Two major generic drug makers — Teva Pharmaceuticals and Mylan — could benefit from a potential slowdown in generic approvals following the FDA commissioner’s departure. So far, stock investors aren’t convinced. Teva’s stock is down nearly 6 percent for the week, while Mylan shares have retreated 2.5 percent this week.