From Andy Kessler's book The End of Medicine.
It gives some insights into how one might trade pharma drug trials:
I was eavesdropping on two guys I recognized from the past. One guy used to run some tech money, I think I remember him getting blown out in 2000 for being long and wrong. But he’s obviously still in the business. I strained to read his name tag, without luck. The other guy was a classic popcorn hedgie. Always showing up where the action in, figuring out some angle and trading rapid fire looking for returns.
“For me, it’s just one thing.”
“Nope, these are all billion dollar markets.”
“Nope, they’re all trying to hit fish with a baseball bat.”
“True. So what is it? Balance sheet? Partners? Their logo?”
“You just play the trials. I don’t give a shit what drug it is, it almost always works the same way.”
“Get out of here.”
“No, check it out. Preclinical is bullshit, you could get gum off the sidewalk to reduce tumor size in rats. So what? Even Phase 1 is a load. They are mostly bent around to get decent enough results so you can get to Phase 2. I’ve tried to time Phase 1 announcements, but no dice. You always wait until you are about a third of the way into Phase 2, then you buy the shit out the stock."
“It works. The first few press releases are almost guaranteed to be positive. Companies will do anything to get their stock up before the final results hit. Phase 3 is just so damn expensive, they want to sell stock or converts or something so they don’t have to give the damn drug away to big pharma.”
“Look, the stock almost always pops. I usually sell into it, unless the press release is blow-away efficacy numbers, then you can stick around. But not forever.”
“Hell no, you almost always sell right before the Phase 2 trial is over. Everyone figures it’s gonna work, so the stock goes up until the day of the announcement. It almost always gets whacked when they announce the real results, people already know. The doctors have been trading the stock ahead of you and dump it on the news.”
“I sometimes do Phase 3, but that’s harder. Even if something works, the costs kill you. The stocks going down.”
“But it pops on the news at the end of Phase 3.”
“Sometimes. Not always. You can get killed if the trial fails.”
“Can’t you play that?”
“Nah. I don’t like to gamble. Not even in Vegas.”