Before Negative Clinical Trial Announcements, Stock Prices Dip

The group looked at drug company stock prices before and after major announcements of phase III clinical trials of experimental anti-cancer drugs and found an interesting discrepancy.

Stock prices rose 13.7 percent for companies that posted positive results from phase III trials, when the stock price was compared 120 days before the major announcement was made. Negative trials dragged stocks down a slight 0.7 percent compared with 120 days before the phase III announcement

However, leading up to negative drug trial announcements, stocks tended to suffer more than expected, the researchers found.

Sixty days before a negative clinical trial announcement where researchers had to admit that their drug wasn't effective, company stocks saw a decrease of 4.5 percent. Companies with positive results saw their stock increase 9.4 percent.

The retrospective survey, conducted by Allan S. Detsky and colleagues at Mount Sinai Hospital in Toronto, included publicly traded biotechnology and pharmaceutical companies before and after key public announcements made between January 2000 and January 2009. The study included 23 positive and 36 negative phase III clinical trials in which their cancer drug was tested and from 41 positive and nine negative FDA regulatory decisions. Stock prices came from the Center for Research in Security Prices and Bloomberg Professional.

The study was published in the Sept. 26 issue of the Journal of the National Cancer Institute.

The researchers said they were surprised to see the differences in company stock prices in relation to positive and negative trials, given all the variables affecting a company's stock price. The results of this study call for increased awareness by investigators regarding the legal and ethical aspects of divulging nonpublic information regarding clinical trials, the authors wrote.

In an accompanying editorial, Adam Feuerstein, a senior columnist at TheStreet, and Mark J. Ratain, M.D., of the University of Chicago, write that the suggestion by Dr. Detsky and colleagues that some investigators involved in phase III trials are illegally tipping the results, which is a criminal violation of the Securities Exchange Act, is of grave concern.

Although the authors should be congratulated for undertaking this novel analysis at the intersection of medicine and Wall Street, it is important to keep in mind that the positive and negative trials may not be comparable, the editorial states. 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.

Other possible explanations for the data include: larger companies tend to have more positive trials because they are better capitalized than smaller firms that might sponsor a higher risk drug trial.

The researchers themselves pointed out limitations of their study,  including selection bias, the fact that it was retrospective, and the small number of companies included in the analysis. They also noted differences in the companies they profiled, namely that those reporting positive phase III study results are likely to be more established and profitable.

At least one researcher has been charged in 2011 with insider trading, according to the Securities and Exchange Commission that regulates trading

On March 29, the SEC charged Cheng Yi Liang, a U.S. Food and Drug Administration (FDA) chemist on allegations of trading in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies.

Liang was accused of pocketing $3.6 million based on the favorable trades that stemmed from seven brokerage accounts, none in his name, the SEC accuses.