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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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« What Layoffs Have Done | Main | Andy Grove's Idea For Opening Up Clinical Trials »

September 27, 2011

So, How Come You're So Darn Lucky, Eh?

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Posted by Derek

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 (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.

Comments (7) + TrackBacks (0) | Category: Business and Markets | Cancer | The Dark Side


1. KC Spingos on September 27, 2011 12:22 PM writes...

"Buy the rumor, sell the announcement", is actually an old say, by most market experts...

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2. Cellbio on September 27, 2011 1:59 PM writes...

I am usually pretty cynical, but isn't it possible that the market is just getting it right, most of the time? I mean, it is not as if the target/pathway is unknown and there are a lot of analysts who are very sharp about the science of our business.

One the most of the time side of things, the 95% confidence intervals are broadly overlapping....−2.2% to 29.6% vs −13.8% to 12.3%) (P = .09). I would expect there is some insider trading, but wonder if the bigger piece is wise investing. This could include proper reading of individuals involved in the studies in public settings (scientific presentations, investor meetings), as body language, confidence etc can be evident and revealing.

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3. Jumbo on September 27, 2011 6:02 PM writes...

I actually doubt this is as much insider trading as it is logical trading. I don't have a subscription so I can only go off Derek's summary, but if no microcaps reported a Ph3 success, then logical investing would be to sell/short any/all microcaps ahead of data. On the other hand, if a big company is successful 21/27 of the time, you can be a little aggressive on the buy side. That likely explains most of the discrepancy, in my mind, unless there is relevant data in the paper not mentioned by Derek?

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4. jamjel on September 27, 2011 8:09 PM writes...

"...whereas 21 of 27 studies reported by the larger companies analyzed (greater than $1 billion capitalization) were positive."

What we really need to know is whether the stock price rose for those 6 negative announcements.

If not, the implication of insider trading is hard to gainsay.

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5. Still Scared of Dinosaurs on September 28, 2011 7:43 AM writes...

Insiders can be locked out of trading for weeks prior to the announcement of P3 results and in small companies this can amount to a large % of total employees. Since insiders are overwhelmingly more likely to sell shares they acquire as part of their employment, rather than buy in the open market, the effect would be an upward bias in the price.

Just one factor, and it doesn't mean that sentiment from inside the company doesn't leak out and have a similar effect. This is just a very complex system and relatively small sample.

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6. Hap on September 28, 2011 5:27 PM writes...

If stock price variations (at least on larger-cap stocks) derive from smart trading and not insider trading of some sort, wouldn't you expect some effect on stock prices from FDA decisions? The FDA is not completely transparent or predictable in making its decisions, but its decisions aren't completely random, either. Trials that can pass the FDA and those that can't should be distinguishable by investors smart enough to anticipate good trial outcomes and bad trial outcomes. If the FDA has gotten more risk-averse over time, you would expect an effect that would decrease over time but be non-zero.

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7. NJBiologist on September 29, 2011 12:14 PM writes...

At a previous (non-cancer-focused) employer, we found out that an investment firm was calling physicians enrolling patients in our clinical trials and asking whether the patients they had in our trials were, as a group, doing better or worse than they expected patients to do. Enough physicians answered the question to allow the firm to work out side effect liabilities that eventually slowed down the program. I was never clear on whether this was insider information or not... but if not, it would be an easy strategy to apply to cancer trials. Just look for the ones with more regression or longer survival than expected, and infer at least one active treatment.

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