A front-page story in The Wall Street Journal for Wednesday, October 29 discussed possible insider trading in the stocks of Dendreon Corp., the Washington state based biotech firm that manufactures Provenge.
Provenge doesn’t cure prostate cancer, but it does prolong the life of those treated. Specifically, patients who had received Dendreon in a critical clinical trial lived a median of 4.1 months longer than those who had received the trial’s placebo.
In late April, 2010, the Food and Drug Administration approved its use.
Weeks later, on June 7th, as Medicare officials engaged in discussions over whether they should set coverage limits on the use of Provenge, an official there [Dr. Louis Jacques] sent three colleagues an email telling reminding them that these in-house discussions were hush hush. Jacques was at this time the head of the Coverage and Analysis Group.
Either Mr. Market figured out that something was up, or somebody told him. Dendreon’s stock price fell 10% later that day. Possibly the markets did figure it out without a leak, that after all is why there is a mosaic defense. Still, let us follow the WSJ in thinking about the other possibility.
The story has its own hush-hush elements: much of it is sourced to “people with direct knowledge of the investigations” who otherwise go unnamed. But it does remind us that the trading on June 7th was no fluke. The actual public announcement of Medicare’s review – formally called a “National Coverage Determination” – didn’t come about until June 30th, so there were three weeks during which the stock price seemed to take repeated hits from the increasingly widespread understanding that an NCD announcement was on the way.
As readers of AllAboutAlpha probably know by now, I have long been skeptical about the logical coherence of insider trading law. Other writers here have also expressed skepticism, including AllAboutAlpha’s founder, Alpha Male himself.
In many cases, after all, leakers perform a valuable whistle-blowing function. Short selling the stock of a corrupt company, for example, helps signal the broader world that there is something wrong at the heart of that company, and might be on the whole a good thing. If it is, then leaking news of that corruption to a short seller can’t be entirely a bad thing, either.
This is plainly not such a case, though. The U.S. government has over the decades, going back to the Great Society days, moving by bits-and-pieces, one might say by inadvertence, rigged up a system in which a Medicare NCD announcement is a major event in the life of a company. This doesn’t mean the company is corrupt. It doesn’t mean the products aren’t valuable. It only means that a government official has come to have reservations about the price.
Also, there is an artificial quality to the “pricing” of such drugs. In the period between the FDA Approval and the time the NCD-related leaks emerged, Provenge was selling for $93,000 per patient. Treatment involved three infusions per patient over a one-month period, so this amounted to $31,000 per shot. Another way to look at this (given the clinical-trial data) is that patients were presumed to be willing to pay $23,000 per extra month of life. This illustrates the artificial nature of the pricing nicely. Why not $23,000? If Medicare is required to assume that cost?
The artificial pricing then becomes an artificial justification for a possible coverage cap, and the very fact of deliberations about such a cap – or whether to announce an NCD, or in effect just the existence of deliberations about possible deliberations – becomes a Big Secret in the possession of the privileged.
In this case, the public announcement of that revelation was bound to be market-moving news, and if the narrative in the Wednesday WSJ is accurate (and everyone actually or possibly involved is entitled to due process), then it seems likely somebody at the Centers for Medicare and Medicaid Services tipped off a policy-research operation., Marwood Group, about the Dendreon/Provenge deliberations.
This sort of story could yet besmirch the fine reputation of cronyism.