Value Creation in Uncertain Regulation: Investor Management of FDA Medical Device Approval

Abstract

This study investigates whether there are firm and device-specific characteristics that affect the magnitude of returns to public investors around FDA medical device approval. An asset pricing model is created to calculate abnormal returns, which are then regressed on firm and medical device attributes over three periods: before, during, and after an FDA approval announcement. Firms in industries more closely associated with the health care ecosystem, firms with larger market capitalizations, and firms that operate only in the United States are found to have higher returns during FDA medical device approval and should be favored in investment considerations. Devices in therapeutic areas with little innovation are negatively correlated with abnormal returns, and investors should accordingly avoid capital allocation to these products. This study concludes that investors can significantly outperform the basket of securities that produce FDA-regulated medical devices, given an implementation of strategies aligned with this study’s findings.