Profiting on Science Discoveries
Executives at Geron Corp. in Menlo Park, Calif., were about to report a scientific breakthrough. Company-funded scientists had found ways to grow human embryo and fetus cells in their laboratories, an important step toward the day when diseased human organs could be replaced or repaired with living tissue. The good news was bound to boost Geron’s flagging stock price.
Publication of the findings in the prestigious magazine Science was supposed to be confidential under a news embargo until 4 p.m. Eastern time Nov. 5, after the close of the Nasdaq stock market. Dozens of company insiders and hundreds of journalists had the information in advance, but were pledged to secrecy.
Yet on that day, the trading volume of company shares skyrocketed. In the three hours before Nasdaq closed and the embargo was to be lifted, Nasdaq reported 4 million shares traded--40 times the average daily volume.
Speculators had somehow gotten wind of the news to come--enabling some to more than double their investments before the media around the country trumpeted the scientific advance. The following day the stock price surged temporarily, to $22 from $10 a share.
The apparent leak of the Geron news illustrates the powerful interplay between scientific discovery and Wall Street, particularly for small biotechnology companies whose shares can soar or plummet based on a single report at a medical meeting or on an article in a research journal.
Officials at the Securities and Exchange Commission, in keeping with their policy, will not comment on whether the agency is investigating the run-up in Geron stock.
The agency, however, says it is concerned about insider trading in the biotech industry. In the last two years it has brought six insider-trading cases against scientists and consultants who used their access to research results to benefit themselves or their families, friends and colleagues. One of those cases centered on a company scientist who purchased thousands of shares of stock in the days before a favorable study was published in a major scientific journal.
Chicago securities attorney James R. Ferguson, who has written extensively about the issue, complains of what he says is “a privileged class” of individuals who get early access to scientific publications and who may be able to use that information for financial advantage.
Hambrecht & Quist analyst Richard A. van den Broek has found circumstantial evidence suggesting that insider trading in the biotech field is fairly common. Van den Broek tracked stock prices of 70 biotech companies that had released results of patient trials. In the days leading up to the release of positive results, share prices of those companies rose an average of 40%. Before the release of unsuccessful trial results, the stock prices dropped almost 10% on average.
The finding “raises the specter that the dissemination of information may not be all the same,” Van den Broek said.
“It is tricky sorting out who has a legal duty not to trade [on advance word of test results] and who doesn’t,” Ferguson said. In general, those with a duty to their employers to keep the information secret--a group that includes company employees and research collaborators, as well as journalists who receive advance copies of papers--can be prosecuted for insider trading.
Analysts Free to Use Early Tips
In contrast, analysts who ferret out information for the benefit of investment firms and their clients are under no such restrictions. And several publications routinely arrive on the desks of Wall Street analysts and other subscribers before the official release date--giving select investors an advantage over the general public on news that can affect stock prices.
In August, for example, the New England Journal of Medicine published two studies on the use of Epogen to fight anemia in kidney dialysis patients. The papers and an accompanying editorial suggested that most patients could sharply reduce the amount of drug they need if they receive injections under the skin rather than intravenously as part of their regular dialysis treatment. Backed by the prestige of the New England Journal, the studies could have a negative impact on the sales of the drug, which is manufactured by Amgen Inc. of Thousand Oaks.
Under the journal’s embargo policy, reporters could not release their stories until 5 p.m. Eastern time Aug. 24, a Wednesday. But two days earlier, PaineWebber senior analyst Elise T. Wang already had issued a note to clients, describing the results in detail and explaining why she continued to rate Amgen stock as “attractive.”
Wang said she usually receives her own copy of the New England Journal on Mondays or Tuesdays. As a regular subscriber, she has no restrictions on how she might use the information.
The New England Journal’s executive editor, Dr. Marcia Angell, said that the publication is mailed out a week ahead of the embargo date, and most subscribers receive it on a Thursday. Journalists who have agreed to abide by the embargo are mailed their copies first-class and get it even sooner.
“There’s no special deal for analysts,” Angell said. “We want to get it to our subscribers so they have full information in front of them at about the time their patients hear about it through Dan Rather or Tom Brokaw. . . . We don’t have control over analysts.
“We are not responsible for the stock market. We are not an arm of the SEC. That’s not really what our focus is, and there is not much we can do about it,” Angell said.
That proved true with another publication in mid-August. The Journal of the American Medical Assn., with a worldwide circulation of 700,000, published a major study of the impact of estrogen replacement therapy on post-menopausal women with coronary heart disease. The researchers found that, contrary to expectations, taking the hormone replacement treatment did not reduce the risk of heart attacks and other heart complications, but did result in a higher incidence of dangerous blood clots and gall bladder disease.
The study was sponsored by Wyeth-Ayerst, a division of American Home Products Corp. of Madison, N.J., and a leading manufacturer of hormone replacement pills. The results were clearly a disappointment to the large pharmaceutical company.
Jeff Molter, director of science news at the AMA, said the details of the study were being circulated before the journal’s release time in an e-mailed stock-tip newsletter called Pharmafool. Molter said he was unable to find the authors of Pharmafool and the journal decided not to lift its embargo. As a result, the general public--and most investors--had to wait several hours for access to the information.
Molter said that he and others at the AMA are concerned about word leaking out to speculators, but cannot always stop that from happening. “The purpose of the embargo is to educate and inform journalists about the medical information,” he said.
The aim of the SEC is to “keep people from getting an unfair informational advantage that is not through skill or diligence of their own,” said Thomas C. Newkirk, associate director of the SEC’s enforcement division.
The commission has a variety of ways of uncovering insider trading, including the agency’s own market surveillance and referrals of suspect trading from securities dealers and stock exchanges.
Beginning in 1996, the SEC has brought a series of insider-trading cases against medical researchers and others associated with biotechnology firms.
In June, for example, the SEC settled one of those cases--a civil complaint against Changnian Liu, who once worked as a scientist at ImmunoGen Inc., a Norwood, Mass.-based biotech firm.
The commission alleged that Liu purchased 30,000 shares of the company stock in the days leading up to the 1996 publication of a study in another esteemed journal, the Proceedings of the National Academy of Sciences. The study showed that one of the company’s drugs had completely eradicated human colon cancer tumors grown in mice. When the embargo was lifted and the news was released, share prices rose by more than 60%. Without admitting fault, Liu agreed to pay back $41,700 in what the SEC described as illegal trading profit, plus $48,333 in penalties and interest.
“The lesson to be learned from all these cases is that if you trade on inside information, on the results of medical tests, the SEC is likely to find out and prosecute you,” said Peter H. Bresnan, assistant chief litigation counsel at the commission. “And the penalties will be severe.”
Geron Stock Rises on Research News
Geron, from the Greek word for “old man,” was founded in 1992 to exploit the growing research into what causes cells to die--and new theories about how to reverse or retard that process.
The company, which went public in 1996, has raised $138 million from public and private sources. And like many biotechnology companies, it has yet to make a profit.
A chart of its share price has a mountainous look--each jagged peak corresponding to the release of another publication in Science, the weekly journal of the American Assn. for the Advancement of Science in Washington, D.C.
Such price variability is common among the many publicly traded biotech companies, which are bought and sold on the basis of promising research results, not on sales. Most have no approved products on the market.
On Aug. 14, 1997, Geron announced that Nobel laureate Thomas Cech of the University of Colorado had cloned the gene for human telomerase--what it described as an “immortalizing enzyme.” The price per share, which stood at $6.50 before the announcement, more than doubled the next day.
In the Jan. 16 edition of Science, Geron scientists and collaborators at the University of Texas Southwestern Medical Center published their success in using the telomerase gene to extend the life span of human cells grown in culture. Normally the announcement of the results would have been withheld until the end of the trading day on the eve of publication, but the Alliance for Aging Research broke the embargo by describing the experiments in a press release.
On the day the embargo was broken, the stock climbed 43%.
Given that history, officials at Geron and Science were especially vigilant when the next Geron-funded research was to be published, in the Nov. 6 issue of the magazine.
Scientists at the University of Wisconsin and the Rambam Medical Center in Israel reported that they had found a way to take early human embryo cells and grow them in the laboratory. The magazine also revealed that other Geron-funded scientists, at Johns Hopkins University, had created similar stem cell lines from human fetuses. The practical applications were years away, but that didn’t stop one wire service reporter from later describing the research as offering “the promise of eternal life.”
On Nov. 5, in the hours before the official 4 p.m. Eastern release time, which corresponded to the close of Nasdaq trading, Geron’s chief financial officer, David L. Greenwood, was watching the market “minute by minute,” he said.
“Important events are what move our stock, not quarterly financial results,” Greenwood said in a recent interview. “As soon as I noticed the uptick in volumes as well as the uptick in price, I called the market.” But because the price of the stock stayed within a narrow range, the market managers did not halt trading.
Also watching the stock was Diane Dondershine, senior communications officer at Science magazine. Each week, 1,200 journalists and public relations officers at universities and government laboratories get advance summaries of the journal’s articles. More than a hundred had asked for full copies of the stem cell research and related commentaries.
With such an extensive list, there was always the chance for information to leak out, and officials at Science are always watchful.
On the morning before the official release, Dondershine learned that NBC was promoting a Nightly News segment that “sounded similar to the article in Science.”
Worried that the promo might be a violation of the news embargo, she said she called a producer at NBC, who was unaware of the teaser.
The promo said: “Imagine: A way to cure our worst diseases--Parkinson’s, Alzheimer’s, heart disease, diabetes--even cancer. We’re looking at a cell that has the potential to do anything. . . . It’s a stunning discovery! It could be a way to replace every diseased cell in your body.”
NBC officials acknowledged that the news report was based on the Science article, but pointed out that the teaser gave away none of the specifics and did not identify the magazine, the researchers or the company.
Meanwhile, at about 1 p.m., Geron invited a number of analysts to a 4 p.m. news conference. The invitation offered no details, but the purpose was to discuss the new discoveries.
For Wall Street traders, looking for an edge, the dribble of information might have been enough.
“The word was out there that someone had made a breakthrough on stem cell technology; there was going to be news on it on NBC,” said David Cathcart of Day Traders On-line, an Internet stock-tip service and chat room geared to short-term investors.
Three hours before the embargo was lifted, Day Traders subscribers were alerted that there would be big news on Geron. Those who acted quickly could have scooped up shares at less than $8 and sold them the next morning for $22--a gain of 175%.
A number of analysts noticed the surge in volume. “The word was leaking out in advance,” said Akhtar Samad of Mehta Partners, a health-care investment analyst firm.
In the days since the news hit and the share price went skyward, the stock has slowly drifted back down to earth. On Thursday, Geron closed down 6 cents to $11.06 on Nasdaq.
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Charting a News Leak
Geron’s research breakthrough, to be reported in the journal Science, was under a news embargo until 4 p.m. Eastern time Nov. 5, after the close of the stock market. But when word of the report began to trickle out around 1 p.m., trading volume in Geron’s shares on Nasdaq tripled and the stock price began to creep upward. Those who got in were rewarded handsomely the following morning, when other investors rushed in, driving the stock price from $10 to $22.
Stock price
Nov. 5
Word of Geron report begins to circulate / 1 p.m. EST
Embargo lifted on Geron news in Science / 4 p.m. EST
Nov. 6
Opening trade Nov. 6 / 9:29 a.m. EST
