Now here is a fascinating piece of work for anyone who's invested in the small pharma/biotech sector. The authors looked over the stocks of companies developing cancer therapies, ones that have had critical Phase III results or regulatory decisions announced over the past ten years. And they looked at the trading in their stocks, for 120 days before and after the announcements. What, do you suppose, did they discover in this exercise?
Uh-huh. You have surely guessed correctly:
The mean stock price for the 120 trading days before a phase III clinical trial announcement increased by 13.7% for companies that reported positive trials and decreased by 0.7% for companies that reported negative trials. . .Trends in company stock prices before the first public announcement differ for companies that report positive vs negative trials. This finding has important legal and ethical implications for investigators, drug companies, and the investment industry.
Indeed it does. Interestingly, the authors did not find such a split around announcements of FDA regulatory decisions, suggesting that insider trading there is not as big a problem compared to what goes on from inside the industry.
But wait - there's more, as they say in the infomercials. In a follow-up commentary on the article, Mark Ratain of Chicago and Adam Feuerstein of TheStreet.com (who certainly has seen his share of market shenanigans) find another striking disparity in the data:
This analysis demonstrated a remarkable difference between companies that had positive and negative announcements. Specifically, the median market capitalization was approximately 80-fold greater for the companies with positive trials vs companies with negative trials. . .Furthermore, there were no positive trials among the 21 micro-cap companies (ie, companies with less than $300 million market capitalization, whereas 21 of 27 studies reported by the larger companies analyzed (greater than $1 billion capitalization) were positive.
That makes sense, as they point out: these small-cap stocks had such low valuations for a reason: because investors thought that the drugs weren't going to work, and in most cases, no larger companies had been willing to put up money on them, either. The oncology Phase III success rate for larger companies is comparable to therapeutics areas in the rest of the industry; the Phase III success rate for micro-cap oncology companies is catastrophic.