'ASCO Effect' Is Bad Medicine for Investors Not in the Know

SAN FRANCISCO -- It's been called the "ASCO effect." Shares in biotech and pharmaceutical companies routinely jump on the release of positive research results at the American Society of Clinical Oncology annual meeting.

With this year's meeting set to start Saturday, investors can try to profit from the "ASCO effect" by buying the stock of companies as they take the wraps off their research. But they'd be late.
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Some investors get the information earlier than the general public thanks to ASCO's long-followed procedures. And it appears that they're then using the information to trade. Trading volume in the shares of certain cancer drug makers spiked around April 10, the day this year that ASCO released preliminary information about its annual meeting to its members -- which include oncologists, cancer researchers and doctors-turned-Wall Street analysts.

The bifurcated way in which ASCO releases research data highlights a possible loophole in Regulation FD, which the Securities and Exchange Commission designed to clamp down on the selective disclosure of potentially market-moving information. ASCO, a nonprofit organization, prohibits presenting companies and the media from sharing the research data, known as abstracts, with the public before the meeting. Wall Street analysts, however, are free to use the information in reports that recommend the stocks of these presenting drug companies. But ASCO extends its news embargo to media publishing information gleaned from these analysts' reports. (On Wednesday, TheStreet.com was barred from attending this year's ASCO meeting after writing about ASCO research data contained in Wall Street analysts' reports.)

Meanwhile, people with access to the information are using it.

The First Thing

"The first thing we did on April 10 was comb through the ASCO abstracts and start taking long and short positions," says one doctor who consults for hedge funds. "The information is a gold mine ... especially for those that are medically sophisticated."

The trading of the stocks involved in the conference this year appears to back up the doctor's assertion.

For instance, shares in Imclone Systems ( IMCL), a small New York biotech firm that will use ASCO as a major coming-out party, jumped 12% on six times its average trading volume on April 10. Millennium Pharmaceuticals ( MLNM), a biotech firm that's expected to present promising early data for its experimental cancer drug, LDP-341, saw its stock climb 7% on April 10.

Ready to Meet
Imclone, Millennium and OSI climbed when ASCO released studies before its annual meeting.

The pattern was similar at OSI Pharmaceuticals ( OSIP), which is developing a drug similar to Imclone's. The company's shares rose 11% on April 10 on volume of nearly 741,000 shares, 37% higher than its average daily volume. Trading in OSI on April 11 was even heavier, but in the opposite direction. The stock fell almost 7% on volume of more than 876,000 shares, suggesting quick profit-taking.

This general pattern of heavy trading around the April 10 release of selected ASCO information is repeated in several other biotech stocks, Cell Therapeutics ( CTIC), Protein Design Labs ( PDLI) and IDEC Pharmaceuticals ( IDPH), all of which are expected to make a splash at the organization's meeting.

Exceptions

Not every drug maker presenting at ASCO exhibited this trading pattern, and of course, there are other external factors that could contribute to the buying and selling. Biotech stocks tend to be volatile because the shares trade more on the prospects for new drugs than on actual product revenue, of which there's often little.

ASCO spokeswoman Laura Livingston maintains that the organization treats the public differently than the investment community because "this system has been in place for years."

"The work of the investment analysis people goes on separately," Livingston says, adding that she's not aware of any policies that govern how ASCO members treat information gleaned from the data that are restricted from the public's view. "We are not involved with that. We have no policies on it. It's a world unto itself."

But it's hard to separate the good works conducted by researchers to aid cancer patients and the profit-seeking strategies of investors in the companies that develop those treatments.

The Study

Last May, Mike Becker, then an analyst at Wayne Hummer Investments, penned a report in which he quantified the trend of stocks rising on positive news stemming from ASCO meetings. The stocks began rising two weeks before the meeting's start, before the release of research data to the public. Becker called the phenomenon the "ASCO effect."

Using data from the 1999 ASCO meeting, Becker looked at 31 companies that presented promising research at the meeting. Many of these companies witnessed dramatic rises in their stock price, Becker found. In one case, shares in Matrix Pharmaceutical ( MATX) rose as much as 159% in the days before the 1999 ASCO meeting. Shares in Medarex ( MEDX) rose 83% on positive ASCO news. He also found an ASCO effect for the years 1996-1998.

But with an advance look at market-moving information, it's the organization's members, and not the average investor, who stands to benefit the most from the ASCO effect.

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