As 2005 draws to a close with the various biotechnology and pharma stock indexes inching upward (the Morgan Stanley Biotech
Index was up 3.44% in October), the prospects for a brighter and more profitable 2006 seem fairly positive. If 2004 was any
indicator when the Biotech Index climbed 12% in November and December after moderate growth in October, then Christmas could
come early for bioscience investors.
In the January issue, I'll write more about what to expect in 2006, and what lessons the life sciences industry can learn
from the events of 2005.
This month, though, a scandal is brewing in biopharm circles that could blow the top off the industry and make it much more
difficult for doctors and biopharm research companies to share critical research information — and possibly put some physicians
behind bars who try to put a price tag on the sensitive research information they hear about from biopharm industry companies.
HERE'S THE SKINNY:
According to a thunderbolt special series from The Seattle Times, prosecutors are preparing charges against medical researchers who allegedly sell confidential information from prescription
drug studies and release that information to Wall Street analysts.
It's a growing market, if not a pretty one. Big-time investors often pay up to $1 million for such information. Doctors can
charge up to $500 per hour to discuss the pros and cons of clinical drug trials. One firm, Gerson Lehrman Group (
http://www.glgroup.com/), even acts as a matchmaker, lining up analysts to talk to any one of 60,000 doctors ensconced in the firm's database. In
2002, that number was 30,000.
Let's visit planet Earth for a moment. I spent five years as a bond trader in New York and one fact of life I learned was
that when an analyst got a hot tip, it was only a matter of seconds for that tip to be passed along to favored clients.
And that practice is illegal. You can't take insider information relating to any company's financial prospects and pass it
along to investors. Such actions create an uneven playing field and reduce investor confidence in the integrity of the financial
Worse still, the doctors involved in the alleged gambit charged analysts hundreds of dollars per conversation — beer money
on Wall Street — for access to potentially hugely profitable information they had in hand.
The Times expose, researched and written by reporters Luke Timmerman and David Heath, found at least 26 cases of insider trading related
to drug research between doctors and stock analysts. The doctors involved weren't pikers either. Blue-chip research universities
such as UCLA and The University of Pennsylvania (full disclosure: I taught, and was compensated for, a writing class at Penn
earlier this autumn) were involved, as were old, established financial firms like Citigroup and Wachovia Securities.
DOCTORS: WHAT'S ALL THE FUSS?
In most instances, doctors allegedly involved in the insider trading scam delivered proprietary information about confidential
studies they were working on to Wall Street analysts. The Times alleges that the analysts subsequently passed the information along to clients.
The Times states that "until now, the selling of drug secrets has been hidden from securities regulators and the public, but biotech
and Wall Street insiders say the practice is widespread." The practice is being driven by hedge funds — largely unregulated
investment pools that cater to the super rich — and is facilitated by firms like Gerson Lehrman. Matchmakers pay the scientists
$300 to $500 per hour to speak with the investors. According to legal experts interviewed by the newspaper, "trading stock
based on secret information bought from medical researchers is illegal." A 1983 US Supreme Court decision found that analysts
are free to gather information about companies and pass it on to their clients, but added that analysts are forbidden to persuade
someone to divulge company secrets, claiming that practice is "misappropriating" nonpublic information.