The economic consequences of US FDA new drug approvals: evidence from Taiwan pharmaceutical and biotech companies

Abstract

ABSTRACT This study examines the association between the new drug approvals released by the US Food and Drug Administration (FDA) and subsequent market stock price reactions for listed pharmaceutical and biotech companies in Taiwan. We find that new drug approvals released by the US FDA lead to significantly positive stock price cumulative abnormal returns (CARs) in most stages of the new drug approval process, in particular, for the phase 3 stage. This implies that public investors are more willing to invest in the later stages of the US FDA approval process due to the high failure rate of drug verification. We also find that research and development (R&D) investment has significantly positive impacts on CARs. Since R&D investments may substantially reduce the taxes and operating costs of pharmaceutical and biotech companies, they are positively related to stock price returns and serve as an important indicator for market investors. Finally, we find that the effect of R&D investment on CARs associated with FDA approvals is more prominent in the period after the passage of the ‘Taiwanese Biotech and New Pharmaceutical Development Act’, indicating that tax incentives or policy effects indeed influence market responses.