Pfizer's Torcetrapib: Science and Investments, What Can Be Done?
It would be nice if Pfizer's decision started a trend, but I am not hopeful.
I was surprised the American Heart Association punted Pfizer's (PFE) torcetrapib abstract from their recent Scientific Sessions meeting in October. AHA pulled the abstract after Pfizer issued a press release describing the data prior to its presentation at the meeting. This violated AHA's embargo rules, giving them the right to pull the abstract and prevent the presentation from happening.
All scientific conferences and most scientific journals have similar restrictions. These restrictions are perhaps the biggest single source of insider trading (the illegal kind) in the market – certainly in the biotech space. The SEC couldn't care less about this judging from its complete lack of response when made aware of this problem.
The torcetrapib situation is remarkable only in that scientific organizations usually give the large companies a free pass. Enforcement of meeting embargoes is selective. Usually, only little companies are slapped by these rules. Pfizer is likely a huge financial supporter of the AHA meeting, and it took some guts on the part of the AHA meeting committee to pull the abstract.
I want to examine this issue from two areas, science and investments:
The abstract covering the torcetrapib data was posted on the AHA meeting web site on November 1. Pfizer released their press release on the same day. Given the abstract was posted on the web site anyway, Pfizer was doing little more than making sure people saw it.
AHA pulled the abstract, which means any presentation scheduled – poster or oral – was cancelled. Someone smarter than I am will have to explain to you how that serves the interests of science. After all, it simply means fewer details will be provided to the scientific community.
The whole idea of an embargo is wacky. Most of you have been to a convention at one time or another – perhaps a large one. At the ASCO cancer conference, to take one example, you're joined by 30-40,000 of your closest friends in a multi-day frenzy to try to see everything "important." Embargoes that prevent companies from discussing scientific presentations until after the presentations are made do little good but ensure by the time you learn about something interesting, you've missed the presentation.
Make no mistake, the reason for the embargo has nothing to do with science. It is economics. Scientific organizations sponsoring these conferences enforce embargoes to make people come to the meetings. This ignores the fact we would all come anyway, because the details available at the meetings are always better than simply reading a press release.
If they were interested in science, there would be no embargoes and talking about the abstracts would be encouraged.
If you invest in biotech or healthcare stocks, you need to understand anyone willing to pay for the right connections will have insider information from scientific conferences. Funds who pay hourly fees to doctors for conversations seek out key presenters ahead of scientific conferences in order to get previews. Funds place doctors who are members of scientific organizations on their paid staff to get members-only copies of journal articles and meeting abstract books before the public.
It's a seamy side of the business rarely discussed in polite company. It's clearly illegal, though the SEC has completely ignored the issue despite award-winning national media articles, inquiries from Congress, and enough letters from investors to denude a small forest.
This side of the business is increasingly obvious, however. The spring AACR cancer meeting used to be a non-event for Wall Street because it focused on pre-clinical science. Nearly everyone attends now. Why? The data are still preclinical, after all.
AACR is held a few weeks before the ASCO conference and by AACR, ASCO has notified everyone whether their abstract made the cut. The doctors who will be making the ASCO presentations are all at AACR, so they are readily accessible to funds willing to pay hourly rates as high as $2000/hour to get the inside scoop.
To be fair, doctors are a little more sensitive about what they discuss these days. But they are not experts on what is inside information and what is not. So any remotely clever investor can usually extract investable tidbits from these conversations. This is so prevalent that I believe one reason ASCO has lost its luster (from an investor standpoint) is that by the time AACR is over, the big healthcare funds already know what's going to happen.
Companies are put into a hard spot because of these rules. Many abstracts and journal articles are material events for smaller biotech firms. "Material" in the sense of that it must be uniformly disclosed to the public to satisfy Regulation FD and other SEC regs. If they do make the disclosure in a timely fashion, then they violate the embargo rules and risk having the abstract pulled – which can be disastrous for the company.
Since the SEC has been so silent on the issue, they violate a number of SEC regulations and sit on the data to satisfy the embargoes.
Pfizer's case is unusual for more than just the cancellation of the torcetrapib presentations. This drug is clearly material to Pfizer's future. I find it fascinating the company chose to listen to its securities lawyers instead of following the embargo. It knew the data on blood pressure was material. When the data became available on the AHA web site, the company knew it had a SEC-mandated duty to make that disclosure uniform.
Can Anything Be Done?
It would be nice if Pfizer's decision started a trend, but I am not hopeful. The solution to the problem has to come from the SEC. The SEC says it has no power over the scientific conferences, so it cannot do anything. I strongly disagree that it has no power – after all, the science organizations are trafficking in insider information – but that's a losing argument. What the SEC does have is power over are publicly-traded companies.
If the SEC cared about uniform disclosure, implementing some simple new rules would fix the problem. These rules would put all public companies on the same footing. Scientific organizations could keep the embargo rules in place, but they would lose the vast majority of their abstracts and, therefore, significant revenues if they did not alter their embargo rules. That's never going to happen because the revenues from scientific meetings are crucial to operations.
The SEC can easily, therefore, make a difference by implementing these four rules:
1) Acceptance of an abstract or manuscript by a scientific publication is equivalent to a disclosure of material information under Regulation FD and any other disclosure rules.
2) Companies of any size must disclose via press release or other acceptable mechanism material information contained in the abstract or manuscript. In the case of an abstract, the complete text of the accepted abstract must be included in the release. In the case of a manuscript, important details on efficacy, side effects, the clinical and statistical significance of the data, and a summary of the conclusions included in the manuscript must be included in the release. The press release must note the dates of the conference where the data will be presented and, when available, the time of the presentation.
3) In the case of scientific conferences, additional data in the form of posters or slides accompanying an oral presentation must also be made available to shareholders. Making the material available on the company's web site for a reasonable period starting at the time the presentation begins or the poster is first available for viewing satisfies this requirement.
4) A statement from the SEC noting the above rules are a compromise position between the need of science and public health and the right of shareholders to have access to material information. This statement includes a warning that continued abuse of these disclosure rules will result in a blanket requirement for companies to release material data upon first possession with no allowance for submission to scientific conferences or medical journals.
These four short rules should be enough to force a change in entrenched behaviors that have institutionalized insider trading in the healthcare space.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter