Monday, August 08, 2005

Another reason to be cautious about Pharma/Biotech reports & investments

Doctors and Wall Street are jerking you around as much as, if not even more than, the Pharmaceutical Industry. The dirty little (not too) secret of pharmaceutical drug development is that confidentiality agreements aren't exactly honored. There have been some companies, especially small biotech/biopharmas that have seen stock price changes quite different than what conventional wisdom would predict based on public announcements. . .some of these small companies have been hit with lawsuits from investors, but it looks like the ones investors may want to be eyeing are those in the investment community & study investigators with big mouths (some which have access to data and accurate information, some who do not). As reported in the Seattle Times [emphasis added]:

Whether they are paid or not, medical researchers who talk with Wall Street about their ongoing research violate confidentiality agreements they sign before drug companies allow the drug testing to begin.

Until now, the selling of drug secrets has been hidden from securities regulators and the public, but biotech and Wall Street insiders said the practice is widespread.

"Everybody does this.... It's now common practice," said the chief executive of California biotech company Valentis, Ben McGraw, a former Wall Street analyst. The practice of selling drug secrets, The Times found, is being driven by hedge funds, the largely unregulated investment pools that cater to the super-rich. Hedge funds can make money with aggressive strategies that exploit quick price swings in stocks, and the volatile biotech industry provides many such opportunities.

A single drug's prospects can determine whether a small biotech company's stock soars or plummets, so any inside information provides a potent investing edge.

Such information is so valuable that elite investors pay up to $1 million a year to firms known as matchmakers, which pair Wall Street firms with doctors involved in ongoing drug research. Gerson Lehrman Group, the largest matchmaker, claims to have 60,000 doctors available to speak to Wall Street, double the number from three years earlier.

Matchmakers typically pay doctors $300 to $500 an hour to talk to elite investors. Some doctors said they can make tens of thousands of dollars a year from such talks.

Drug-company executives say they know about the practice but can't crack down on the doctors they rely upon for conducting patient testing.

Ordinary investors are victimized when inside information is leaked to select investors. Those who know in advance whether a drug is going to succeed or fail can buy stock low or sell it high to those who don't know, making quick fortunes by taking advantage of unwitting investors.

And there is a broader cost to society: Leaking details about ongoing research can introduce bias into drug trials and possibly halt development of potentially life-saving drugs, biotech executives said.

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