Matthew Herper wrote an article about a tiny biotech preparing for its initial public offering by licensing a promising anti-cancer drug from Merck. According to Herper, the start-up is attempting to repeat the success its top executives had turning Big Pharma’s castoffs into hits at MGI Pharma — bought by Eisai for $3.9 billion in 2008. My first question is: if the drug is so promising, why would Merck dump it? Herper’s article was on the Forbes website on the afternoon of June 6, 2012. Since the announcement, Merck (NYSE: MRK) stock has moved up about a dollar by the end of the week. Just one day prior, Merck received a complete response letter from the FDA saying it “cannot approve the application for its drug ridaforolimus — an investigational oral mTOR inhibitor under development for maintenance therapy for patients with metastatic soft tissue or bone sarcoma who have stable disease or four or more cycles of chemotherapy. What gives? I would think not getting a drug approved and dumping a “promising drug” would result in a sharp decline.
Announcements’ Impact On Share Price
I decided to do further research on these types of announcements and their effects on stock price. A research article by Sarkar and de Jong, published March 2006 in the Quarterly Review of Economics and Finance entitled, “Market Response to FDA Announcements,” found that investors adjust expectations through the approval process, and most uncertainty is resolved by final approval. So according to these authors, if a drug receives a nonapprovable letter from the FDA, the stock shouldn’t take a hit. In support of this assertion, Allan Detsky, M.D., Ph.D. and colleagues did a retrospective analysis of stock prices of publicly traded biotechnology and pharmaceutical companies before and after key public announcements from January 2000 to January 2009. There were 23 positive and 36 negative Phase 3 clinical trials involving cancer drugs resulting in 41 positive and 9 negative FDA regulatory decisions. The researchers found that the average stock price of a drug 120 days before a Phase 3 clinical trial announcement showed an increase of 13.7% for companies reporting positive trials and a decrease of .7% for companies that reported negative trials. However, company stock prices before FDA regulatory decisions did not differ between companies with positive and negative decisions. According to these researchers, one possible explanation for these trends is inside trading. Last time I checked, insider trading was illegal.
In December 2011, I posted a blog entitled, “A Novel Approach To Shortening The Drug Approval Process,” in which I note how law makers are not prohibited from acting upon insider information they may get from companies, such as positive clinical trial results which are not yet public. According to the Detsky article, “The results of this study call for increased awareness by investigators regarding the legal and ethical aspects of divulging nonpublic information regarding clinical trials.” In an accompanying editorial, Adam Feuerstein, a senior columnist at TheStreet, and Mark Ratain, M.D. of the University of Chicago, wrote that the suggestion by Detsky and colleagues that some investigators involved in Phase 3 trials are illegally tipping the results, which is a criminal violation of the Securities Exchange Act, is “of grave concern.” Really? Perhaps a few clinicians have broken the law, which would be unfortunate. Of graver concern to me is when laws are structured by lawmakers to their exclusion of prosecution. Plenty of members of congress have used insider information on drug clinical trials to feather their nests. Check out www.opensecrets.org to learn who, and while doing so, ponder what former President Theodore Roosevelt once stated — “No man is above the law and no man below it.” Why does the rule of law seem not to apply to government legislators?