When a pharmaceutical company in the U.S. develops a new drug, they must receive the approval of the Food and Drug Administration (FDA) before releasing it on the market. This is referred to as the FDA drug approval process.
The process consists of three essential clinical trial phases. A decision is taken by the FDA at the end of each phase to determine whether the company can proceed on to the next stage.
Phase 1: Drug is tested on 20-80 healthy volunteers to measure safety.
Phase 2: Drug is tested on 100s of patients suffering from a disease or condition.
Phase 3: Drug is tested on 1000s of patients, gathering more detailed information.
New Drug Application (NDA): Pharma company formally asks FDA for drug approval.
PDUFA: FDA announces approval decision.
PDUFA, short for Prescription Drug User Fee Act, is a word that you will come across very often. It is an act which permits the FDA to receive fees from the pharma company with the purpose of funding the drug approval process, hence making it more efficient. The PDUFA Date therefore is the deadline by which the FDA must announce their decision on the drug.
OK, but how does that make me money?
The new drug application process can prove to be a highly lucrative trading opportunity for investors with a high risk-appetite. Speculating on the outcome of the clinical trials or the FDA decision, one can take a position on the stock at any point in the approval process. Quite commonly, investors purchase shares prior to the due-dates of Phase 1&2&3 or the PDUFA date to benefit from the price gain in the run-up to the ‘catalyst’ event. Such catalysts are recorded in our Catalyst Calendar.
Let’s take an example. Dynavax Technologies ($DVAX) had a PDUFA date of July 27 for their Hepatitis-B vaccine Heplisav-B. The price of the stock began to pick up in early June, and increased from $5.50 to $9.25 leading up to the action date. Upon the approval of the drug, it increased to $15.85 in the same day, and is currently trading at $19.60. For somebody who bought shares in early June, that’s a whooping 256% increase in their investment.
At BullCatalyst, we are mostly interested in the catalysts of stocks that are trading below $25. The value of such smaller-cap companies whose revenues are either low or non-existent are affected much more heavily by catalysts than a pharma company with a larger market capitalisation. This allows for huge potential gains. Plus, it’s much more affordable for individual small-time investors like you and I.
Stay tuned for more articles on catalyst trading and share your opinions in the comments!