University of Chicago oncologist Dr. Mark Ratain was asked by the JNCI editors to comment on the Destky paper. Ratain disagreed strongly with the authors' main interpretation of the stock-trading data, and he asked me to co-author a rebuttal. Our commentary was also published in this week's JNCI alongside the Detsky paper.
Using the same list of 59 phase III cancer drug clinical trials identified by Detsky and colleagues, Ratain and I chose to analyze the companies developing these cancer drugs based on market capitalization instead of stock-price trading activity. Like Detsky, we used as our key time point 120 days prior to the announcement of trial results. What we found was striking:
"This analysis demonstrated a remarkable difference between companies that had positive and negative announcements. Specifically, the median market capitalization was approximately 80-fold greater for the companies with positive trials vs companies with negative trials… Furthermore, there were no positive trials among the 21 micro-cap companies (ie, companies with less than $300 million market capitalization) whereas 21 of 27 studies reported by the larger companies analyzed (greater than $1 billion capitalization) were positive."
Our analysis should strike savvy health care investors as common sense. Sophisticated investors anticipate the outcome of future events like phase III clinical trial results using data from phase I and phase II studies (all publicly available information) as well as other factors like competition and management.What we found is that cancer drugs which succeed in phase III clinical trials tend to be owned by larger companies with strong records of accomplishment in drug development. Roche (RHHBY) and its Genentech subsidiary, Novartis (NVS), Sanofi (SNY) and Celgene (CELG) were among the large market-cap companies with positive clinical trials identified by Detsky and his co-authors. Investors have greater confidence in these companies and therefore reward them with larger market valuations and increasing stock prices ahead of the public announcement of trial results. The opposite is true for drugs that fail phase III trials. These drugs have often demonstrated poor efficacy in earlier stage studies and are owned by smaller companies with less drug development experience. Investors lack confidence in these companies resulting in low market valuations and falling stock prices before announcements of phase III trial results.
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