Stock Price Effects of FDA Announcements on Prescription Drugs

Abstract

The pharmaceutical industry has continually been one of the highest performing areas in the equity market for many decades. Though the returns on investment are very high, so is the volatility of individual stocks. The purpose of this paper is to analyze the volatility that specific stocks experience when the company's individual drug is approved or disapproved by the Federal Drug Administration (FDA). The development of a new drug usually runs in the high millions of dollars (Over $150 million after taxes); if accepted, it can translate to billions in revenue for the company over the drug's marketable life. Through analyzing the data of stocks' performance during a time window of approval and disapproval announcement dates, this paper will try to gauge the positive aspects of approval, the negative aspects of disapproval, and the levels of variation in both instances. This paper focuses on the notion that FDA disapproval of a drug will cause a high percentage drop in the stock price, more so than for the percentage gain a stock's price will experience from approval.