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Biotech Analysts Strive to Peek Inside Clinical Tests of Drugs
Biotech Analysts Strive to Peek Inside Clinical Tests of Drugs
By GEETA ANAND and RANDALL SMITH
On Feb. 15, David Risk drove his black BMW into the Palm Beach Research Center and signed up as a patient in a clinical trial of a new sleep drug. Saying he suffered from a sleep disorder, he gave blood and urine samples and signed a form agreeing not to disclose anything he had learned about patients.
Five days later, Mr. Risk published a research report recommending that investors sell shares of Neurocrine Biosciences Inc., the company whose drug trial he entered. The Sterling Financial Investment Group report said one patient in the trial had a bad reaction -- a middle-aged man couldn't be roused from sleep by his wife for some time. Neurocrine stock, about $35 at the time, didn't get hit right away but slid through spring and early summer to about $23.
David Scott, vice president of the Florida clinic where the analyst enrolled as a patient, says the analyst behaved unethically by disclosing confidential company and patient information. Mr. Risk says he was just acting as a stock sleuth. He says he heard of the reaction from a doctor he spoke to while posing as a patient. Then he spread the news in a report read by 150 clients -- many of them short sellers who aim to profit from a stock's fall by selling borrowed shares and replacing them after they've fallen.
It's just one of several questionable tactics used by some analysts and investors to get an edge in the volatile world of biotechnology stocks. Among increasingly common techniques: Analysts posing as doctors or desperately ill patients call managers of clinical trials, saying they need information to decide whether to participate. Sometimes, analysts or money managers pay middlemen to arrange phone calls with doctors working on trials, hoping to glean some shred of data.
The tactics reflect the high stakes in the biotech game. Biotech initial public stock offerings world-wide soared to $8.7 billion in 2000, twice the yearly rate of the previous eight years, amid a blast of enthusiasm about gene mapping. While the stock market is obviously much different now, the stocks remain volatile, because short-selling is attractive in a nervous market where any hint of trouble can thrash a stock.
Given that many biotech companies are virtually crap shoots -- their fates tied to the outcome of a single trial -- investors are sensitive to the faintest whisper about how a trial is going. The stocks often gyrate wildly as a result. People are "throwing out random bits of raw data that present a very different picture than if you looked at the information as a whole," says Casey Cunningham, an oncologist who runs clinical trials of a cancer drug for Genta Inc. "That's highly unethical and dangerous."
Such activity could be considered insider trading if the research analysts misappropriated clinical-trial information or obtained it under false pretenses, then traded on it or passed it along to someone who did, says Daniel J. Kramer, a specialist on insider-trading law at Paul, Weiss, Rifkind, Wharton and Garrison. The information would have to be material, meaning substantial enough to influence the stock price, he adds.
On the regulatory front, the National Association of Securities Dealers, which requires broker-dealers to observe just and equitable business practices, is reviewing activities related to such aggressive research operations. It declines to comment, as does the Securities and Exchange Commission. Lawyers familiar with SEC regulation say the agency hasn't filed charges in any cases of analyst subterfuge.
Efforts to game biotech stocks offer yet another look at the underbelly of Wall Street -- now facing widespread criticism for alleged misconduct during the stock-market bubble. Some brokers have settled allegations that they awarded hot initial public offerings to investors willing to pay kickbacks in the form of high commissions on other trades, and analysts have been investigated for writing favorable research reports on companies they were privately disparaging.
Mr. Risk's report on the Neurocrine sleep drug was inaccurate, says Mr. Scott, the clinical-trial-center executive. People familiar with the situation say the patient who was hard to rouse from sleep had tested positive for opiates the same day, and doctors blamed those, not the sleep drug. He was kicked out of the trial for violating its protocol. Neurocrine says the trial continues, and the company hopes to apply for marketing approval from the FDA next year. Its stock, meanwhile, has bounced from a high of about $54 in December to a low of $23.25 in June and the current level of $37.14.
Mr. Risk says he didn't know the patient had tested positive for opiates or that doctors weren't blaming the Neurocrine drug. He didn't check with Neurocrine before putting out the report, the 25-year-old analyst says, adding that he doesn't believe it's essential to call companies before attacking or lauding their products. "I'm young and inexperienced and not afraid to be wrong," he says.
Mr. Risk, who calls himself "Risky," basks in the results of his work. "The portfolio managers said we scared the Street," he says. "Creativity knows no bounds with us. We're tracking down the truth."
Steven Kirsch, head of Sterling's research division, says there's no legal obligation to call biotech companies for comment and it wouldn't help anyway because securities rules bar companies from saying anything they haven't made public already. He says Sterling's "rather aggressive methods of getting information" are justifiable even if they involve breaking confidentiality agreements, given the goal of finding the true story. Mr. Risk says he expected he'd have to sign a confidentiality form to enroll in the Neurocrine trial and went ahead after Sterling's legal department gave him the go-ahead.
The research division of Sterling, of Boca Raton, Fla., has won a place on money managers' reading lists as one of the alternatives to investment houses' often-bullish stock write-ups. "It's nice to have the case against the company made, whether the information is new or not," says Sam Isaly, managing partner of OrbiMed Advisers LLC, a money manager specializing in drug-company stocks.
Analysts at better-known firms are getting in on the action. One is Friedman, Billings, Ramsey Group Inc. in Arlington, Va., the 12th-ranked U.S. stock underwriter this year. Friedman Billings analyst Jonathan Aschoff says he was just trying to get the real story when he impersonated a doctor in early March.
First he sent an e-mail to Dr. Cunningham, the oncologist involved with trials of Genta's experimental cancer drug, requesting a progress update. When it went unanswered, Mr. Aschoff says he telephoned on March 13, posing as a "Dr. Rosen" who had a leukemia patient interested in enrolling in the trial. The alias came from the movie "Fletch," where Chevy Chase pretends to be a doctor by that name, says Mr. Aschoff.
Dr. Cunningham, who works at a cancer center in Dallas, says he talked to the caller about the progress of the trials and the side effects seen. He says he mentioned some shrinking of the "lymphadenopathy," which means swollen lymph nodes. "What's that?" the caller asked.
Dr. Cunningham, his suspicions aroused, said he had to run but would call back with some even better information if he could just have "Dr. Rosen's" phone number. Racing to his computer and rummaging through old e-mails, he found that the number was the same as the one Mr. Aschoff had given in the e-mail request days earlier. "I was mad as hell," Dr. Cunningham says. He called Mr. Aschoff and "chewed him out." He says he told the analyst his behavior was "unethical in the extreme. I don't appreciate being pulled out of patient care to talk to someone who is lying to me."
Mr. Aschoff's defense: "Companies are saying to investors, 'Give me your money.' Are you going to give it to idiots who go off unchecked? I'm trying to bring the truth to investors." He acknowledges lying about being a doctor but says it was for the greater good of unearthing the truth.
Friedman Billings says it provides objective analysis of about 400 companies, demanding "the highest standard of ethical, professional behavior" of all employees.
Dr. Cunningham says a few weeks after the incident, his partner got a call from someone claiming to be a cancer patient interested in enrolling in the trial -- who confessed, when pressed, that he, too, was really an analyst. Dr. Cunningham warned other clinical investigators to beware of impersonators. His own incident "put a damper on my phone conversations with doctors I don't know," he says, adding: "It's bad for medicine, it's bad for science -- and it's bad for investors to take raw scientific data and throw it out there."
Genta investor Barbara Rubensohn, a New Yorker who says she has lost $8,000 on her shares, says, "I have no problem in a stock going down if a drug doesn't get approved. I have a real problem with somebody knowing that before I do."
Mr. Aschoff says he won't misrepresent himself in the future because "it's not appropriate for an NYSE-certified firm." He says he now calls clinical-trial doctors and nurses and tries to avoid saying who he is, "aborting the mission" if they press for his identity. Mr. Aschoff says he talked to others besides Dr. Cunningham who were involved with the Genta trial, and then orally advised some of his firm's 600 clients -- mostly institutional investors -- to short the stock.
Ray Myers, of Boston Partners Long-Short Equity LLC of Boston, took the advice. He sold short as many Genta shares as he could on April 29, a day when Genta's stock rose as it signed a deal with a big pharmaceutical firm, Aventis SA. So many investors were trying to short Genta that day that Mr. Myers says he could borrow only 30,000 shares, which he sold at about $14. Within a month the stock was down $4 and he had a profit of $120,000. Genta believes the stock fell mainly because of short selling. The stock closed on Wednesday at $8.32.
Bill Nasser of Scranton, Pa., who has lost money in Genta, agrees. "I believe the shorts and hedge funds have been just spreading a tremendous amount of disinformation regarding clinical trials, finances and similar items" about Genta, he says. Genta, of Berkeley Heights, N.J., says that its drug trial is on track and it hopes for marketing approval sometime next year.
Mr. Myers of Boston Long-Short Equity says he also pays the medical-research division of Leerink Swann & Co., a Boston health-care securities boutique, to connect him to doctors involved in clinical trials. He says that in the past month, he paid about $5,000 to Leerink Swann for a half-hour conversation with a doctor involved in a clinical trial.
He says the trial concerned a surgical instrument. The doctor "told me how the trial was going," Mr. Myers says. The doctor was excited about the instrument but told Mr. Myers that "training surgeons to use the product would take time" and sales probably wouldn't take off until the middle of next year.
Coupling this tidbit with his research on how long the company's cash on hand would last, Mr. Myers sold the stock short. Stock of the company, which he won't name, has since fallen 20%, Mr. Myers says, and he expects to make about $2 million on the investment. He adds that, with big securities firms' research departments conflicted by their investment-banking needs, "it's important for people to understand the lengths we have to go to" to get accurate data.
Daniel Dubin, Leerink Swann's managing director of health-care strategy, wrote the business plan for the firm's medical-advice division in 1996 while doing a residency after medical school. He says Leerink Swann president Jeff Leerink agreed to support the concept if Dr. Dubin could sign up 40 doctors in three months. He signed up 60, who agreed to talk in a general way about trials they were involved in without violating their confidentiality agreements. Many were doctors frightened of managed care and "figuring out ways of making extra money," he says.
The firm says about 5,000 doctors now consult for it, using their knowledge of a particular field to advise analysts on whether a drug candidate has promise. Leerink pays them from several hundred dollars to $1,000 for a telephone consultation.
Dr. Dubin says he tells doctors not to violate their confidentiality agreements, and most don't. But he adds that clever clients can read a lot in a doctor's silences and pauses, "and on occasion some doctors slip up" and give out information they shouldn't.
John Borzilleri, a money manager at MetLife's State Street Research and Management unit, says he uses the Leerink Swann service, and clinical investigators' "general observations" help him make investment decisions. He says he doesn't believe he's getting proprietary information but acknowledges that "there are a lot of gray areas."
By contrast, Sterling's Mr. Risk says he is counting on finding some juicy tidbit when he talks to the doctors. Sterling has its own team of doctor consultants who are paid to set up phone interviews for Mr. Risk with clinical-trial investigators, whom Sterling pays $200 to $400 per one-hour consultation.
In one consultation, Mr. Risk says, he learned that in a trial of a Regeneron Pharmaceuticals Inc. obesity drug, a patient had developed Guillain-Barre Syndrome. That is a potentially fatal disorder in which the immune system attacks part of the peripheral nervous system, and Mr. Risk put out a report Feb. 6 calling the case "a major red-flag." Prospects "for this development program are increasingly bleak," the report said.
George Yancopoulos, Regeneron's chief scientific officer, says the Tarrytown, N.Y., company tried to explain to investors that clinical-trial doctors didn't believe the drug caused the problem. They concluded it was probably related to an upper-respiratory infection or the patient's recent flu vaccination, both known risk factors. He says several thousand patients have taken the experimental drug for an average of nine months, without any other cases of the syndrome. The company is hoping to release trial results next spring and to apply for marketing approval in 2004.
Dr. Yancopoulos says his firm thought about complaining to regulatory authorities but decided not to, figuring the damage was done and it was risky to pick a fight with short-sellers. "It's easy to get misinformation out there and it's a great way to make easy money. Unfortunately, it violates the way the system should work," he says.
The day Mr. Risk's report came out, Regeneron shares fell 13% to $20, as company officials scrambled to address the report. "It's terrible for the company. You lose momentum," Dr. Yancopoulos says. The stock has continued to slide in a skittish biotech market. On Wednesday, it closed at $15.30 in 4 p.m. Nasdaq Stock Market trading.
Dr. Yancopoulos says Regeneron has no way of knowing who may have told the analyst of the Guillain-Barre case. The trial involves 2,000 patients at 60 test sites around the world. "All you have to do is have a relationship with someone in one center," Dr. Yancopoulos notes.
Write to Geeta Anand at firstname.lastname@example.org and Randall Smith at email@example.com
Updated August 8, 2002
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