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Stock Cults and the Coronavirus

Let’s take a few minutes to talk about biopharma stocks in general – or to be more precise, about some of the people who invest in biopharma stocks. There’s a lot of weird behavior in this area, and the pandemic has amplified it. I refer specifically to the “stock cult” mentality that will be familiar to anyone who writes about the market, about drug trials and approvals, anything that touches on the vital topic of whether Stock XYZ will take off like a rocket (or not).

We’ll stipulate up front that the very nature of biotech investing is that some stocks do take off in this way. Some of the charts you get in this business are wild indeed, total binary events that send previously obscure issues off into the skies and make the people who were holding them while they were unloved quite wealthy. I should mention that the opposite happens, too – there are plenty of biopharma stocks that have suddenly cratered on news of a regulatory rejection, suddenly toxicity in a Phase III trial, unexpected pullouts by larger partners, that sort of thing. But while there are always a few short-sellers looking for those events, the state of the market has always been hugely biased towards upside events – a constant raging thirst for upside.

With small biopharma companies, this gets mixed in with another psychological issue, a storyline. Human beings have a narrative bias. We often think in terms of stories, stories with beginnings and ends and plot lines and resolutions, with heroes and villains, with explanations that tie the threads together. But the natural world doesn’t have a narrative bias at all. I mean sure, there are causes and effects, but (1) they’re not always something that we are aware of, (2) they’re under no obligation to be relatable or even comprehensible to us, and (3) they’re similarly under no obligation to happen on the time scale of human attention or to be easily visible to our senses.

We also model events as if they were being done by other humans, and we ascribe intentions, emotions, and mental states to things. That can work, a little bit, with animals, because sometimes (not always!) those mental states overlap with things we can relate to: kitty wants food, doesn’t she? But it doesn’t work at all with things that don’t have any mental states at all. There is no god called Hurucan that assaults the Yucutan peninsula with high winds and rain, and lighting bolts are not sent by Jupiter. Earthquakes and comets are not signs of the displeasure of higher beings. That’s one of the problems with dealing with the coronavirus pandemic – the virus is beyond human concerns and it does what viruses do, which is make copies of themselves.

That’s all viruses do. They have no motivations and no storyline, and they don’t notice if we’re bored or frustrated or angry. While those copies are being made, the imperfections of that process mean that mutations will constantly occur. Most of those will do nothing, but if one of them turns out to help make more copies, it’ll stick around. Meanwhile, mutations that interfere with copy-making will vanish quickly. But don’t confuse with with any sort of intention; the virus didn’t “come up with a new strategy” or “respond” to anything, not in the way that we use those words. It’s very easy to speak that way, but it suggests abilities that a virus simply does not have. It makes copies. That error-prone mutation-throwing copy-making is, in fact, just another thing that in the past has turned out to be useful for making copies.

Back to stocks. The storyline, for many small investors, is a very simple one. It’s Us versus Them, a Manichean struggle of the forces of darkness against the forces of light. People get married to their ideas, in an emotional version of the Sunk Cost Fallacy, and when money is involved this process happens even more surely and strongly. So someone who becomes convinced that LittleTinyCorp, unappreciated by the world, has the answer to pancreatic cancer or to the coronavirus and then puts a good pile of their own money behind it . . .well, the last thing you should expect is for them to be continue being rational about that decision. Not everyone loses their mind, but plenty do.

In too many cases, every setback that LTC and their amazing therapy might encounter is ascribed not to the science just not working out, but to Evil Intentions. Paid “stock bashers” are at work – they want to shake the shares out of the weak hands, you see, so the “money managers” can pick them up cheaply to reap the huge, huge profits that are surely on the way. People have been bribed, suborned, paid off; it’s really the only reason that LittleTinyCorp hasn’t conquered yet. And remember, LTC are the good people who are fighting to bring a lifesaving therapy into the world. What does that make the ones who are fighting them, then? Who apparently want people to suffer and die so they can turn a buck? To arms, to arms, the forces of darkness are right there in front of you.

Well, as mentioned, you can see a lot of this going on during the pandemic. I’m not even going to mention the names of the drugs and the companies and the therapies – I’m sure that many readers will be able to fill them in. Just go back and look at the comments section here to find the accusation of bad faith and nefarious plans. Biopharma stocks have always had this problem because of the confluence of health, money, and the sheer fact that most ideas for new therapies simply do not work. But it’s worse than ever. Keep an eye out for this sort of thing, and adjust your worldviews accordingly.

56 comments on “Stock Cults and the Coronavirus”

  1. Jackie Treehorn says:

    All certainly true. However, there is an opposing narrative in Biopharma that runs along the lines of: “LTC are a bunch of incompetent (or self-serving) schnooks who are primarily interested in paying themselves huge bonuses while promoting a marginal technology that has almost zero chance of success”. That narrative, I think you can sometimes find evidence to support.

    1. Charles H. says:

      You can, occasionally, find evidence to support both narratives. And both are, occasionally, true. But that’s not the predominant case. And there’s also a bunch of people who are committed to the “invented here” science, even when it’s a bit flaky, and without bad faith on anyone’s part. And various other narrative threads exist out in reality to be noticed by selective filters. (Otherwise there’s too much noise in the signal.)

      What Derek’s asserting isn’t that those other things don’t exist (and influence stock prices), but that they are comparatively rare.

    2. milkshake says:

      My former biopharma employers were bunch of schnooks who paid themselves huge bonuses and had animal data misrepresented and manipulated, to impress the investors. But eventually they run out of wealthy individuals willing to put money in the company – and had to shutter the research and lay off the research staff. The capital mismanagement group that later bought the remains of the company were even bigger zoolanders – they thought they were getting several clinical programs at a bargain, that the only problem was the lack of funding. This was their first investment in biophama and they did not know how to do due diligence. When they realized that their investment was worthless, they transferred the only project that looked like it had some remote chance into a new entity which they also control, the new company being a completely virtual shell actually controlled from the office of the old company. And surprise surprise, they re-purposed this cancer drug candidate as a great COVID antiviral… The bullshit they keep spewing is astonishing. Their whole business plan is predicated on fraud. And they also withheld unfavorable manufacturing data from the FDA, to get orphan designation for their drug candidate because they did not want to repeat botched Ia trial.

      So tell me about miraculous little biopharma companies.

      1. a says:

        We miss you milkshake. Come back and tell us more stories from the sharp end of the stick!

      2. Rick Maabolz says:

        well said!
        Sounds like you used to work for SNGX, ABIO, ATOS, DVAX, or dang, about 20 the other ones.
        thanks for sharing!

  2. Anon says:

    Despite your feeble attempt at debunking, there’s still a time-proven way to make a small fortune trading stocks on Wall Street. Start off with a large fortune.

  3. Calvin says:

    Derek. LTC sounds amazing. Where can I buy LTC stock? Hang on, you work for the other side. There’s a catch. What are you hiding? That’s it, I’m selling.

    1. James Cross says:

      You already miss it. Buy on the rumor. Sell on the news. Time to short LTC.

      1. DrOcto says:

        Oh, you’re all shorting LTC? Time for a big money short squeeze.

  4. John Wayne says:

    I find the speculation on certain biopharma stocks to be very odd. Even if one company ‘wins’ the coronavirus, at the end of the day they aren’t going to make that much money doing it. If you are the sort of person who bets against a stock, there are a few out there right now …

    1. Sam Weller says:

      Even with a small margin, supplying hundreds of millions of vaccines may mean a substantial revenue. This obviously may be far more meaningful for a biopharma that has not had any approved drug so far. Furthermore, if the vaccine technology is somewhat different than the traditional approaches, the proof of concept may be even a bigger win than the vaccine itself.

      1. John Wayne says:

        I think I mostly agree with you. If 1-2 companies end up on the top of the pile and provide a lot of vaccine it will be a boon for them. I think that the larger prize is for ‘best in class’ over the next few decades, especially if that vaccine finds its way into the usual vaccination rounds.

        I also agree that a proof of concept for a new vaccine technology would also be a huge win for any company without significant revenues. The primary caveat here, and I think this is being overlooked, is the long term safety data. For me, new constructs are guilty until proven equal or better than existing methods. If a new technology had superior safety profile compared to the standard of care, now that would really be something.

        1. Rupert says:

          WARP speed ahead – public money to fund your first in human safety data. Doesn’t sound like a bad deal to me, even if they aren’t first in class or efficacy.

          1. Rick Maabolz says:

            WARP speed for insiders to ‘award’ themselves stocks, take government money, then sell said stocks.
            NVAX

  5. Pierre R Bedard says:

    Robert Shiller, economics Nobel prize winner wrote about this, not specifically in bio but finance in general

    https://www.amazon.com/Narrative-Economics-Stories-Economic-Events/dp/0691182299

    1. Ken says:

      Interesting, I was also reminded of an author when I read: “(1) they’re not always something that we are aware of, (2) they’re under no obligation to be relatable or even comprehensible to us, and (3) they’re similarly under no obligation to happen on the time scale of human attention or to be easily visible to our senses.” But in my case it was H. P. Lovecraft.

      1. Derek Lowe says:

        Dang, you’re right. That had not consciously occurred to me as I was writing it!

        1. The CC says:

          The Great Old Ones don’t care about your returns.

          1. heteromeles says:

            I actually posted in a blog that, given Lovecraft’s description of the Great Old Ones in “The Dunwich Horror,” he could have easily been describing microbes. Perhaps his Great Old Ones were an early version of the Panspermia theory (/tongue fully in cheek).

            Anyway, back to the real cargo cult.

        2. Metaphysician says:

          There is a reason, hilarious racism aside, Lovecraft continues to resonate to this day.

          1. eub says:

            Yep, Lovecraft was responding to cosmological and scientific change that decentered humans and made the universe unimaginably vast and unconcerned and pointlessly blank of narrative.

            He then blended this with his deep discomfort with and hatred for ‘alien’ humans, which is psychologically understandable but rather a category error. (“Hate” is his word. He couldn’t stand the “crude, foreign hostility & underbreeding of New York” with its “Asiatic hell’s huddle of the world’s cowed, broken, inartistic, and unfit”, and told his wife trying to settle his rage “It is more important to know what to hate than to know what to love.”) Matt Ruff does interesting things with this cosmic / human alienness in Lovecraft Country, recommended, but I think my favorite after-Lovecraft sf is Ruthanna Emrys’ Winter Tide series — novella that preceded it is linked from my name.)

          2. loupgarous says:

            @eub Yet, Arthur C. Clarke did more and better with this kind of emotionally skewed ungraspable alien-ness in Childhood’s End and his 2001 novels. The “Overlords” have immense technological power, yet can never transition into what humanity ultimately will develop into as their home star system dies.

      2. Churlish says:

        Ken, I’m in no way authorized to make this decision but your comment “… but in my case it was H. P. Lovecraft” wins the comment section.

        1. Ken says:

          Thank you, but getting a reply from Derek (I think it’s my first) is reward enough.

  6. Magrinho says:

    Sports and free agency offer a valuable lesson for biotech investors: “all it takes is one idiot owner to overpay this guy…”

    And the same can be true of biotechs and over-inflated valuations based on a possible acquisition. There are many, many companies that were shorted based on sound reasoning only to have those short positions blown up by a foolish acquisition. Sometimes it doesn’t pay to be right.

    1. Derek Lowe says:

      I have lived that exact experience! I was short a small biotech some time ago that I was convinced was overvalued (I never wrote about them here). And then one day I woke up to find that a big pharma had bought them out for a handsome premium, to my horror and dismay, instantly costing me a fair amount of money. . .

      1. matt says:

        Did you short Sirtris?

      2. Dylan says:

        My first real job was working at a hedge fund that got blown up by a similar situation. They shorted the bejeezus out of a stock going into an FDA advisory committee, unfortunately including loading up on unprotected options. The advisory committee opinion was supposed to be negative, which made sense, as the drug hadn’t made the endpoints in PhIII trials, but surprisingly the committee gave a recommendation for approval. Stock shot up after hours and wiped millions of our assets off the books. Of course, a couple of weeks later the FDA did the sensible thing and didn’t approve and the stock cratered…but by then lots of us were out of jobs.

      3. An Old Chemist says:

        Derek did you short Loxo Oncology which got acquired by Lilly at a premium price?

    2. John Wayne says:

      I have the same thoughts all the time. Okay, this company is founded on dubious premise, the data isn’t that compelling, and it is a ship of fools. The question often is – are they going to succeed anyway?

  7. Alphalpha says:

    Chill bro, I’m seeking ALPHA because I AM AN ALPHA

  8. Blaine White, M.D. says:

    One of the 3 doctors who negotiated Emergency Medicine into existence with the American Board of Medical Specialties in 1979 was Ronald L. Krome, a converted surgeon. The other 2 were David Wagner and John Wigenstein. Ron used to say about diseases, “Even if you are paranoid, they may really be after you.” Federal prisons have been host to a number of “big” operators that illustrate this maxim. That experience underlies a cautious view of “big pharma,” even in a pandemic.

  9. Dionysius Rex says:

    One of the more peculiar sub-sects is the belief that when a stock „gaps up“ on good news, that at some unspecified point in the future that this „gap“ must be „filled“ (i.e. the share price must return below this level). Utterly bonkers…..

  10. Give me that old time religion says:

    We’ll see who has the last laugh! And in this instance I’m thinking it will be Jupiter, when you get turned into poison ivy for impugning his electrical powers. 🙂

  11. choi chuck says:

    Pay trolls no heed..

  12. Zambo says:

    Derek,

    So you’re telling me you’re not some big pharma shill with a personal vendetta against Inovio and Hydroxychloroquine? Unbelievable!

  13. Koss says:

    I am surprised noone has mentioned yet, that LTC in (some) trading circles typically refers to Litecoin, a cryptocurrency only slightly less old than Bitcoin itself.

    1. EJ says:

      I only remember litecoin because I got a *great* deal on some GPUs when that bubble burst.

  14. Alan Goldhammer says:

    I review all the registered clinical trials posted to the NIH site for a daily newsletter. It is amazing the number of such trials coming from small companies with a trial description that has no mechanistic way of helping COVID-19 patients. I doubt that many of them even enroll a patient or if they do complete the trial. All the companies are quick to update their websites showing they are working on a COVID-19 treatment. Maybe they get a stock bounce.

    IRBs that approve such trials really need to look deep down and think about whether they are doing the ethically correct thing.

  15. EJ says:

    This is a problem with tech stocks in general. As in high technology, not “tech.”

    As a CE person, I feel that I have a better-than-average grasp on the semiconductor and software industries. And I also feel bewildered by the hype and baseless justification behind some *WILD* swings there. But biotech is *not* my thing, and, that kind of conspiratorial thinking is far more alluring when reading the same kind of news on these biotech stocks.

    This is not true for, say, Coca Cola. Its much easier for a layman to intuitively understand what a food company does than, say, a photolithography equipment supplier or a pharmacutical chemical manufacturer, and that gives imagination room to run wild. Theres also lack of appreciation for just how hard and expensive high tech research and manifacturing is.

    Also, to paraphrase Warren Buffet, the market is in “La La Land” right now. Biotech’s insane valuations and volatility are built on top the insane volatility and enthusiasm of the entire U.S. market atm.

      1. eub says:

        2019 followup, I haven’t heard major new in 2020:
        https://hackaday.com/2019/05/14/what-happened-with-supermicro/

        I’d

  16. Rhenium says:

    What a lovely bit of writing, very meta, and appropriate for this day and age.

    At heart this is the classical “teleological fallacy”, that there must be a purpose and a reason that we can understand. Alas except in the simplest cases it is not the truth, but that makes it common enough to use as a mental model. In every other case it is then a matter of “now this position lacks nuance which is why you have to consider factors B, C, D and so on ad infinitum”.

    I particularly enjoyed Derek’s use of the Manichean dichotomy. What a lovely turn of phrase and which has it’s roots in Gnosticism and even earlier Zoroastorism with clear good and evil positions. As opposed to the Lovecraftian analog noted above of “you are an insignificant speck who cannot conceive of the ultimate picture due to your utter physical limitation as a human”.

    1. Bannem says:

      > “you are an insignificant speck who cannot conceive of the ultimate picture due to your utter physical limitation as a human”.
      or “an invisible dot on an invisible dot . . .” Zaphod Beeblebrox, via Douglas Adams . . .

  17. Marko says:

    Great overview of the vaccine landscape by Florian Krammer :

    https://twitter.com/florian_krammer/status/1292595204118249472

    1. Erik Dienemann says:

      Krammer is great – thanks for the heads up!

    2. Rick Maabolz says:

      thanks for posting! very interesting.

  18. loupgarous says:

    The pernicious myths driving small investment in Pharma:

    1) The investment prospectuses describe the research and development as accurately as possible, but:
    2) bad things happen,
    3) people make mistakes,
    4) people surnamed Shkreli manipulate LTC stock and
    5) (rubbing their hands evilly) frustrate their original business plan at every turn while
    6) peeing in their sample aliquots and
    7) spend what money’s left paying nasty people on the Internet to lie about what’s clearly the finest thing in Pharma since sartans (before some idiot screwed up the intermediate APIs in Chindia).
    Note to evil people: I’m waiting for my check.
    You know all that evil stuff you paid me to say about LTC on the Net? Pay up or you”re next.

    1. Doug says:

      You’re not supposed to pee in your sample aliquots?!?!

  19. Covidiot19 says:

    I saw a good summary that sticks with me:

    Speculating on stocks is just horoscopes for people in suits.

  20. dearieme says:

    I’m mildly surprised that Tesla isn’t offering a vaccine or a cure.

    1. loupgarous says:

      Musk seems content to stick with what he knows about – wringing out every buck from applications of orbital mechanics and battery technology. The parallels between Musk and Shipstone (in Heinlein’s novels) are eerie.

  21. Barry says:

    Daniel Dennett insists that the “intentional stance” is the most useful way to discuss darwinian selection, whether of a pathogen or of anything else

    https://en.wikipedia.org/wiki/Intentional_stance#:~:text=The%20intentional%20stance%20is%20a,in%20terms%20of%20mental%20properties.

  22. In Vivo Veritas says:

    Wish I was part of the cult of Seres earlier this week. 🙂

  23. Sav says:

    Admittedly the market amplifies human biases and is flawed, but it’s a lot better than expecting govt bureaucrats to “pick winners”. Markets do what they do best – transfer risk to those willing to bear it and innovate. Markets are also a kind of superintelligence that can solve almost any problem over time as long as a reasonable ROI can be obtained. The problem is that often ROI does not capture broader positive externalities/negative externalities. Of course, we also need to be aware of manipulation/rent seeking and ultimately “caveat emptor”.

    But in my view, the main problem with drug development is the lack of rational private incentives to create medicines with the most health impact. Rather, everything is geared towards securing a patentable blockbuster NCE/NME where you can enforce a monopoly price. This mean that repurposing existing generic drugs or combinations/dosing regimes are ignored by industry (unless you can reformulate, patent and enforce a monopoly price securely against generic competition).

    According to Benjamin Roin who is an assistant professor of technological innovation, entrepreneurship, and strategic management at M.I.T:

    “One of the most dramatic public-policy failures affecting biomedical research is the lack of incentives for industry to develop new therapeutic uses (“indications”) for off-patent drugs—generally known as “the problem of new uses” – see https://dash.harvard.edu/handle/1/11189865.

    There are various generic drugs that can be used to treat Covid-19, including cimetidine or famotidine, dipyridamole, fenofibrate or bezafibrate, and sildenafil citrate, with a combination of generics and determination of optimal dosing regimes being the fastest path forward to a treatment or cure.

    The solution is to use financial innovations such as “pay for success” contracts to provide the market with incentives to repurpose generic drugs to treat Covid. With financial innovations such as Prize Funds or Social Impact Bonds, the risk of “picking the winners” via grant funding is transferred from payers to the market, similar to how derivatives are used to transfer risk. Impact investors that achieve the predetermined criteria or outcomes receive payment based on healthcare costs saved (e.g. the success criteria or target product profile would be a Phase III randomised controlled trial (RCT) showing 100% reduction in COVID viral load vs usual care when treated within the 72h hour window of symptom presentation). The terms of the contract can ensure market rates of return (e.g. 2.5% – 7.5% p/a). Clinical trials to assess reduction in viral load for COVID can also be conducted rapidly (within a few months) compared to traditional clinical trials that can take years.

    TL:DR: By raising a relatively small fund to support a pay for success contract (e.g. US$10-50m) you can incentivise private investors to harness the superintelligence of the market to conduct large definitive clinical trials to repurpose affordable generic drugs to treat Covid. This has never been tried before.

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