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A Galaxy-Sized Disclosure Loophole Screws Individual Investors


Geez David, tell us what you REALLY think!

The sub-sector of the market comprised of development-stage biotechnology companies is unique. Companies in this sub-sector have no revenues and no assets - nothing that is amenable to traditional valuation techniques. Individual investors are particularly drawn to the sector because the companies are working on drugs to treat diseases affecting these investors personally.

These individual investors are being screwed because of the disclosure policies of scientific publications and scientific organizations. While the American Society of Clinical Oncology (ASCO) is not the only violator, they are one of the most blatant.

Scientific Conferences

If you have ever been to one of these, you know these things are dripping with news. I'm not talkin' trade show here - though that is an interesting sidelight of most of these conferences. I'm talking about top doctors making presentations about the latest and greatest drugs in their field. Entire companies are made or broken at the podiums and poster boards at these conferences. At 35,000+ attendees, ASCO's Annual Meeting is arguably the biggest game in town.

The stock price of a development-stage biotech company is very dependent on news events concerning the progress of drugs through the clinical and regulatory pipeline. A successful human clinical trial will boost a company's stock price by 30-40% overnight. A failed human clinical trial will decimate a company's stock price by 40-60% overnight. These news events are the only real drivers of a development-stage company's stock price given the aforementioned lack of "traditional" metrics available to calculate fair value. As such, the data that make up the news releases is extraordinarily material in both practical and legal terms.

ASCO is a membership organization whose membership requirements are highly restrictive. If you don't treat cancer patients or study cancer in a lab, no membership for you. The characteristics of exclusive membership are not de facto problematic.

What is problematic is when organizations like ASCO provide material, non-public information on publicly traded companies to their members two weeks before anyone else gets to see it and two weeks (and a few days) before the companies who sponsored the drugs in question are allowed to tell their shareholders.

2005 ASCO Annual Meeting

Dissemination of data at the meeting happens in three formats, a system common to all scientific conferences: abstracts, posters, and oral presentations. Abstracts are short summaries of the clinical trial data that include the population studied, the drug studied, a description of the clinical trial, and a summary of the results. At ASCO 2004 there were several thousand abstracts contained in the ASCO "Abstract Book." A percentage of these abstracts are chosen for "poster presentations." These posters can be thought of as expanded abstracts. A much smaller percentage of the abstracts are chosen for oral presentations. The doctors who are the lead investigators for the study are invited to make a 15-20 minute presentation and take a few questions.

Abstracts, posters, and oral presentations all contain material information. This information is largely new information to the investment community because ASCO mandates companies submitting the abstracts for presentation may not have presented or substantially described the data prior to its unveiling at the ASCO meeting.

The intersection between ASCO's rules (in this example) and SEC rules governing disclosure of material information and uniform disclosure of material information is where the problem starts.

A company will be in possession of material information concerning data from one of their clinical trials before the December deadline to submit abstracts. By ASCO rule, they cannot disclose this information in any significant detail to their shareholders because that cancels their ability to have the abstract presented at the ASCO meeting in mid-May. This presents a significant conflict between SEC rules, the right of shareholders to material information, and uniform disclosure of that information.

In December of each year, publicly-traded companies - through the auspices of the doctors they have hired to run their clinical trials - submit this material, non-public information to an ASCO committee in the form of a proposed abstract. Recall this abstract often has key information, including the results of the trial.

These abstracts are then disseminated to dozens and dozens of "reviewers" whose job it is to pick the best abstracts for inclusion at the annual meeting. These reviewers, therefore, have been selectively disclosed material, non-public information. The abstracts go through several levels of review and each is read by several individuals as decisions are made by ASCO as to which companies are granted abstract status, poster status, or oral status. The more groundbreaking (and previously unknown) the data in the abstract are, the more likely it is ASCO will grant the company a coveted oral presentation.

As the ASCO meeting draws closer, usually in February, companies are notified whether their abstracts have been accepted for inclusions at the meeting. They are also told if they will be subject to oral, poster, or abstract-only status.

All abstracts are compiled into a thick book by ASCO and readied for distribution. This book is a treasure trove of material, non-public information covering many publicly-traded companies.

It is important to reiterate that the companies who have submitted this material, non-public information to ASCO are prohibited by ASCO from discussing the material. This "embargo policy" varies by the type of presentation. For data that are shown in abstract form only, the embargo lasts until the end of the conference. For data that are presented in posters, the embargo lasts until the end of the 2-3 hour poster session. For data that are presented in oral presentations, the embargo lasts until the 15-20 minute presentation has concluded.

Here's where the individual investor gets screwed...

ASCO sends these books to ASCO members two weeks ahead of the annual meeting. Individuals who paid to attend the ASCO conference (attendance is generally open to the public) but who are not ASCO members were not sent the books. This means a very select group of individuals is selectively disclosed this material, non-public information at least two weeks ahead of the general investing public.

If you are an individual investor anxiously awaiting news about your investment's presentation at ASCO, get used to the idea some doctors knew this information in December, a few more in January, and several thousand two weeks before the company ever is allowed to release that information to you, their shareholder.

ASCO puts a notice on the books telling their members not to use the information in them for investment purposes, but that warning is about as useful as the warning on the side of a cigarette package is to your average nicotine addict. These books make their way into the hands of investors - typically professional investors - very quickly. In some cases, this happens because the professional investor has an ASCO member as part of their research staff.

In 2003, ASCO responded to criticism in the press about this selective disclosure by making all abstracts available on the ASCO web site two weeks ahead of the meeting. ASCO members had something of a revolt and in 2004 ASCO changed the policy back to sending out the abstracts in advance to ASCO members only. On the day the 2004 ASCO meeting began, ASCO published the text of all the abstracts on their web site.

To my knowledge, no ASCO member has ever been penalized for early disclosure even though ASCO staff acknowledges the abstract books are used immediately for investment purposes. Journalists who have broken the embargo in an effort to level the playing field for individual investors have had their credentials revoked, however.

Upcoming events

In about two weeks, ASCO will send their books to members. Here is a small sample of the companies I expect will begin to move because of this early disclosure of this material, non-public information.

On March 21, Onyx Pharmaceuticals (ONXX) announced top-line results of an interim analysis of a pivotal trial for their lead (and only) drug. At one point in 2004, investors valued Onyx at over $2 billion on the strength of the promise of this drug. Onyx has no revenues nor does it have any other drugs in clinical trials. 100% of the company's market cap is derived from this one drug candidate. Because of ASCO's disclosure restrictions, Onyx management was not able to share with their shareholders material, non-public information concerning the results of this interim analysis on March 21st nor in a subsequent release just this week. Crucial information on side effects, magnitude of benefit, and the statistical significance of the benefit were withheld by management despite their clearly material nature. Members of ASCO's abstract review committee, the publishers of ASCO's abstract book, the lead investigators of the trial, and others are all in possession of this material information. When ASCO releases the abstract book to a subset of its membership two weeks ahead of when the information becomes available to the public, thousands of people (including most of the professionals on Wall Street) will have access to this material, non-public information before individual investors. By ASCO policy, Onyx is prohibited from issuing a press release on this material information until after it is presented at the conference. Whereas some people already have this information and some 18,000 ASCO members will have access to it the first few days of May, Onyx shareholders may not see it until as late as May 14. When the ASCO abstract books are released, watch the equity and options action in Onyx to see how this non-public release of material information affects the stock.

Genta (GNTA) had a market cap that reached $1 billion before the FDA rejected a new drug application for the company's melanoma drug Genasense. The company has since dropped to under $100 million in market cap. At this year's ASCO meeting, the company will present follow-on survival data of the melanoma trial. If the melanoma survival data are positive, it could mean the company would re-file their application for approval in the melanoma indication. In accordance with ASCO policies, Genta will not discuss these material, non-public data with shareholders until after the presentations are made. While some people have these data already and 18,000 ASCO members will see the data (including Wall Street professionals) in the first few days of May, shareholders will not see a press release on the data until as late as May 14. When the ASCO abstract books are released, watch the equity and options action in Genta to see how this non-public release of material information affects the stock.

On March 7, Cell Therapeutics (CTIC) released top line data on a pivotal clinical trial for their cancer chemotherapy drug Xyotax. Because of ASCO restrictions, data shared with shareholders was very incomplete. While shareholders know the trial failed to meet its primary endpoint, they have to rely on management's qualitative characterization that there were positives in the side effect profiles and in sub-populations that make this trial not a lost cause. Cell Therapeutics will not discuss these material, non-public data with shareholders until after the presentations are made. While some people have these data already and 18,000 ASCO members will see the data (including Wall Street professionals) in the first few days of May, shareholders will not see a press release on the data until as late as May 17. When the ASCO abstract books are released, watch the equity and options action in Cell Therapeutics to see how this non-public release of material information affects the stock.

These are but a few examples from one meeting.


ASCO is not the only offender here. This "system" is widespread and involves all the major scientific publications and meetings. Individual investors get screwed to the tune of billions of dollars in real cash and lost opportunities every year. Professional investors are able to negotiate or buy their way to access for material information weeks or months ahead of its public release. Because of stringent embargo rules, publicly-traded biotechnology and pharmaceutical companies are in a bind. Obeying the letter of SEC regulations causes them long-term harm because it eliminates their ability to present at these meetings or be published in important medical journals. Not obeying SEC regulations harms their shareholders.

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