The past couple of weeks should have been heady ones for Bethesda-based Northwest Biotherapeutics.
The small biotech firm, with an innovative new vaccine treatment for brain, prostate and other cancers, had just received an initial green light from British regulators to offer its drug to doctors and patients even before its definitive Phase III trial is completed in the United States. The approval was the first under a new program designed to speed the process of getting promising treatments to market, and it follows a similar decision by Germany in March. Both European regulators cited independent analyses of results from earlier brain cancer trials showing that Northwest Bio’s immune therapy doubled the average of 17 months of extra life now provided by the standard treatment of chemotherapy and radiation.
But as it happens, Northwest Bio’s stock, after a brief upward spike, ended the week down 11 percent below where it was the day before the news from Britain crossed the ticker. And therein lies an eye-opening tale of how hedge funds and their Wall Street allies stifle innovation and damage the economy in their relentless pursuit of short-term trading profits.
I’m talking, of course, about the “shorts” — investors who actively bet against companies by borrowing shares of their stock and selling them in the hope that the price will go down and they can buy them back at a lower price before returning the shares to their rightful owner. In theory, short-selling enhances the efficiency of markets by bringing in fresh information and capital. In reality, it has contributed to turning financial markets into a giant casino which is easily rigged for the benefit of insiders.
Biotech stocks are particularly vulnerable to manipulation by the shorts. They tend to be small, with low share prices and relatively few shares actively traded. And because of the high risk involved — relatively few biotech companies ever succeed — share prices tend to be volatile, easily moved by rumors and news of regulatory action.
These characteristics make it easy for a handful of hedge funds to anonymously drive down the price by selling borrowed shares into the market at the same time, creating a self-fulfilling momentum that scares off other investors. Even when they can’t get ahold of enough borrowed shares, they might sell the shares anyway and simply fail to deliver them three days later when they are due. That’s known as a “naked” short, and it’s illegal.
The shorts’ tactics, however, extend well beyond the trading room. As the nonprofit advocacy group Citizens for Responsibility and Ethics in Washington (CREW) lays out in a recent white paper, shorts are active in anonymously feeding false and misleading information about their target companies to friendly analysts and bloggers while using social media to attack the intelligence and motives of those who view the company favorably. They enlist plaintiffs law firms to issue press releases soliciting shareholders to sue the target companies for securities fraud. And they pepper regulators with threatening letters and fillings demanding that they investigate their targets or deny them product approvals.
Such tactics make it difficult and expensive for biotech firms to raise the large amounts of capital they need to conduct drug trials and build production facilities. They were all used in recent years to cripple Dendreon, another company that is a pioneer in the use of immune therapy for cancer treatment, which was so weakened by the shorts that it has failed to recover even after receiving its much-delayed FDA approval. And now they are after Northwest Bio.
As you can see from the accompanying chart, anytime the price of the company’s shares began to rise this year, it was hit with another wave of short sales that drove the price back down. By the end of last week, the total number of borrowed shares was reported to be about 8.5 million, or about 30 percent of the shares not held by company executives or entities they control. That level of short interest is unusual. It’s also suspicious — so much so that at one point this summer, shareholders could earn a 34 percent return by lending their stock to the shorts just for one month. Based on filings by brokerage firms, Northwest Bio estimates that, in addition to the 8.5 million reported short shares, there are as many as 4 million short “phantom” shares created by the “naked” transactions.
In late July, CREW’s executive director, Melanie Sloan, asked the Securities and Exchange Commission to investigate market manipulation of Northwest Bio’s stock. (Sloan told me her organization has never been contacted by the company and has no connection to its executives, investors or directors.)
In her letter, Sloan called particular attention to Adam Feuerstein, a biotech reporter whose relentlessly negative blog posts for thestreet.com this year have not only been filled with exaggeration, mischaracterization and half-truths, but curiously have also coincided with the spikes in short trading.
On March 11, for example, the day that German regulators announced their approval and Northwest Bio’s stock broke through $10, Feuerstein was quick to weigh in with a story that the company had withheld the news for two weeks to use it to divert attention from the fact that it had failed to deliver an interim report on the results of its Phase III trial back in the United States. As the chairman of the independent committee overseeing the trial later pointed out, there was no interim study and, by protocol, the company would have been prevented from seeing it even if there were one. As for that delay in getting out the good news, the company’s perfectly reasonable explanation was that it needed time to have the German notification translated into English and checked by the Germans.
The next month, on April 3, the headline on Feuerstein’s post was that Northwest Bio acknowledged that the FDA might throw out results of its Phase III study. It sounds pretty ominous. But all that really happened was that the company, in its annual report filed with the SEC, included that possibility in the long list of risks that investors should take into consideration, just as any company in the midst of a Phase III trial would have to do.
Or consider Feuerstein’s posts in May and June concerning a presentation by Northwest Bio’s chief executive, Linda Powers, at the big annual cancer research conference, in which she described how one patient had responded to the company’s therapy.
In both columns, Feuerstein expressed outrage that a drug company would exploit the suffering of patients for commercial gain (imagine that!) by selectively releasing results from a Phase I/II trial. He quoted Dr. Aman Buzdar, the head of clinical research at MD Anderson Cancer Center, the lead hospital for the Northwest Bios trial, criticizing the company for taking the “unusual and inappropriate” step of releasing such information. If Buzdar had first checked with his colleagues, however, he would have found that two of them had recently appeared in a National Geographic documentary focused on just such interim results from a pancreatic cancer patient. And, as CREW noted in its letter to the SEC, Buzdar himself made positive comments at a 1999 conference about a breast cancer drug he was testing that was still in clinical trials.
Then last week Feuerstein declared that the approval by London was really a “non-news event” because only one other company had applied for a similar approval since the program was launched in April. It was all just a smokescreen, he explained, to divert attention from the unfavorable terms on which Northwest Bio had recently raised another $27 million from investors in a hostile funding environment — a hostile funding environment, we should note, that Feuerstein himself had helped to create.
Feuerstein declined to speak to me last week, but his editor said she was sticking by her “dynamic” reporter. When I asked whether Feuerstein had been in contact with the shorts, she would only say that he was in touch with a wide range of investors. Using thestreet.com’s journalistic standards, the headline on that might be: “Biotech reporter concedes he may be exchanging information with shorts.”
I have no idea whether Northwest Bio’s immunizations work or whether it will become the billion dollar company that Powers says it could be. What I do know is that given the choice between allowing innovative companies to develop promising products that could save thousands of lives, or allowing Wall Street wise guys to use sleazy tactics to manipulate share prices for short-term profit, I’m siding with the companies. Maybe it’s time for the Justice Department and the Securities and Exchange Commission to be siding with them as well.