Biotech Stock Volatility and Regulatory Risk: Navigating the Path to Long-Term Investment Success

The recent FDA rejection of Scholar Rock's lead drug, apitegromab, for spinal muscular atrophy (SMA), offers a stark reminder of the volatility inherent in biotech investing. In September 2025, the U.S. Food and Drug Administration (FDA) issued a Complete Response Letter (CRL) citing manufacturing deficiencies at a third-party facility, triggering a 14% plunge in Scholar Rock's stock priceScholar Rock stock falls after FDA issues response letter for SMA drug^[1]. While the company emphasized that the rejection was not tied to the drug's efficacy or safety data, the incident underscores the precarious balance between regulatory risk and long-term potential in the biotech sector.

The FDA's CRL Landscape: A Double-Edged Sword

The FDA's recent transparency initiative—publishing over 200 CRLs from 2020 to 2024—reveals a critical trend: 74% of rejections were attributed to manufacturing or quality issues, with 70% of CRLs targeting small or mid-sized biotech firmsFDA’s CRLs reveal 74% of applications rejected for quality/manufacturing issues^[2]. These statistics highlight the disproportionate challenges faced by emerging companies lacking the infrastructure of larger peers. For instance, Eli Lilly's mirikizumab and Gilead's Sunlenca both faced CRLs due to manufacturing site deficiencies, yet both eventually secured approvals after addressing the issuesFDA rejects Scholar Rock's apitegromab application due to facility issues^[3].

The Scholar Rock case aligns with this pattern. The CRL for apitegromab was linked to Catalent Indiana LLC, a facility recently acquired by Novo Nordisk, and not to the drug's clinical profile. This distinction is crucial: regulatory setbacks tied to third-party manufacturing are often surmountable, provided companies act swiftly to resolve facility-specific issues. Scholar Rock's plan to resubmit its Biologics License Application (BLA) once Catalent resolves the FDA's concerns reflects a common industry strategyScholar Rock stock falls after FDA issues response letter for SMA drug^[1].

Historical Precedents: From CRL to Approval

While CRLs are undeniably disruptive, history shows that many biotech firms recover and thrive. Kyowa Kirin's istradefylline (Nourianz), for example, received a CRL in 2008 but was eventually approved in 2019 after addressing CMC (Chemistry, Manufacturing, and Controls) deficienciesFDA shares 200 CRLs for now-approved drugs^[4]. Similarly, Lykos Therapeutics' MDMA-assisted therapy for PTSD faced a CRL but continued negotiations with the FDA, illustrating that early regulatory feedback does not necessarily spell the end of a drug's journeyLearning from the Letters: FDA Complete Response Letter Trends 2020–2024 and What They Mean for Sponsors^[5].

These cases underscore the importance of robust CMC planning and proactive regulatory engagement. For investors, the key is to differentiate between CRLs caused by transient manufacturing issues and those rooted in fundamental flaws in a drug's safety or efficacy. The latter are far rarer, particularly for therapies with strong clinical data and accelerated designations like Orphan Drug or Fast Track.

Stock Market Reactions: Short-Term Pain, Long-Term Gain?

The immediate market impact of a CRL is often severe. A 2025 Morgan Stanley analysis found that biotech stocks typically experience an average 15–20% drop following manufacturing-related CRLsBiopharma Industry Outlook 2025: Trends Signaling a …^[6]. However, the long-term trajectory depends on the company's ability to address deficiencies and the strength of its lead candidate. For example, companies like Amgen and Biogen have historically rebounded after CRLs, leveraging their clinical and regulatory expertise to resubmit and gain approvalsTrends in FDA drug approvals over last 2 decades: An …^[7].

Scholar Rock's situation is further complicated by its reliance on a single lead asset. With the European Medicines Agency (EMA) still reviewing apitegromab, the company retains a critical lifeline. If the EMA approves the drug in mid-2026, it could mitigate U.S. setbacks and restore investor confidenceScholar Rock stock falls after FDA issues response letter for SMA drug^[1].

Therapeutic Area Matters: Oncology vs. Neurology

Post-CRL approval rates vary significantly by therapeutic area. Oncology therapies, particularly those with accelerated pathways like Breakthrough Therapy designations, have historically shown higher resubmission success rates. For instance, tivozanib hydrochloride, rejected in 2013 for advanced renal cell carcinoma, was approved in 2021 after additional data was submittedFDA’s Published CRLs Deliver Insight Into the Drug Approval Process^[8]. In contrast, neurological and lifestyle therapies face slower approval timelines, with fewer examples of CRL recovery within the same timeframeTrends in FDA drug approvals: 2021–2024 insights & innovations^[9].

Strategic Considerations for Investors

For long-term investors, the key is to assess a company's regulatory preparedness and financial resilience. Smaller biotechs must demonstrate not only scientific innovation but also the operational rigor to navigate FDA scrutiny. Scholar Rock's prior receipt of Orphan Drug, Rare Pediatric Disease, and Priority Review designations for apitegromab suggests the FDA recognizes its potential, even if manufacturing issues delayed approvalScholar Rock stock falls after FDA issues response letter for SMA drug^[1].

Moreover, the broader biotech sector is showing signs of stabilization. A 2025 Morgan Stanley report noted that improved financing conditions and M&A activity could bolster recovery for companies overcoming CRLsBiopharma Industry Outlook 2025: Trends Signaling a …^[6]. Investors should also monitor the EMA's decision on apitegromab, as European approvals can serve as a bridge to U.S. resubmissions.

Conclusion

The rejection of Scholar Rock's apitegromab is a cautionary tale but not a definitive verdict. Regulatory risk is an inescapable part of biotech investing, yet history demonstrates that many companies can—and do—bounce back from CRLs. For investors, the challenge lies in distinguishing between temporary setbacks and existential threats. By focusing on therapeutic areas with higher approval rates, robust CMC strategies, and companies with regulatory agility, long-term success remains within reach—even in the shadow of an FDA rejection.