Biotech's Regulatory Crossroads: Balancing Innovation, Risk, and the Right to Try

The biotechnology and pharmaceutical industries stand at a pivotal juncture, where the tension between patient access and regulatory oversight is reshaping the landscape of innovation. The “Right to Try” movement, once a niche policy proposal, has gained momentum in recent years, challenging the traditional role of the U.S. Food and Drug Administration (FDA) in safeguarding drug safety and efficacy. As states like Montana and Arizona expand access to unapproved therapies and federal courts weigh the rescheduling of psychedelics like psilocybin, investors must grapple with a complex interplay of political, ethical, and financial risks.

The Right to Try: A Double-Edged Sword

The Right to Try Act, enacted at the federal level in 2018, allows terminally ill patients to access investigational drugs that have completed Phase I trials but have not yet received FDA approval. While this law was intended to empower patients, its practical impact has been limited. Data show that only a small fraction of patients have utilized the pathway, with many physicians and manufacturers opting for the FDA's Expanded Access program, which offers a more structured framework. However, the ideological push for deregulation—fueled by figures like Elon Musk and a broader distrust of bureaucratic red tape—has accelerated state-level expansions. For instance, Montana's 2023 legislation now permits access to therapies post-Phase I, bypassing the FDA's traditional safeguards.

This shift raises critical questions for investors. While deregulation may spur innovation by reducing barriers to experimental therapies, it also introduces significant risks. The FDA's role in monitoring adverse events and ensuring accountability remains minimal under the Right to Try framework. Sponsors are not legally obligated to provide unapproved drugs, and patients often face exorbitant costs without insurance coverage. The lack of robust clinical data further complicates the assessment of long-term efficacy and safety.

FDA's Evolving Oversight: A New Era of Accountability

The FDA's recalibration of its accelerated approval (AA) pathway in 2025 underscores a growing emphasis on postmarketing rigor. Under the new framework, confirmatory trials for AA drugs must be “underway” at the time of approval, requiring tangible progress such as protocol submission and enrollment initiation. This shift, driven by the 2023 Consolidated Appropriations Act, has tightened regulatory standards, particularly in oncology. For example, Regeneron Pharmaceuticals' bispecific T-cell engager, odronextamab, faced a Complete Response Letter (CRL) in 2024 due to incomplete trial enrollment, forcing the company to resubmit its application with a narrower focus.

This case highlights the dual-edged nature of the new FDA approach. While it demands greater upfront investment and operational agility, it also rewards companies that can demonstrate robust trial execution and regulatory alignment. Investors must now scrutinize not just clinical data but also a firm's ability to manage enrollment timelines and navigate competitive landscapes. The risk of a CRL has become more tied to trial execution than purely to scientific merit, creating a higher bar for biotech firms—especially small-cap players with limited resources.

The Inflation Reduction Act: Pricing Pressures and Innovation Incentives

The Inflation Reduction Act (IRA), enacted in 2022, has further complicated the regulatory environment. By granting the Centers for Medicare & Medicaid Services (CMS) the authority to set drug prices after 9 years for small-molecule drugs and 13 years for biologics, the IRA has created a stark divergence in innovation incentives. Small-molecule developers, facing shorter exclusivity periods, are increasingly shifting focus to biologics, which enjoy longer market protection. This shift could stifle investment in critical areas like antibiotics or rare disease treatments, where small-molecule drugs often play a pivotal role.

The IRA's impact is already evident in R&D trends. A 2021 study predicted a nearly 45% decline in pharmaceutical R&D investments by 2039, with 135 fewer new drugs developed between 2021 and 2039. For investors, this signals a narrowing of the therapeutic pipeline and a greater emphasis on high-margin, niche indications. Companies like Blueprint Medicines or Mirati Therapeutics, which leverage biomarker-driven trial designs, may thrive in this environment, while those reliant on broad-market small-molecule drugs could face headwinds.

Navigating the New Normal: Investment Strategies for a Shifting Landscape

The confluence of these regulatory shifts demands a recalibration of investment strategies. Here are three key considerations:

1. Prioritize Operational Execution Over Promising Data: The new FDA framework rewards companies with strong trial management capabilities. Investors should focus on firms with diversified trial designs, transparent communication with regulators, and in-house manufacturing to mitigate supply chain risks. Regeneron's ability to maintain trial progress despite regulatory hurdles exemplifies this approach.

2. Factor in Pricing Pressures and Market Exclusivity: The IRA's pricing controls necessitate a focus on biologics and niche therapies with long-term exclusivity. Companies like Amgen (AMGN) or Gilead Sciences (GILD), which have robust biologics pipelines, may outperform peers in a post-IRA world.

3. Leverage AI and Agentic Technologies: The industry's embrace of AI to accelerate R&D and reduce costs is a critical differentiator. Firms investing in AI-driven drug discovery, such as Insilico Medicine or Recursion Pharmaceuticals, are well-positioned to navigate the new regulatory and economic landscape.

Conclusion: A Sector at a Crossroads

The biotech and pharma industries are navigating a regulatory and ideological crossroads. The Right to Try movement, while championing patient autonomy, has exposed the limitations of a deregulated approach. Meanwhile, the FDA's tightening of AA standards and the IRA's pricing pressures are reshaping the risk-reward calculus for investors. Success in this environment will belong to companies that balance innovation with accountability, adapt to evolving regulatory frameworks, and harness emerging technologies to drive efficiency. For investors, the path forward lies in discerning the “haves” from the “have-nots”—those with the operational and scientific rigor to thrive in an era of heightened scrutiny and constrained resources.