The Fragile Edge: How FDA Rejections and Litigation Shape the Fate of Clinical-Stage Biotechs

The biotech sector has long been a double-edged sword for investors: a realm of high-risk, high-reward where breakthroughs can redefine medicine but regulatory missteps often spell financial ruin. Over the past decade, clinical-stage companies have faced a surge in securities litigation following FDA rejections, with lawsuits often citing mismanagement of clinical trial expectations and investor disclosures. The cases of Brainstorm Cell Therapeutics (BCLI) and Replimune Group (REPL) offer stark lessons in how regulatory setbacks and litigation can erode trust, destabilize valuations, and force companies to pivot or collapse.

The FDA's Role: A Gatekeeper and a Liability

The U.S. Food and Drug Administration (FDA) is both a catalyst and a constraint for clinical-stage biotechs. A positive regulatory decision can propel a stock into stratospheric gains, while a rejection—such as the FDA's refusal to file (RTF) for Brainstorm's NurOwn or its Complete Response Letter (CRL) for Replimune's RP1—can trigger catastrophic declines. In 2025 alone, 32% of all securities class actions targeted biotech firms, underscoring the sector's vulnerability to regulatory volatility.

When the FDA rejects an application, it often highlights flaws in trial design, patient heterogeneity, or insufficient evidence of efficacy. For example, Replimune's IGNYTE trial for RP1 was criticized for its inability to isolate the therapy's effectiveness from combination treatments. Such feedback, while critical for scientific rigor, also exposes companies to litigation if investors perceive the company as having misrepresented risks.

Litigation as a Consequence of Misaligned Expectations

Securities lawsuits typically arise when companies fail to disclose material risks or overstate the likelihood of regulatory success. Brainstorm's case illustrates this: After receiving an RTF in November 2022, the company downplayed the setback, leading to a 42.21% drop in its share price when the truth emerged. A subsequent 48.72% plunge followed an FDA advisory committee's 17-1 vote against NurOwn's efficacy. The lawsuit alleged that Brainstorm's optimism was unfounded, leaving investors to absorb the losses.

Similarly, Replimune's CRL in July 2025—triggered by methodological flaws in its melanoma trial—sparked a 75% stock collapse and a class-action lawsuit. The plaintiffs argued that the company's public statements about the IGNYTE trial's “positive” results were misleading, as internal data had already flagged design weaknesses.

These cases highlight a recurring pattern: Companies that rely heavily on a single asset or trial are particularly susceptible to litigation. When a product candidate is the cornerstone of a company's valuation, any regulatory setback becomes a existential threat, amplified by investor lawsuits.

Investor Trust and the Long-Term Viability of Biotechs

The erosion of trust following litigation and regulatory rejections can have lasting consequences. Brainstorm's decision to withdraw its BLA for NurOwn in 2023 and pivot to a Phase 3b trial reflects the need to rebuild credibility. Yet, even with revised protocols and alignment with the FDA, the company faces skepticism. The same applies to Replimune, which must now fund a confirmatory trial for RP1 while defending against litigation.

For investors, the key question is whether these companies can demonstrate resilience. A diversified pipeline, transparent communication, and financial prudence are critical. Brainstorm's pivot to Alzheimer's and Replimune's focus on oncolytic immunotherapies show potential, but their success hinges on avoiding past mistakes.

Strategic Implications for Investors

1. Due Diligence on Regulatory Alignment: Scrutinize companies' interactions with the FDA. Firms that proactively address regulatory feedback—such as Brainstorm's Special Protocol Assessment (SPA) for its Phase 3b trial—are more likely to navigate setbacks successfully.
2. Pipeline Diversification: Avoid companies with a single product candidate. Firms with multiple therapeutic areas or platforms (e.g., Brainstorm's NurOwn for ALS, PMS, and AD) are better positioned to weather individual failures.
3. Financial Resilience: Assess whether a company has sufficient capital to fund litigation, trials, and operational costs. Replimune's $483.8 million cash reserve as of March 2025, for instance, provides some breathing room but may not be enough to cover all contingencies.
4. Litigation Risk Assessment: Monitor the legal landscape. The Private Securities Litigation Reform Act of 1995 requires plaintiffs to prove “scienter” (fraudulent intent), but the burden of litigation alone can drain resources and management focus.

Conclusion: Navigating the High-Stakes Biotech Landscape

Clinical-stage biotechs operate in a minefield of regulatory, scientific, and legal challenges. While innovation drives the sector's allure, the path to profitability is fraught with FDA rejections and investor lawsuits. Companies like Brainstorm and Replimune exemplify the fine line between optimism and recklessness. For investors, the lesson is clear: Success in biotech demands not just belief in science but a rigorous evaluation of governance, regulatory preparedness, and financial discipline. As the FDA continues to enhance transparency—by publishing CRLs and rejections—the onus is on both companies and investors to adapt. In this high-stakes arena, the most enduring firms will be those that balance ambition with accountability.