FDA Regulatory Turbulence Creates Subtle Biotech Investment Risks

This conversation offers a crucial, often overlooked perspective on the biotech industry, revealing how regulatory turbulence at the FDA can create significant, yet subtle, investment risks that extend far beyond immediate approval timelines. While the industry enjoyed a banner year in 2025, outperforming even AI darling NVIDIA, the speakers highlight that this success may be built on shifting sands. Investors who fail to account for the "slow rolling chaos" at the FDA risk misjudging the true risk profile of biotech companies, particularly those in emerging fields like gene and cell therapies. This analysis is essential for any investor looking to navigate the complexities of biotech, offering a strategic advantage by identifying hidden pitfalls and adjusting timelines for potential payoffs, thereby enabling more resilient and informed investment decisions.

The FDA's Shifting Sands: Regulatory Uncertainty as a Hidden Cost

The biotech industry, after a prolonged downturn, experienced a remarkable resurgence in 2025, with the XBI index even outperforming NVIDIA. This success has fueled optimism for 2026, yet a significant undercurrent of concern emanates from the Food and Drug Administration (FDA). As Carl Thiel notes, a former senior executive, Richard Pazdur, warned of a "breached firewall between political appointees and drug reviewers," suggesting that the industry is underestimating the damage already done. This isn't just bureaucratic grumbling; it translates into tangible risks for companies reliant on FDA approvals.

The core issue lies in a perceived contradiction between the FDA's stated intentions and its operational reality. Commissioner Martem Kari has championed faster, more accessible approvals, encouraging initiatives like reduced animal testing, easier standards for rare diseases with limited data, and approval based on "plausible mechanism pathways." Industry enthusiasm for these measures is high, as they promise to accelerate drug development. However, the ground truth appears different.

"The pharma industry is continuing to underestimate the damage that's already been done."

-- Richard Pazdur (as quoted by Karl Thiel)

This discrepancy manifests in seemingly inconsistent regulatory approaches. For instance, while the FDA aims to ease standards for rare diseases, there are instances where the bar appears to be rising. Gene and cell therapies, particularly those regulated by the CBER division, are experiencing significant unpredictability. RegenxBio's gene therapy for Hunter Syndrome, initially expected for approval on February 8th, faced a clinical hold due to a tumor complication observed in a patient treated years prior with a different gene therapy. While the connection was unclear and the tumor benign, the hold was extended to a similar drug nearing approval, even without direct evidence of problems. This creates a ripple effect, forcing companies and investors to build in extended timelines and anticipate delays.

"I think that you have to realistically put extra risk around anything in the gene therapy, cell therapy space. We're just seeing that. We've seen it too many times at this point to not recognize that."

-- Karl Thiel

This regulatory ambiguity forces a re-evaluation of investment strategies. What might have been considered a reasonable approval timeline is now subject to greater uncertainty. The implication for investors is clear: a more cautious approach is warranted, particularly for companies in cutting-edge therapeutic areas. This isn't a call to abandon biotech, but rather to adjust expectations and factor in a higher degree of risk and longer development horizons. The "biotech winter" may be thawing, but the regulatory climate remains turbulent.

The Weight Loss Trade: A Double-Edged Sword for Pharma Giants

The earnings preview for Eli Lilly (LLY) and Novo Nordisk (NVO) underscores the immense impact of GLP-1 weight loss drugs on the pharmaceutical landscape. These are no longer niche treatments; they are the primary drivers of growth for these century-old giants, effectively positioning them as biotech players in their own right. Eli Lilly, in particular, is expected to deliver strong earnings, building on a streak of successful quarters. The consensus points towards a beat, with strong revenue growth fueled by its weight loss medications.

However, even this seemingly unassailable growth faces subtle headwinds. A key factor to watch is the impact of CVS pharmacies removing Tirzepatide (the active ingredient in Zepbound and Mounjaro) from their formulary last summer. While the immediate impact was felt in Q3, the fourth quarter will reveal the true extent of this shift, as some patients may have switched to competing drugs like Semaglutide. Despite this, the prevailing sentiment is that Lilly's overall strength will likely allow it to "drown out" this particular challenge.

Novo Nordisk, while also a major player in the weight loss drug market, presents a slightly more complex picture. The company has faced some recent struggles and has a new CEO signaling a push into acquisitions. This strategic shift, coupled with two prior guidance cuts in the last year, suggests a more cautious outlook. While a beat is hoped for, a "meet" or even a slight miss is considered more probable. The recent launch of their oral Wegovy is a significant development, but it's still too early to significantly move the needle on earnings for this quarter. The question of a dividend initiation from Novo Nordisk also looms, with both speakers leaning towards "no" for the current quarter, suggesting a preference for conserving cash to fund potential acquisitions.

"It effectively is [the weight loss trade]. And first of all, I just have to say, by the way, I love that you're referring to Lilly as a biotech company. That's such a victory for biotech."

-- Karl Thiel

The reliance on a single drug class, while currently a massive advantage, also represents a concentrated risk. A significant regulatory issue, a competitor's breakthrough, or a shift in market sentiment could have outsized impacts on these companies. This highlights a critical lesson in systems thinking: even dominant players are subject to the broader ecosystem's dynamics, and what appears to be an unassailable advantage today can be eroded by unforeseen consequences tomorrow.

Twist Bioscience: Navigating the Biotech Winter with Foundational Technology

Twist Bioscience (TWST) offers a different perspective on navigating the biotech landscape, particularly during periods of industry-wide pessimism. The company's core business--manufacturing synthetic DNA for researchers--positions it as a foundational technology provider, largely insulated from direct FDA regulatory chaos. While not immune to the broader "biotech winter" of reduced investment and pessimism, Twist has demonstrated remarkable resilience.

Tom King highlights that Twist has consistently grown revenue, adding approximately $60 million annually, even through challenging times. Crucially, its cash burn rate has decreased, indicating a move towards improved financial efficiency. The company's valuation has also normalized, moving from an "eye-watering" 111 times revenue multiple to a more reasonable seven times. This suggests that while the market has cooled, the underlying value proposition of Twist's technology remains strong.

"The bigger picture here is more interesting for me, though, the longer term trend in Twist Bioscience. So it's a company that at first, you know, crossed my radar, I think in 2020. Basically, what Twist does is they make DNA for other people."

-- Tom King

The key takeaway here is the power of a business model that serves a fundamental need within the industry. While drug developers face the direct brunt of regulatory hurdles and market sentiment shifts, companies like Twist, providing essential tools, can maintain steady progress. Their success is less about navigating immediate approval pathways and more about the sustained demand for their core technology, driven by ongoing research and development across the sector. This demonstrates how investing in companies with durable, underlying technological advantages can offer a more stable path through industry volatility.

Key Action Items:

• Immediate Action (Next Quarter): Re-evaluate the risk exposure of biotech investments, particularly those in gene and cell therapies, by factoring in potential FDA delays.
• Immediate Action (Next Quarter): Monitor the impact of CVS's formulary changes on Eli Lilly's revenue streams and competitor responses.
• Short-Term Investment (Next 6 Months): Consider lengthening investment horizons for biotech companies, especially those in early-stage development, to account for increased regulatory uncertainty.
• Long-Term Investment (12-18 Months): Explore companies with foundational technologies, like Twist Bioscience, that are less directly exposed to regulatory bottlenecks and benefit from sustained R&D activity.
• Strategic Consideration (Ongoing): Diversify biotech holdings beyond single-drug class dependencies, seeking companies with broader pipelines or diversified revenue streams.
• Discomfort for Advantage (Ongoing): Accept that increased due diligence and longer timelines for biotech investments, while potentially frustrating in the short term, will create a more resilient portfolio and mitigate unexpected losses.
• Information Gathering (Next Quarter): Track any further developments regarding FDA policy changes and their impact on drug approval processes, particularly for novel therapeutic modalities.