Pharmaceutical Lottery Stocks: Investors’ Reaction to FDA Announcements

Abstract

We investigate return patterns of lottery-type-stocks around FDA announcements regarding New-Drug-Applications (NDAs), Biological-Licensing-Applications (BLAs), and New-Molecule-Entities (NMEs). Focusing on post-event returns, we document negative abnormal returns (‘bio-run-down’) for the 176 NDAs and BLAs, whether the FDA approved the firms’ applications or not. We document also negative abnormal returns for the 313 NMEs, mainly for small firms. We attribute these results to investors’ desire to participate in the ‘lotteries’ of FDA announcements and lack of interest in the firms’ stocks after the announcements. Employing Bloomberg’s Abnormal-Institutional-Attention (AIA) we suggest abovementioned pricing behavior is due to individual investors, rather than to professionals.