As Congressional funding for the government faces uncertainty, there is growing concern among investors about the potential repercussions for drug-approval reviews. While a short lapse in funding may not have a significant impact, an extended pause lasting longer than a month or two could pose serious challenges.

Investors are closely examining the contingency plans of agencies like the Department of Health and Human Services (HHS) as the House grapples with passing appropriation bills for the upcoming fiscal year. Initially, the HHS plan appears reassuring, indicating that nearly 60% of workers will remain on the job.

Fortunately, Medicare and Medicaid will continue to process health insurance claims, as these programs have mandatory funding that allows approximately half of their staff to remain active. Additionally, the Food and Drug Administration (FDA) intends to retain over 81% of its employees to ensure critical tasks such as reviewing and approving new medical products, overseeing factories, and managing product recalls.

The FDA's ability to maintain such a high level of staffing is primarily due to the user fees paid by the industries it regulates. These fees, along with funds carried over from the previous fiscal year, will enable the agency to sustain its oversight activities, including addressing the ongoing challenges posed by Covid-19.

However, if there is a lapse in Congressional appropriations, the FDA will no longer collect new user fees. This raises concerns about the duration for which the carry-over user fees will last, as highlighted by Raymond James analyst Chris Meekins in a recent research note.

During a previous 34-day funding halt from December 2018 to January 2019, industry experts estimated that the FDA's user fee reserves would have only lasted approximately one additional month. When asked about this issue, the FDA stated that it cannot determine the exact duration of its user fee reserves.

While this may not be an immediate concern, Meekins warns that a protracted government shutdown could have significant implications. Nevertheless, he considers a prolonged shutdown to be unlikely.

In summary, the potential impact of a government funding lapse on drug-approval reviews is a matter of increasing concern for investors. While agencies like the FDA have contingency plans in place and carry-over user fees to continue their operations, the duration of such reserves remains uncertain. A prolonged shutdown could pose more significant challenges, highlighting the need for timely resolution in the interest of public health.

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