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Biotech Stock Mailbag: Research Backs Shorting Micro-Cap Cancer Drug Stocks

Stocks in this article: CELG AEZS VICL SNY CYCC TRGT AMRN

The list of companies with negative phase III trial results -- and falling stock prices prior to announcement of those results -- included Cell Genesys, Novacea, Aeterna Zentaris (AEZS), Vion Pharmaceuticals, Vical (VICL - Get Report) and more. No surprise: Many of the these companies are no longer in business.

Detsky and his co-authors deserve credit for raising the issue of insider trading as it relates to the conduct of clinical trials, but trying to prove that point by looking only at stock trading demonstrates a real lack of understanding about how Wall Street operates.

Instead, what Ratain and I demonstrate with our analysis is that the markets do a pretty decent job of using publicly available information to separate out the winners from the losers well before phase III clinical trial results are announced.

For investors looking ahead at ongoing cancer drug studies, our conclusion offers some potentially valuable advice:

"The phase III success rate for the studies conducted by larger companies was excellent (78%) and is consistent with success rates outside of oncology. Thus, the perceived high risk of failure of phase III oncology trials is primarily limited to smaller oncology companies. Furthermore, when considering very small oncology companies (ie, those with a market capitalization under $300 million) with a drug in phase III trials, the best investment strategy appears to be to short the stock (ie, borrow shares and sell them) before the announcement of the pending negative results."

I plan to test this hypothesis prospectively soon, so stay tuned.

Regarding my interest and enthusiasm for Targacept (TRGT - Get Report) and its "add-on" anti-depressant drug TC-5214, @lomu_j tweets, "@adamfeuerstein MDD market is being flooded with generics. Does '5214 have a chance?"

MDD is the acronym for major depressive disorder and yes, the market is filled with cheap generics, but that hasn't crimped growth for branded antidepressants. Sales of branded antidepression drugs in the U.S. grew 18% to $12.5 billion last year, according to Bloomberg. The overall depression-drug market in the U.S. was estimated at around $16 billion, according to several analyst reports.

Certainly as more generic drugs enter, the market size will decrease, but '5214 is intended initially as an add-on therapy, which means doctors will prescribe '5214 in combination with currently approved antidepressants. It's estimated that approximately 60% of patients treated for depression do not respond to first-line therapy, making them ideal candidates for add-on (or augmentation) treatment with '5214.

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