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XMFHelical (< 20)

Biotech Trading Research



September 29, 2011 – Comments (2)

There has been some interesting commentary on a recent study of stock trading ahead of phase III trial data with oncology companies.  I'll start with a link to some of the commentary.

Derek Lowe
Ed Silverman

The Research - Rothenstein, Detsky, et al

We identified public announcements from 23 positive trials and 36 negative trials and from 41 positive and nine negative FDA regulatory decisions. The mean stock price for the 120 trading days before a phase III clinical trial announcement increased by 13.7% (95% confidence interval = −2.2% to 29.6%) for companies that reported positive trials and decreased by 0.7% (95% confidence interval = −13.8% to 12.3%) for companies that reported negative trials (P = .09). In a post hoc analysis comparing the stock price averaged over 60 trading days before and after day −60 relative to the clinical trial announcement, the mean stock price increased by 9.4% for companies that reported positive trials and decreased by 4.5% for companies that reported negative trials (P = .03). Changes in company stock prices before FDA regulatory decisions did not differ statistically between companies with positive decision and companies with negative decisions.

So, the trend is that the stocks tend to predict success before it is announced, arguing that the results are not quite as 'unknown' as they should be.  But the last line is quite interesting as well, that while the trial result appears 'leaky', the FDA determination is quite watertight.  But perhaps more interesting from a follow-on study is the trend that the market cap of the company releasing the data is even more predictive of the success of the trail.

Ratain and Feuerstein (yup, that one)

Drugs that succeed in phase III clinical trials tend to be owned and developed (or acquired) by larger companies that have strong records of accomplishment in drug development. Investors have greater confidence in these companies and therefore reward them with larger market valuations and increasing stock prices ahead of the public announcement of trial results. The opposite tends to be true for drugs that fail phase III trials: Such drugs tend to be owned by smaller companies that lack the confidence of investors and may be saddled with low market valuations and falling stock prices before announcements of trial results. Furthermore, the latter companies may have been of little or no interest to potential acquirers due to their perceived low probability of success.

None of this is all that surprising, but it is nice to see it evaluated.  Good fodder for an investors bias-checks.  If you are sitting on a late trial result, you might want to look at how the stock has been performing of late, and also limit the bets on the small and micro cap bets.

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2 Comments – Post Your Own

#1) On September 29, 2011 at 9:53 AM, zzlangerhans (99.77) wrote:

Unfortunately, the full text of the article requires a journal subscription. Without reading the entire article, several factors jump out rendering the study invalid.

The obvious glaring flaw is that all companies which had positive trials had market caps more than 300 million dollars, and a median valuation of 17.8 billion dollars. Phase III trial results will have a proportionately lesser effect in these companies with large market caps, because they may already be cash flow positive from other marketed drugs and will likely have several other advanced pipeline projects.

Without any positive results in the sub-300M group and likely only one or two in the sub-1B group, it is impossible to make any conclusive statistical analysis. It is a classic case of comparing apples to oranges. For a valid comparison, one would have to examine the changes in stock prices leading up to phase III trial results in sub-1B cap companies that included a substantial number of both positive and negative results. Restricting this study to oncology trials prevented the authors from reaching a valid conclusion, as they had insufficient events in the sub-1B population.

We already know that speculators with resources can legally pay clinical trial site administrators for certain types of information regarding an ongoing trial. Anyone who has looked at the price action of small cap biotech/pharma stocks before and after phase III trials (and FDA approval decisions as well) has a healthy respect for the impact of insider trading.

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#2) On September 29, 2011 at 11:26 AM, XMFHelical (< 20) wrote:


I agree that the market cap item is exaggerated due to what was evaluated i.e. phase III studies.  A study on phase II studies would have been far more informative in my opinion, both from the standpoint of information 'leakage' and company size / return potential.  It is after all the phase II data that interests those 'large market cap' lurkers to assist/acquire the micros.


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