Drug Stocks Prey for Insiders as Industry Resists Change
At a time when more than one in five U.S. insider-trading cases involve health-care stocks, the industry’s companies say their policies designed to prevent abuse are sufficient -- or they refuse to publicly discuss the issue at all.
Since 2007, 97 people charged or sued by U.S. regulators for insider trading gained their edge as a result of secret information about drugs, devices and the companies that make them, according to data compiled by Bloomberg. Yet most drugmakers among 30 surveyed wouldn’t discuss their policies, and those that did saw no reason for change.
Francois Nader, the chief executive officer at NPS Pharmaceuticals Inc. (NPSP), a biotechnology company, said insider trading is largely confined to “rogue cases from time to time,” a view shared by other executives in interviews. Critics, though, say it is a systemic problem that will undercut investor support if companies fail to step up.
It is “garbage” that drugmakers are doing all they need to do, said Bill Singer, a former regulatory attorney with the American Stock Exchange who is now in private practice at Herskovits Plc in New York. “The industry isn’t capable or willing to regulate itself.”
Among the companies declining to outline their compliance policies are Bristol-Myers Squibb Co. (BMY) and Abbott Laboratories (ABT), each of which has had executives accused of insider trading in the past six months, according to complaints filed by the U.S. Securities and Exchange Commission.
Pharmaceutical and biotechnology companies are particularly vulnerable to insider trading because of the large number of market-moving events they’re involved with, and the many people with insider knowledge. This includes multiple clinical trials, regulatory hearings and the acquisition and partnership deals that historically have oiled the skids of drug development.
“The big loser is confidence in the system; no one wants to play a rigged game.” said Utpal Bhattacharya, a professor who studies insider trading at Indiana University’s Kelley School of Business in Bloomington.
Companies try to head off problems using nondisclosure agreements and yearly training, and by isolating who has access to information when a decision is close, according to statements by Merck & Co. (MRK), based in Whitehouse Station, New Jersey, and Paris-based Sanofi, the only major drugmakers to describe their policies. Neither company, though, was willing to discuss whether their systems are sufficient at a time when insider- trading cases are on the rise.
One problem right now is that the relationship between companies and researchers is often “kind of loosey-goosey,” said Garret Fitzgerald, director of the Institute for Translational Medicine & Therapeutics at the University of Pennsylvania in Philadelphia.
Companies need to more closely monitor researchers’ financial ties with others, and not just depend on confidentiality agreements signed years before a study’s results are known, Fitzgerald said. They also need to more strongly emphasize the legal consequences for passing along secrets, including the possibility of jail time and fines, he said.
The feeling is that “doctors are honorable people with academic credibility whose only interest is public health. But we have the same number of venal criminals as any other occupation,” Fitzgerald said.
As researchers gain additional sensitive information over the multiple stages of a trial, “they should be reminded not just of their obligation to maintain confidentiality, but the actual liability they’re exposed to if they break it.”
So-called expert network organizations, in which doctors are paid thousands of dollars to act as consultants to investors, are the source of more than a dozen insider-trading cases in the last three years, according to the data compiled by Bloomberg.
Last month, U.S. authorities said that Mathew Martoma, a hedge-fund manager at SAC Capital Advisors, made $276 million in illegal profits and avoided losses as a result of secret information provided to him by Sid Gilman, a University of Michigan researcher. Martoma contacted Gilman through an expert network organization run by Gerson Lehrman Group Inc.
Gilman was paid as much as $1,000 an hour for consulting at the same time he was running a clinical trial for Wyeth and Elan Corp. (ELN), U.S. regulators have said. Martoma has said he’s innocent. Gilman, 80, who retired from the Ann Arbor-based university last month, has a non-prosecution agreement with the Department of Justice in return for his continuing cooperation. He was also sued by the SEC.
Gilman’s relationship with Gerson Lehrman began in 2002, according to his 43-page resume. Since then, he has been a researcher on drug trials for some of the industry’s biggest companies, including Johnson & Johnson (JNJ), Pfizer Inc. (PFE), Teva Pharmaceutical Industries Ltd. (TEVA), and Allergan Inc. (AGN)
While neither Pfizer nor J&J would discuss their policies on insider trading, Chris Loder, a Pfizer spokesman, and Greg Panico, a J&J spokesman, both confirmed that their companies have ended ties with Gilman. Bonnie Jacobs, a spokeswoman for Allergan, wouldn’t say if he was still working for the company and a spokeswoman at Teva, Denise Bradley, didn’t return a call and e-mail asking for comment.
There are also parts of the drug development process that companies have little control over.
In March, for instance, Cheng Yi Liang, a chemist at the U.S. Food and Drug Administration, was sentenced to five years of prison for using non-public information he got through his job to make $3.78 million trading.
While Liang was an agency employee, there are also more than 600 independent medical advisers who meet regularly in panels to discuss potential approvals. These researchers get early access to staff reports that may include data and conclusions that haven’t yet been made public, opening the potential for abuse.
The results of those panel meetings can often dramatically affect stock prices.
The agency, which reviews drugs and oversees clinical trials, says its confidential information is secure. While it seeks advice from outside doctors on drugs, it reminds them not to share those secrets with outsiders, said Erica Jefferson, an FDA spokeswoman.
She wouldn’t say whether the agency had any current investigations into insider trading. “FDA doesn’t comment on or confirm its investigations,” Jefferson said in an e-mailed response to questions. “If the agency became aware of such an issue, it would be referred to the appropriate authorities.
Some health-care organizations have taken steps to limit the scope of expert networks.
The Cleveland Clinic, which employs about 3,000 researchers and doctors, has a strict policy in which any arrangement -- even a paid lunch -- with investors must be reviewed in a session with the hospital’s lawyers, said Guy Chisolm, director of the clinic’s Innovation Management and Conflict of Interest Program.
At the same time, the clinic regularly circulates cautionary tales to its doctors showing the fallout when insider-trading cases are prosecuted, including the SAC case, he said.
‘‘We were very nervous about” the relationship between investors and the clinic’s researchers, Chisolm said in a telephone interview. “We struggled on why we’d want our physicians and scientists to do it. The rationale doesn’t outweigh the risk.”
Some biotechnology firms, though, said they worry that if they ban hired researchers from consulting with hedge funds, top doctors will decline to work with their companies in favor of the higher pay that investor relationships can offer.
That’s particularly true for biotechnology companies. There are a limited number of medical investigators with the expertise to test their products, said Jane Wasman, general counsel and president, international at Acorda Therapeutics Inc. (ACOR), which develops drugs for nervous system disorders, including multiple sclerosis. Rules that are too tight, even in the service of insider-trading protections, means they may not be able to get a well-regarded researcher affiliated with their project.
“It’s important that there be strict guidelines, but if you have a black-and-white rule, you risk forcing people to make choices and you’ll have some people who say, ‘I won’t be an investigator,’” she said in a telephone interview. “And then you lose the opportunity to have some really good, skilled investigators in your trials.”
Wasman said that stock in smaller companies such as Acorda, with about a $995 million market value as of yesterday, tend to be more volatile than the shares of bigger companies.
In biotechnology, “there are a lot of inflection points and stocks tend to be more volatile than in other industries because of binary-type events,” she said. “A clinical trial can make or break a company, and if someone gets advance notice on the results, they’re going to have an unfair edge.”
There are reasons for investors to hire researchers as consultants, “like wanting to know more generally about the MS space,” she said. “But there’s a line between that and providing insight into our clinical trials.”
Acorda’s strategy for preventing insider trading starts with training on where the lines are, she said. The Hawthorne, New York-based company also puts into place “blackouts” affecting trading by employees when news is ready to occur and limits the number of people in the know.
Nader, the CEO at Bedminster, New Jersey-based NPS, said his company, which develops rare-disease drugs, also depends on “prevention and consequences” to keep insiders under control.
Code of Conduct
Every NPS employee signs a code of conduct yearly, and the company has a system in place that keeps corporate decisions on a “need to know” basis, he said. When final study numbers are crunched, the process is taken “off site to make sure they don’t communicate with people or don’t send signals, like being happy or sad around the office,” he said.
It’s not just researchers at fault for the increasing instances of insider trading, according to a review of the cases. Company executives are also facing added scrutiny.
James Mazzo, a senior vice president at Abbott, remains employed there while he been sued by the SEC. Authorities say Mazzo illegally tipped his neighbor, former major league baseball player Doug DeCinces, on Abbott’s 2009 purchase for $2.8 billion of a company he formerly led, Advanced Medical Optics. Mazzo is retiring at year’s end, said Adelle Infante, a spokeswoman for the Abbott Park, Illinois-based company.
Mazzo couldn’t be reached, and messages sent to two people listed as his attorneys on the SEC’s filing weren’t returned.
Abbott isn’t alone in its reticence. Bristol-Myers, which also had an executive charged this year with insider trading, also wouldn’t comment on its policies, according to Jennifer Mauer, a company spokeswoman.
In August, Robert Ramnarine, 45, the company’s executive director of pensions and savings investments, was charged by federal authorities with making $311,361 in illegal profit by buying stock options in three companies he helped evaluate at a time when Bristol-Myers was considering buying them.
Ramnarine was immediately put in unpaid leave, and he has since been fired, Mauer said. Ramnarine is negotiating a plea agreement, court records show.
Nader, whose NPS Pharmaceuticals hasn’t had an insider trading case, said he’s confident the procedures the company has in place are working.
Still, he said, “it is virtually impossible to prevent someone from saying something they shouldn’t. We can’t be standing by every person who talks about our products.”
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