You Can Expect More Insider Trading in Pharma Stocks: Here’s Why

Over the past year, a growing number of insider trading cases involved information concerning drugs, devices and companies that develop them. But the recent case involving Sid Gilman, a leading Alzheimer’s expert and former University of Michigan neurology professor, has focused increased attention on the issue.

Gilman, you may recall, chaired the safety monitoring committee for the 2008 trial of the ‘bapi’ drug that was developed by Wyeth, now a unit Pfizer (PFE), and Elan (ELN), and became a tipster in what federal prosecutors last month called the “most lucrative insider trading scheme ever charged.” He provided inside info about the trial to a former trader at a division of SAC Capital who was charged with making $276 million in combined profits (read earlier Pharma news).

As it turns out, more than one in five US insider-trading cases involved health-care stocks, and since 2007, 97 people charged or sued by regulators for insider trading gained an edge thanks to secret info about drugs and devices, according to Bloomberg News. Yet most drug makers among 30 surveyed refused to discuss their policies, and those that did saw no reason for change, the news service writes.

NPS Pharmaceuticals (NPSP) ceo Francois Nader tells Bloomberg said insider trading is largely confined to “rogue cases from time to time,” a view shared by other execs. But critics say it is a systemic problem that will undercut investor support if companies fail to step up. It is “garbage” that drug makers are doing all they need to do, Bill Singer, a former regulatory attorney with the American Stock Exchange who is now in private practice at the Herskovits law firm, tells Bloomberg. “The industry isn’t capable or willing to regulate itself.”

The pharmaceutical industry has figured in many cases because of a large number of market-moving events and many people with insider knowledge. This includes people involved in clinical trials, regulatory hearings and reviews, and the numerous acquisition and partnership deals, Bloomberg explains.

The market capitalizations of major Pharma stocks are large.

PFE Market Cap Chart

PFE Market Cap data by YCharts

As noted here previously, there have been several notable instances. Earlier this year, FDA chemist Cheng Yi Liang was sentenced to five years in prison for insider trading. Liang, 58, used confidential information about upcoming announcements of 27 different FDA approval decisions involving 19 publicly traded companies over a five-year period, and generated more than $3.7 million in illegal profits for himself (see this Pharma news).

A Bristol-Myers Squibb (BMY) executive was charged with insider trading for buying stock options in three drug makers that were targeted for acquisition (more Pharma news). And a former senior director at Takeda Pharmaceuticals, also earlier this year agreed to pay more than $136,000 to settle charges that he traded on inside information about various business alliances and acquisitions (look here).

To read the remainder of this article, go to Pharmalot.

Ed Silverman, a contributing editor of YCharts, is the founder and editor of Pharmalot. He previously reported on the pharmaceutical industry and other business topics for the Star-Ledger of New Jersey, New York Newsday and Investor’s Business Daily. He can be reached at editor@ycharts.com.

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