Biotechnology stock prices before public announcements: evidence of insider trading?

Unique financial challenges faced by biotechnology companies developing therapeutics have contributed to the creation of a highly sensitive market, where stock prices are capable of great fluctuation. The potential for significant financial reward and the nature of the scientific review process make this industry susceptible to illegal share trading on nonpublic information. We examined stock prices of biotechnology products before and after announcement of Phase III clinical trial and Food and Drug Administration (FDA) Advisory Panel results for indirect evidence of insider trading.

Biotechnology stock prices were recorded for 98 products undergoing Phase III clinical trials and 49 products undergoing FDA Advisory Panel review between 1990 and 1998. Prices were recorded for 120 consecutive trading days before and after public announcement of these two events. We compared the average change in stock price of successful products ('winners') with unsuccessful products ('losers') before the public announcement of results for both critical events.

The difference between average stock price change from 120 to 3 days before public announcement of results of Phase III clinical trial winners (+27%) and losers (-4%) was highly significant (P = 0.0007). A similar but non-significant difference was observed between the average stock price of winning (+27%) and losing products (+13%) before FDA Advisory Panel review announcements (P = 0.25).

Our results provide indirect evidence that insider trading may be common in the biotechnology industry. Clinical investigators may wish to consider this issue before participating in any equity position in the biotechnology industry, especially if they are going to perform research for those companies.