Gold9472
08-07-2005, 04:59 PM
Drug researchers leak secrets to Wall St.
By Luke Timmerman and David Heath Seattle Times staff reporters
http://seattletimes.nwsource.com/html/businesstechnology/drugsecrets1.html
8/7/2005
Doctors testing new drugs are sworn to keep their research secret until drug companies announce the final results. But elite Wall Street firms — looking to make quick profits — have found a way to harvest these secrets:
They pay doctors to divulge the details early.
A Seattle Times investigation found at least 26 cases in which doctors have leaked confidential and critical details of their ongoing drug research to Wall Street firms.
The practice involves doctors at top research universities from UCLA to the University of Pennsylvania, and powerful financial firms including Citigroup Smith Barney, UBS and Wachovia Securities.
In 24 of the 26 cases, the firms issued reports to select clients with detailed information obtained from doctors involved in confidential studies. The reports advised clients whether to buy or sell a drug stock.
Trading stock based on secret information bought from medical researchers is illegal, say legal experts who were told of The Times' findings.
"That's a good way to go to jail," said lawyer Thomas Newkirk, former associate director of enforcement at the Securities and Exchange Commission (SEC).
Whether they are paid or not, medical researchers who talk with Wall Street about their ongoing research violate confidentiality agreements they sign before drug companies allow the drug testing to begin.
Until now, the selling of drug secrets has been hidden from securities regulators and the public, but biotech and Wall Street insiders said the practice is widespread.
"Everybody does this.... It's now common practice," said the chief executive of California biotech company Valentis, Ben McGraw, a former Wall Street analyst.
The practice of selling drug secrets, The Times found, is being driven by hedge funds, the largely unregulated investment pools that cater to the super-rich. Hedge funds can make money with aggressive strategies that exploit quick price swings in stocks, and the volatile biotech industry provides many such opportunities.
A single drug's prospects can determine whether a small biotech company's stock soars or plummets, so any inside information provides a potent investing edge.
Such information is so valuable that elite investors pay up to $1 million a year to firms known as matchmakers, which pair Wall Street firms with doctors involved in ongoing drug research. Gerson Lehrman Group, the largest matchmaker, claims to have 60,000 doctors available to speak to Wall Street, double the number from three years earlier.
How it works
How Wall Street gets the inside scoop on drug testing
Matchmakers typically pay doctors $300 to $500 an hour to talk to elite investors. Some doctors said they can make tens of thousands of dollars a year from such talks.
Drug-company executives say they know about the practice but can't crack down on the doctors they rely upon for conducting patient testing.
Ordinary investors are victimized when inside information is leaked to select investors. Those who know in advance whether a drug is going to succeed or fail can buy stock low or sell it high to those who don't know, making quick fortunes by taking advantage of unwitting investors.
And there is a broader cost to society: Leaking details about ongoing research can introduce bias into drug trials and possibly halt development of potentially life-saving drugs, biotech executives said.
"It appalls me, I must say," said Christopher Henney, a Seattle biotech pioneer who co-founded Immunex, now part of Amgen. "It's absolutely outrageous that they [researchers] would allow themselves to be corrupted in that way."
"The practice is a moral cesspool," said Arthur Caplan, director of the Center for Bioethics at the University of Pennsylvania. "It really just seems to me to be the last straw in the corporatization of American medicine."
Doctors who divulge
Elite investors gained when doctors on a drug trial dropped the word that the drug was failing.
Excitement was building in fall 2002 at Isis Pharmaceuticals, a 300 employee Carlsbad, Calif., company, as it wrapped up a study of Affinitak, an innovative drug to treat lung cancer.
Unknown to the company, however, analysts had started making calls to doctors testing the new drug. Despite confidentiality contracts, the doctors were talking.
By late November, Isis' stock price was plummeting on heavy trading; it lost 20 percent by early December.
A bombshell fell Dec. 6, and suddenly the drop made sense. Andrew Gitkin, an analyst at UBS, a big brokerage firm, issued a research report with a shocking revelation: Doctors on the Affinitak drug trial had talked to UBS and divulged that the drug was not working.
Gitkin's report sent Isis stock spiraling down even further.
Later that day, a news report confirmed that word of Affinitak's failure had "spread across Wall Street's biotech trading floors" for more than a week. Gitkin said in an interview that he believed he "wasn't the only analyst or investor" who had called the doctors.
That would explain why investors were selling Isis shares, driving the price down. Investors who knew the trial results in advance could have shorted Isis stock — a way to make money when its price falls — and made a quick 30 percent profit.
Isis chief executive Stanley Crooke, an M.D. with a Ph.D. in pharmacology, was furious.
"We were very shocked that somebody would try to do an analysis like that, shocked that any investigators would talk to an analyst and give him impressions and lead him to specific conclusions," Crooke would say later.
Crooke complained to UBS. He also questioned the doctors testing his new drug, trying — without success — to find the leak, he said.
Three months later, Isis released its Affinitak results and Gitkin's information was proved correct — the drug was a dud.
Gitkin said he did nothing wrong. "I don't know who does and who doesn't sign confidentiality agreements. ... I would assume that if they signed a confidentiality agreement they wouldn't talk to me."
Sometimes, hedge funds and brokerage firms pay one well-informed doctor to be quizzed by investment managers in a conference call. But other times, their approach to gathering valuable secrets about drug trials is more sophisticated and wide-ranging.
Recently, Citigroup Smith Barney penetrated a major study to see how an experimental drug fared against a just-approved drug for treating macular degeneration, an incurable eye disease and the leading cause of blindness in the elderly.
The brokerage talked to 26 eye doctors, but they weren't just any doctors. Twenty of the 26 had researched the experimental drug; 23 of the 26 had researched the other one, meaning that more than half had worked on both. The doctors were able to give Smith Barney valuable comparative information.
Nearly all agreed that the drug still being studied, a product called Lucentis from biotech powerhouse Genentech, would prove vastly superior to the drug that recently had gone on the market, Macugen, made by Eyetech, a smaller company.
But the doctors were more explicit than that. Based on its survey, Smith Barney predicted remarkable results: 97 percent of patients on Lucentis would have stable or improved vision, as measured by how many lines of an eye chart they could read. Smith Barney summarized those findings in a report to select customers May 5.
As it turned out, the numbers were almost exactly on the money. On May 23, not long after Smith Barney's report, Genentech announced results from its Lucentis study: 95 percent of patients had stable or improved vision — just as predicted by the doctors Smith Barney talked to.
The announcement battered Eyetech's stock, which lost nearly half of its value in a day. Any hedge fund or other investor who had acted on Smith Barney's research by betting against Eyetech would have made better than a 40 percent return in just three weeks.
Dr. Scott Pendergast, a lead researcher in the Macugen study who said he doesn't speak to investors, was shocked when told of the Smith Barney report.
"That's definitely inappropriate," Pendergast said. "They're getting information that was not publicly available."
The Seattle Times interviewed 15 of the lead doctors on the Macugen and Lucentis research, many of whom acknowledged accepting money to talk to Wall Street firms. None specifically recalled talking to Smith Barney, but they said they had talked to many investors during the time Eyetech's stock price was in a steep decline.
All 15 doctors insisted they didn't reveal confidential or valuable details.
"People will call and ask 'Do you think this drug is working?' I'm just being asked to give my gut feeling," said Dr. David Boyer, a Los Angeles ophthalmologist.
"They'll ask what I can't answer," said Dr. Richard Rosen in New York City, who said he talked on the phone or face to face with investment firms about twice a day for $300 to $500 an hour.
"They're looking for results of trials that aren't out yet," Rosen said. "I can't answer that. I can just answer from my personal experience in how patients seem to respond to certain therapies."
Even so, Rosen acknowledged his experience can be valuable. "If you treat 20 patients you can get some sense of where a trial is going," he said.
Some medical researchers say they refuse to talk to hedge funds or stock analysts because they know the aim is to get confidential information.
Dr. Steven Nissen, a cardiologist at the Cleveland Clinic involved in half a dozen ongoing research studies and chairman of a federal Food and Drug Administration (FDA) advisory panel making recommendations on new drugs, said he gets "zillions" of calls from investors who say they simply want to talk about a certain disease.
"As soon as I hear the pitch I know what's going on," Nissen said. "The impressions of somebody on the trial are relevant to whether the trial is likely to succeed."
Dr. Ron Garren, who runs a small hedge fund in Carmel, Calif., and works part time as a cancer doctor, knows this. He admits he pays doctors in an effort to get confidential details about ongoing drug research.
"They really aren't supposed to talk because of confidentiality," Garren said. "But a lot of times it's a slip of a word here and there. You can generally tell from body language if a person running a trial likes the drug or doesn't. You can generally ferret out, if you're good, the safety issues."
One experienced research analyst at a major brokerage firm said he's studied "elicitation techniques" taught to FBI and CIA interrogators.
"We get them to talk about the weather, or the Mariners, then you pop in your one innocent question you want to know about," said the analyst, who spoke on the condition that his name not be used. "Then you switch back to whatever it was you were talking about before. When the doctor hangs up, he thinks he's had a nice conversation about the weather or the Mariners."
End Part I
By Luke Timmerman and David Heath Seattle Times staff reporters
http://seattletimes.nwsource.com/html/businesstechnology/drugsecrets1.html
8/7/2005
Doctors testing new drugs are sworn to keep their research secret until drug companies announce the final results. But elite Wall Street firms — looking to make quick profits — have found a way to harvest these secrets:
They pay doctors to divulge the details early.
A Seattle Times investigation found at least 26 cases in which doctors have leaked confidential and critical details of their ongoing drug research to Wall Street firms.
The practice involves doctors at top research universities from UCLA to the University of Pennsylvania, and powerful financial firms including Citigroup Smith Barney, UBS and Wachovia Securities.
In 24 of the 26 cases, the firms issued reports to select clients with detailed information obtained from doctors involved in confidential studies. The reports advised clients whether to buy or sell a drug stock.
Trading stock based on secret information bought from medical researchers is illegal, say legal experts who were told of The Times' findings.
"That's a good way to go to jail," said lawyer Thomas Newkirk, former associate director of enforcement at the Securities and Exchange Commission (SEC).
Whether they are paid or not, medical researchers who talk with Wall Street about their ongoing research violate confidentiality agreements they sign before drug companies allow the drug testing to begin.
Until now, the selling of drug secrets has been hidden from securities regulators and the public, but biotech and Wall Street insiders said the practice is widespread.
"Everybody does this.... It's now common practice," said the chief executive of California biotech company Valentis, Ben McGraw, a former Wall Street analyst.
The practice of selling drug secrets, The Times found, is being driven by hedge funds, the largely unregulated investment pools that cater to the super-rich. Hedge funds can make money with aggressive strategies that exploit quick price swings in stocks, and the volatile biotech industry provides many such opportunities.
A single drug's prospects can determine whether a small biotech company's stock soars or plummets, so any inside information provides a potent investing edge.
Such information is so valuable that elite investors pay up to $1 million a year to firms known as matchmakers, which pair Wall Street firms with doctors involved in ongoing drug research. Gerson Lehrman Group, the largest matchmaker, claims to have 60,000 doctors available to speak to Wall Street, double the number from three years earlier.
How it works
How Wall Street gets the inside scoop on drug testing
Matchmakers typically pay doctors $300 to $500 an hour to talk to elite investors. Some doctors said they can make tens of thousands of dollars a year from such talks.
Drug-company executives say they know about the practice but can't crack down on the doctors they rely upon for conducting patient testing.
Ordinary investors are victimized when inside information is leaked to select investors. Those who know in advance whether a drug is going to succeed or fail can buy stock low or sell it high to those who don't know, making quick fortunes by taking advantage of unwitting investors.
And there is a broader cost to society: Leaking details about ongoing research can introduce bias into drug trials and possibly halt development of potentially life-saving drugs, biotech executives said.
"It appalls me, I must say," said Christopher Henney, a Seattle biotech pioneer who co-founded Immunex, now part of Amgen. "It's absolutely outrageous that they [researchers] would allow themselves to be corrupted in that way."
"The practice is a moral cesspool," said Arthur Caplan, director of the Center for Bioethics at the University of Pennsylvania. "It really just seems to me to be the last straw in the corporatization of American medicine."
Doctors who divulge
Elite investors gained when doctors on a drug trial dropped the word that the drug was failing.
Excitement was building in fall 2002 at Isis Pharmaceuticals, a 300 employee Carlsbad, Calif., company, as it wrapped up a study of Affinitak, an innovative drug to treat lung cancer.
Unknown to the company, however, analysts had started making calls to doctors testing the new drug. Despite confidentiality contracts, the doctors were talking.
By late November, Isis' stock price was plummeting on heavy trading; it lost 20 percent by early December.
A bombshell fell Dec. 6, and suddenly the drop made sense. Andrew Gitkin, an analyst at UBS, a big brokerage firm, issued a research report with a shocking revelation: Doctors on the Affinitak drug trial had talked to UBS and divulged that the drug was not working.
Gitkin's report sent Isis stock spiraling down even further.
Later that day, a news report confirmed that word of Affinitak's failure had "spread across Wall Street's biotech trading floors" for more than a week. Gitkin said in an interview that he believed he "wasn't the only analyst or investor" who had called the doctors.
That would explain why investors were selling Isis shares, driving the price down. Investors who knew the trial results in advance could have shorted Isis stock — a way to make money when its price falls — and made a quick 30 percent profit.
Isis chief executive Stanley Crooke, an M.D. with a Ph.D. in pharmacology, was furious.
"We were very shocked that somebody would try to do an analysis like that, shocked that any investigators would talk to an analyst and give him impressions and lead him to specific conclusions," Crooke would say later.
Crooke complained to UBS. He also questioned the doctors testing his new drug, trying — without success — to find the leak, he said.
Three months later, Isis released its Affinitak results and Gitkin's information was proved correct — the drug was a dud.
Gitkin said he did nothing wrong. "I don't know who does and who doesn't sign confidentiality agreements. ... I would assume that if they signed a confidentiality agreement they wouldn't talk to me."
Sometimes, hedge funds and brokerage firms pay one well-informed doctor to be quizzed by investment managers in a conference call. But other times, their approach to gathering valuable secrets about drug trials is more sophisticated and wide-ranging.
Recently, Citigroup Smith Barney penetrated a major study to see how an experimental drug fared against a just-approved drug for treating macular degeneration, an incurable eye disease and the leading cause of blindness in the elderly.
The brokerage talked to 26 eye doctors, but they weren't just any doctors. Twenty of the 26 had researched the experimental drug; 23 of the 26 had researched the other one, meaning that more than half had worked on both. The doctors were able to give Smith Barney valuable comparative information.
Nearly all agreed that the drug still being studied, a product called Lucentis from biotech powerhouse Genentech, would prove vastly superior to the drug that recently had gone on the market, Macugen, made by Eyetech, a smaller company.
But the doctors were more explicit than that. Based on its survey, Smith Barney predicted remarkable results: 97 percent of patients on Lucentis would have stable or improved vision, as measured by how many lines of an eye chart they could read. Smith Barney summarized those findings in a report to select customers May 5.
As it turned out, the numbers were almost exactly on the money. On May 23, not long after Smith Barney's report, Genentech announced results from its Lucentis study: 95 percent of patients had stable or improved vision — just as predicted by the doctors Smith Barney talked to.
The announcement battered Eyetech's stock, which lost nearly half of its value in a day. Any hedge fund or other investor who had acted on Smith Barney's research by betting against Eyetech would have made better than a 40 percent return in just three weeks.
Dr. Scott Pendergast, a lead researcher in the Macugen study who said he doesn't speak to investors, was shocked when told of the Smith Barney report.
"That's definitely inappropriate," Pendergast said. "They're getting information that was not publicly available."
The Seattle Times interviewed 15 of the lead doctors on the Macugen and Lucentis research, many of whom acknowledged accepting money to talk to Wall Street firms. None specifically recalled talking to Smith Barney, but they said they had talked to many investors during the time Eyetech's stock price was in a steep decline.
All 15 doctors insisted they didn't reveal confidential or valuable details.
"People will call and ask 'Do you think this drug is working?' I'm just being asked to give my gut feeling," said Dr. David Boyer, a Los Angeles ophthalmologist.
"They'll ask what I can't answer," said Dr. Richard Rosen in New York City, who said he talked on the phone or face to face with investment firms about twice a day for $300 to $500 an hour.
"They're looking for results of trials that aren't out yet," Rosen said. "I can't answer that. I can just answer from my personal experience in how patients seem to respond to certain therapies."
Even so, Rosen acknowledged his experience can be valuable. "If you treat 20 patients you can get some sense of where a trial is going," he said.
Some medical researchers say they refuse to talk to hedge funds or stock analysts because they know the aim is to get confidential information.
Dr. Steven Nissen, a cardiologist at the Cleveland Clinic involved in half a dozen ongoing research studies and chairman of a federal Food and Drug Administration (FDA) advisory panel making recommendations on new drugs, said he gets "zillions" of calls from investors who say they simply want to talk about a certain disease.
"As soon as I hear the pitch I know what's going on," Nissen said. "The impressions of somebody on the trial are relevant to whether the trial is likely to succeed."
Dr. Ron Garren, who runs a small hedge fund in Carmel, Calif., and works part time as a cancer doctor, knows this. He admits he pays doctors in an effort to get confidential details about ongoing drug research.
"They really aren't supposed to talk because of confidentiality," Garren said. "But a lot of times it's a slip of a word here and there. You can generally tell from body language if a person running a trial likes the drug or doesn't. You can generally ferret out, if you're good, the safety issues."
One experienced research analyst at a major brokerage firm said he's studied "elicitation techniques" taught to FBI and CIA interrogators.
"We get them to talk about the weather, or the Mariners, then you pop in your one innocent question you want to know about," said the analyst, who spoke on the condition that his name not be used. "Then you switch back to whatever it was you were talking about before. When the doctor hangs up, he thinks he's had a nice conversation about the weather or the Mariners."
End Part I