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What Hedge-Fund Managers are Reading this Morning

By Rob Fannon, editor Phase 1 Investor
Friday, May 16, 2008

Last May, shares of Regeneron Pharmaceuticals (REGN), a billion-dollar biotech, slid 35% in just 30 days. The company had no press releases, no earnings reports, nothing.
Main Street investors watched helplessly as Regeneron lost nearly $500 million from its market cap in roughly three weeks. Should we just chalk it up to typical biotech volatility?
Actually, scores of hedge funds had anticipated Regeneron's downward spiral weeks in advance. As I'll explain, the group took advantage of another biotech "glitch," sold Regeneron's shares short, and pocketed a cool 30% return... while naïve investors were blindsided.
Last week, I described the "ivory tower glitch," which occurs when academic studies shove around biotech stocks. Well, before those studies go public, scientists and researchers often present the data at academic conferences. This unpublished data can sometimes move entire sectors of the industry.
The most famous (or infamous) of medical conferences is ASCO, the annual meeting of the American Society of Clinical Oncology. This is the "Super Bowl" of cancer meetings.
But ASCO has a dark side, which last year cost Regeneron investors a third of their investment. You see, before every scientific conference, organizers release "abstracts" – one-page appetizers summarizing each presentation. At clinical conferences like ASCO, the abstracts can contain highly anticipated data on new drugs... the kind of information that can move a stock up or down 75% in one day.
Here's the catch: ASCO has traditionally released abstracts to the public at the beginning of the conference. Yet ASCO members – cancer doctors and researchers who pay annual membership dues – received this information a full three weeks in advance.
Clearly, the scientists on Wall Street's payroll selectively ignored the Confidential label on ASCO's abstract books. This data leak created a "glitch"... allowing some investors to trade on "insider" information, while the rest were left in the dark.
In its abstract last year, Regeneron summarized disappointing trial results for its lead cancer drug. Investors who saw this data weeks early had a chance to set up short positions, knowing the market would punish the company. Sure enough, when the public got the bad news, Regeneron's stock lost 11% in a day and continued to drift lower for weeks.
Regeneron is just one example of dozens of similar ASCO "glitches." So now, after enduring numerous complaints, ASCO is trying to level the playing field. This year, conference organizers released the 2008 abstracts to everyone all at once... last night at 9:00.
You might want to check them out to see if any of your biotech holdings are presenting at this year's ASCO meeting. You can bet dozens of volatility-junky hedge-fund managers and analysts are scouring through the pages as you read this, getting ready to make major moves in the market.
If you're looking for short-term volatility trades, check out the presentations from the usual suspects – big biotech players in the cancer market, including Imclone (IMCL), Genentech (DNA), Onyx (ONXX), Celgene (CELG), Exelixis (EXEL), Medarex (MEDX), and Immunogen (IMGN).
If history is any measure, we're heading into a span of volatile trading days in biotech. At least this year, we're all in the same boat.
Good investing,

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