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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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December 15, 2008

Insider Trading in Drug Stocks? Not Unknown. . .

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Posted by Derek

With all the financial scandals going on these days (really, a multibillion-dollar Ponzi scheme run by the former head of NASDAQ?), it’s worth asking how often such shady dealing goes on with the stocks of drug companies. From what I can see, it does happen, but it’s certainly not endemic.

The first thing that comes to mind is insider trading. Since many companies see their stock move abruptly on the single news items pertaining to clinical trials results, regulatory actions, adverse events, and so on, front-running is always going to be a problem. And I’m sure that it goes on, but I also know that companies put a lot of effort into trying to keep it from happening. For clinical trial results, that means that such information is strictly need-to-know, and believe me, not that many people need to know. Most companies have a rather short list of people who see such numbers before a public release, which makes tracking down suspicious trades a bit too easy for comfort, if you’re inclined to reach for the easy money. I’m certainly not on any such list myself, and never have been.

There are other kinds of material information, but it’s still rare for anything that goes on in my end of the industry to affect the stock price. We’re just too far from the clinic and from the FDA to make that much of a difference. But in any case, I agree with a definition of “material information” that I once heard: if it makes you think about trading the company’s stock, and it’s not in a press release already, it’s material information. And you act on it at your peril.

But that doesn’t mean that people don’t act. Sam Waksal of Imclone is merely the most famous executive to place a phone call to his broker at an inopportune time. The chief legal counsel over at Biogen Idec got in hot water a couple of years ago about a suspicious options trade around the time of the bad news about the company’s Tysabri. (The case was settled with the SEC, with no language about wrongdoing involved - there was still some reasonable doubt about the timing of the trade, although it would have been far more prudent to not have made it). A few years before that, the chief attorney at Vertex got into trouble with another ill-advised trade of his own company's stock. And there are others, naturally.

Then there's the problem with theoretically-embargoed information from the big clinical meetings like ASCO. In recent years, it's become clear that this stuff is leaking out in one form or another, because interesting trading patterns become evident in the run-up to the meetings themselves. I think that sending out an abstract book while trying to keep the lid on them is probably futile. Of course, in many cases the real stock-moving news in such cases doesn't come from anything in the abstract book, but from the information in the presentations themselves, which is all later-breaking stuff added long after the abstract submission deadline. So you could argue that people trading on the pre-meeting stuff are still kidding themselves. . .

The closest I've ever come to this sort of thing myself was some years ago. A colleague attending a clinically-oriented meeting in a particular medical specialty called some of us back at our company to say that an anticipated series of posters and talks from another company didn't look like it was going to materialize. No one from that organization was putting anything up for the poster session. We guessed that there was some last-minute problem with their compound - and so it proved in a press release the next morning.

It occurred to me during that afternoon that a stock or options trade could well be profitable, but I didn't go through with it. It would have been profitable (especially the options, naturally), but in the end I didn't quite have the nerve. I still don't think that it would have been illegal, but I didn't like the idea of explaining actions of mine in those terms. "Not illegal as far as I know" isn't exactly the rock on which one wishes to make one's stand, you know?

Comments (10) + TrackBacks (0) | Category: Business and Markets | The Dark Side


1. Mark M on December 15, 2008 9:40 AM writes...

Interesting post Derek.

A few weeks back I noticed an unusual runup in the stock price of one of my clients. This all happened about 90 minutes prior to the official announcement by the firm (after the closing bell)that their latest phase II results were negative.

I reasoned the investors who had caused the stock to rise had insider information and were looking to short the stock as it fell the next day on the negative news.

I dont think the SEC has the manpower to investigate all but the most egregious of these cases and am guessing this practice may be somewhat common. Looking at the volume indicator, the largest stock purchase during the period in question was 6000 shares (worth about $18,000)

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2. Hap on December 15, 2008 1:08 PM writes...

It sounds a little too much like taking a tax break I'm not certain I should get - having my innards eaten by rabid pit bulls might less painful and frustrating than attempting to deal with the IRS. I don't want to bet that the SEC is easier to deal with.

I might still wonder how many of those who trade on closed knowledge actually are caught, though.

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3. Sili on December 15, 2008 1:10 PM writes...

Would it make any sense to make big clinical trials 'triple blind' to avoid this sorta thing?

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4. Jammer on December 15, 2008 1:17 PM writes...

Who has money to buy stocks?

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5. Hap on December 15, 2008 2:07 PM writes...

Why would the former head of NASDAQ need a Ponzi scheme? I guess his board wasn't compliant enough to give him, say, $200M. Who needs insider trading to make lots of money? Just get your friends to let you run a stock market.

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6. wcw on December 15, 2008 5:06 PM writes...

MarkM, I'd say the most-likely explanation for your client's stock's move is completely innocent: hope. Someone was betting on the opposite results. You can't make money shorting a gap-lower open by buying at the close.

Derek, you could have traded. You had non-material, non-public information, which you had to synthesize with other information to come to a conclusion -- one you 'guessed' -- that turned out to be right. However, you probably did the right thing. Your trading would have looked suspicious, and your expected profits probably were less than the expected cost of unwanted regulator attention.

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7. Mark M on December 15, 2008 5:27 PM writes...


that's the thing--they didnt buy at the close; they bought in the hours before the close. and these buys in this volume did not happen in the days or weeks leading up to the event.

it was not public knowledge when the trial decision was due. there had to be inside information that a decision was coming on that day. good or bad result--money was to be made knowing a decision was due.

seems to me you stick out like a sore thumb if you do this for a stock that is flat for weeks on end.

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8. Anonymous BMS Researcher on December 15, 2008 9:17 PM writes...

Nearly everything remotely close to material I tend to learn from sources outside of BMS before I hear anything from inside the Company. Some years ago my wife heard about an impending round of layoffs before I did, that was an interesting month to be sure. And I'll bet half of Pfizer and Merck already knows more about the layoffs we're all expecting this week than I know.

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9. Still Scared of Dinosaurs on December 16, 2008 1:17 PM writes...

Probably the coolest thing about being a Biostatistician in industry (especially one who does a lot of his own programming) is that I can sometimes be the first person in the world to see the results of big clinical trials. Of course one of the main reasons for that is that I have to be really really careful about showing the numbers to anyone before I am conviced they are right. Also, it's quite common that the 2nd, 3rd, and 4th people in the world to see the results are looking over my shoulder, and if they are there it's likely that they also responsible for making sure the numbers are right.

Then we have to spend about five weeks trying to show as little emotion as possible so that others don't read a bad mood or an unconscious smile as a signal to trade.

As for the question about how likely you are to get caught remember that there are two kinds (at least) of suspicious signals that can arise. One has to do with the activity in the stock and the other has to do with the activity in the account in which the trade is made. Timely purchases of shares or options in an account that has only bought mutual funds previously will stand out to the software used to watch such activity. Any connection to someone who might have had access to inside information counts against you, too. I've never been involved in any way with such an investigation (thankfully) and I'm not a lawyer (thankfully) but I believe that SEC actions can be criminal and/or civil in nature and that civil actions have much lower burdens of proof.

If you think it's questionable don't do the trade until you are sure. Remember, though, one function of inhouse counsel is to advise employees whether they are at risk for trades in company shares. Just make sure you go through channels and get the answer in writing.

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10. jb on August 28, 2009 3:47 PM writes...

which came first? the insiders or the drug.
the stock market is a ponzi scheme game.
remember, you don't have to play...

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