san francisco

Officials of the US Securities and Exchange Commission (SEC) have begun to look closely at bioscience stocks for illegal trading.

Over the past two years, the agency has filed six cases against scientists and consultants suspected of having used inside knowledge about research results to trade stock or to suggest investments to family and friends.

“The agency is increasingly focused on biotechnology as an area where insider trading is a severe problem,” says James R. Ferguson, a Chicago securities attorney.

Ferguson says the scientific practice of broadly disseminating confidential research results that could be important to a company's future helps to create the potential for misbehaviour. Peer reviewers, researchers in clinical trials, journalists and company consultants often have early access to sensitive data.

Such a situation is especially dangerous in young biosciences companies because a positive or negative clinical trial result can have a huge impact on the fate of a company's stock, says Ferguson. And, because scientific developments in the field are more widely reported in the popular press than in other technology areas, they have a greater effect on the stock price.

Questions have been raised, for example, by the frenetic trading in Geron Corp. the day before a report in Science last November that company-funded researchers had been able to grow human embryonic stem cells successfully in the laboratory (see above).

On the day on which the article appeared, the value of Geron stock nearly tripled, although such timing can be purely coincidental. (It is SEC policy to decline to comment on whether investigators are reviewing trading activity in a particular company.)

One industry analyst says that insider trading rules can be especially tricky in the biosciences. “The majority of biotechnology companies don't have revenues or profits, so [investment decisions] revolve around deal rumours, or what you can find out about what's going on experimentally with these drugs,” he says.

Some companies, recognizing the potential for problems, issue a summary of clinical results as soon as possible, even before publication in a peer-reviewed journal.