Why Biotech Stocks Fall After Positive Clinical Trials

Sometimes, after a biotech or biopharma company releases positive results of a clinical trial, the company's stock still goes down. What contributes to the apparent disconnect?

In this video clip from "The Pharma & Biotech Show," recorded on Feb. 9, Motley Fool contributor Brian Orelli asks Dr. Frank David, author of The Pharmagellan Guide to Analyzing Biotech Clinical Trials, to explain why positive press releases are sometimes met with negative stock price movements.

Brian Orelli: Then once companies have data in hand, what are some things that investors should look at to try to decide whether the company's interpretation is the correct one. I think we've all seen situations where a company issues a press release saying so-and-so bio released positive results from its clinical trial and then shares fell. Obviously, smart investors aren't agreeing with the interpretation of the company.

Frank David: Yeah. I think there are two parts to that. One is more clinical and maybe the other is more financial valuation-oriented. On the financial valuation side, which is not necessarily the topic for today, but maybe we should at least pay homage to it, there's always a question about what was baked into the current valuation. If the expectation was that the trial was going to succeed at a certain magnitude, then you could have a positive trial, which doesn't manage to be quite as positive as investors were expecting. Certainly, that's one situation in which you can imagine that the sentiment as negative, even though the trial is nominally positive, because it was already baked in that the trial would be successful and really the question was how successful it would be. Separate from that, you run into the press release shenanigans questions, which I think are a whole other category of places where it's important just to look closely at what's being reported. Does positive really mean positive? I would say some of the most common scenarios that arise especially with small biotechs are situations in which the top line headline says positive, but actually, it was not positive on the primary endpoint, it was positive on some other endpoint that was measured. Another would be, it wasn't positive in the whole group of patients, but then it was positive in a small subset of patients that was identified after the fact. Those are both classic, what's called p-hacking strategies which are meant to put lipstick on a pig, as they say. I think most people who have been in the industry long enough certainly see through a lot of those. But it does point to the general issue that you can't just read the headline of the press release and assume that you know the whole story.