Is There Any Insider Trading Going On in Drug Stocks?

With all the financial scandals going on these days (really, a multibillion-dollar Ponzi scheme run by the former head of NASDAQ?), it’s worth asking how often such shady dealing goes on with the stocks of drug companies. From what I can see, it does happen, but it’s certainly not endemic.

The first thing that comes to mind is insider trading. Since many companies see their stock move abruptly on the single news items pertaining to clinical trials results, regulatory actions, adverse events, and so on, front-running is always going to be a problem. And I’m sure that it goes on, but I also know that companies put a lot of effort into trying to keep it from happening. For clinical trial results, that means that such information is strictly need-to-know, and believe me, not that many people need to know. Most companies have a rather short list of people who see such numbers before a public release, which makes tracking down suspicious trades a bit too easy for comfort, if you’re inclined to reach for the easy money. I’m certainly not on any such list myself, and never have been.

There are other kinds of material information, but it’s still rare for anything that goes on in my end of the industry to affect the stock price. We’re just too far from the clinic and from the FDA to make that much of a difference. But in any case, I agree with a definition of “material information” that I once heard: if it makes you think about trading the company’s stock, and it’s not in a press release already, it’s material information. And you act on it at your peril.

But that doesn’t mean that people don’t act. Sam Waksal of Imclone (IMCL) is merely the most famous executive to place a phone call to his broker at an inopportune time. The chief legal counsel over at Biogen Idec (BIIB) got in hot water a couple of years ago about a suspicious options trade around the time of the bad news about the company’s Tysabri. (The case was settled with the SEC, with no language about wrongdoing involved - there was still some reasonable doubt about the timing of the trade, although it would have been far more prudent to not have made it). A few years before that, the chief attorney at Vertex (VRTX) got into trouble with another ill-advised trade of his own company's stock. And there are others, naturally.

Then there's the problem with theoretically-embargoed information from the big clinical meetings like ASCO. In recent years, it's become clear that this stuff is leaking out in one form or another, because interesting trading patterns become evident in the run-up to the meetings themselves. I think that sending out an abstract book while trying to keep the lid on them is probably futile. Of course, in many cases the real stock-moving news in such cases doesn't come from anything in the abstract book, but from the information in the presentations themselves, which is all later-breaking stuff added long after the abstract submission deadline. So you could argue that people trading on the pre-meeting stuff are still kidding themselves...

The closest I've ever come to this sort of thing myself was some years ago. A colleague attending a clinically-oriented meeting in a particular medical specialty called some of us back at our company to say that an anticipated series of posters and talks from another company didn't look like it was going to materialize. No one from that organization was putting anything up for the poster session. We guessed that there was some last-minute problem with their compound - and so it proved in a press release the next morning.

It occurred to me during that afternoon that a stock or options trade could well be profitable, but I didn't go through with it. It would have been profitable (especially the options, naturally), but in the end I didn't quite have the nerve. I still don't think that it would have been illegal, but I didn't like the idea of explaining actions of mine in those terms. "Not illegal as far as I know" isn't exactly the rock on which one wishes to make one's stand, you know?