Why Pharma Stocks Can Rise Before Trial Results
September 28th, 2011 // 1:03 pm @ jmpickett
In a conclusion that is unlikely to surprise some investors, a new study has determined that advanced knowledge of Phase III clinical trials of new cancer meds and FDA decisions may affect the publicly traded shares prices of drugmakers. Put another way, shares in drugmakers tend to rise during the run up to reporting positive trial results, but fall when negative results are reported.
Of course, recent events have underscored this finding. In one case, for instance, an FDA chemist named Cheng Yi Liang was charged by the US Securities and Exchange Commission with insider trading on confidential info about upcoming announcements of 27 different FDA approval decisions involving 19 publicly traded companies. And in a similar instance, a hedge fund manager was recently accused by Massachusetts regulators of paying a so-called expert consultant for advance information on a clinical trial .
To determine the impact advance info can have on share prices, the researchers conducted a retrospective analysis of stock prices of publicly traded pharma and biotechs before and after key public announcements were made between January 2000 and January 2009 about 23 positive and 36 negative phase III clinical trials in which a cancer drug was tested, and from 41 positive and nine negative FDA regulatory decisions.
They analyzed each closing stock price before and after the date of a public announcement and found that the average stock price 120 days before a phase III clinical trial announcement showed an increase of 13.7 percent for companies that reported positive trials and a 0.7 percent drop for those reporting negative trial results.
In a post-hoc analysis comparing average stock prices from 120 to 60 days before results were announced to the average price for the subsequent 60 days, those reporting positive results saw a mean increase in share price of 9.4 percent. But those reporting negative results saw a decrease of 4.5 percent in share price, which was statistically significant. However, stock prices before FDA regulatory decisions did not differ between those with positive and negative decisions.
And so, the researchers posit one possible explanation is insider trading. They add that FDA decisions would not influence stock prices because the information on which they are based is already public, although that was not the case in the episode involving the FDA chemist. Among the study limitations – drugmakers reporting positive phase III results are likely to be more established and profitable (here is the statement).
In fact, an accompanying editorial by The Street columnist Adam Feuerstein and Mark Ratain of the University of Chicago did their own analysis. They calculated market caps at 120 days before public disclosure and found that values were 80-fold greater for those with positive results than those with negative trials.
In other words, this may not be startling. “The perceived high risk of failure of phase III oncology trials is primarily limited to smaller oncology companies…The stock market is known to anticipate future events, as opposed to reacting to the past. Thus, it is not surprising that sophisticated investors are able to judge the probability of success, which is reflected in the share price.â€
Source: Pharmalot
