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
http://pipeline.corante.com/archives/2011/09/27/so_how_come_youre_so_darn_lucky_eh.php
Ed Silverman
http://www.pharmalot.com/2011/09/why-pharma-stocks-can-rise-before-trial-results/
The Research - Rothenstein, Detsky, et al
http://jnci.oxfordjournals.org/content/early/2011/09/26/jnci.djr338.abstract
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)
http://jnci.oxfordjournals.org/content/early/2011/09/26/jnci.djr375.full
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.
TMFHelical
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