The U.S. Food and Drug Administration (FDA) sends a complete response letter to communicate it has completed its review of a new or generic drug application, and it decided that it will not approve it for marketing in its present form. Receiving one of these letters from the FDA is never good news, but their long-term impact varies.
What to look for
Familiarity with the ins and outs of these letters can help you make better investing decisions. The most important thing you want to look for when a company announces the receipt of a complete response letter is the list of deficiencies cited by the FDA. The agency rarely outright rejects an application it has officially accepted and agreed to review. Instead, it uses complete response letters to cite issues that must be addressed before it will review the application again.
Some issues frequently cited in complete response letters are more easily resolved than others, but those likely to require additional clinical trials are the most damaging from a shareholder's perspective. When Dynavax announced the receipt of a complete response letter for a new hepatitis B vaccine in 2016, its stock tanked in response to the company's disclosure the letter asked for clarification of safety data observed during studies leading to its approval.
In 2016 the number of complete response letters issued spiked to a three-year high, largely due to increased concerns related to manufacturing facilities. Partners Regeneron and Sanofi hit a snag with a promising new anti-inflammatory drug when they received a complete response letter, but their respective stock prices avoided a rout because the disclosed issues were limited to the new entity's proposed manufacturing facility as opposed to a problem with the drug itself.
The announcement had little effect on the big French pharma's stock, but Regeneron shares immediately dipped. Investors that panicked and quickly dumped their shares learned an expensive lesson when the stock bounced back after the market had a little time to digest the information..
Complete response letter disclosure requirements
Perhaps the most important thing to bear in mind about complete response letters is the way companies are required to share their contents. Failure to inform shareholders about receiving one of these letters while awaiting an approval decision would most likely result in shareholder litigation, but their specific details are not subject to full disclosure.
For example, Amgen announced the FDA sent it a complete response letter for their new drug application for Parsabiv, a therapy for secondary parathyroidism. When the company announced it received the letter instead of an approval decision it didn't provide any details about issues cited in the letter. Reading between the lines here is a more of an art than a science, but you should probably assume there's a good chance the specific issues Amgen didn't mention hint at another clinical trial before a resubmission.
Luckily Amgen is an enormous biotech with enough irons in the fire that Parsabiv's application isn't a make or break event. If you're holding shares of a smaller biotech stock that just received a complete response letter for a vital new drug application, it might be in your best interest to assume the worst details won't be in the press release.
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