Physicians aren’t necessarily better health care investors

I strongly believe that clinical physicians do not have an edge on the rest of the market. Therefore, they should heed Warren Buffett’s advice — avoid picking individual stocks and invest in index funds.

Nevertheless, some doctors do believe that they have an edge when it comes to investing in health care stocks. They think that just because they are a doctor, they are better trained to invest in the stocks of the drug companies and device makers that they prescribe and use every day.

Unfortunately, I don’t believe that physicians make better health care investors. This is because many of the edges that physicians perceive they possess are not actually advantages at all.

Prescribing the drug does not equal knowing the company

Some physicians may think that they have superior knowledge about a drug company because they prescribe the company’s drugs on a regular basis. They may be completely up-to-date with the medical literature and know that the company’s drugs are popular among their physician colleagues.

Unfortunately, the prescribing patterns of physicians are a tiny piece of the puzzle that determines a health care stock’s value. They may know how often they personally are prescribing a drug, but they have little idea about how often it is being prescribed around the world, nor do they know how much the drug company is making each time a prescription is filled at the pharmacy.

Can physicians predict the future of medicine?

Recently, I heard a colleague talking about how he thought it’d be a good idea to invest in various pharmaceutical companies because immunotherapy is going to be a big thing in oncology over the next 5-10 years.

Unfortunately, by the time a new drug or trend hits the minds of clinical physicians, the market has long priced in its potential value.

Immunotherapy is a thing, and has been a thing, for a very long time in oncology already. Ipilimumab, the first big immunotherapy drug to hit the market, completed its Phase 3 melanoma trial way back in 2010, and was FDA-approved in 2011. Needless to say, ipilimumab was in the pipeline for years before that, and the stock market was pricing in future sales of ipilimumab into Bristol Myers Squibb stock well before it gained FDA approval.

In order to truly understand the future prospects of pharmaceutical companies, you have to understand the potential of new drugs way before it ever gets prescribed by a physician. For example, Bristol Myers Squibb publishes their R&D pipeline on their website. It currently lists 41 compounds in development. The future prospects of Bristol Myers Squibb rest not just on the success or failure of its FDA-approved drugs, but also of these obscure molecules still in development.

Don’t trade on insider information

One type of information that physicians might be privy to that would actually be an edge is the results of pending clinical trial results. The results of clinical trials move markets, and these trial results are tightly embargoed prior to their presentation at national meetings. For the few people who are privy to the trial results, it can be tempting to trade off these results, or leak them to friends or family.

Of course, this would be illegal insider trading, and physicians have gotten into deep trouble for leaking trial results to hedge funds or trading off of insider information. For example, the former chair of the University of Michigan neurology department, Dr. Sidney Gilman, was privy to the trial results of bapineuzumab, a drug developed for Alzheimer’s by Elan and Wyeth. He shared the information of the Phase III trial results to Matthew Martoma, a trader at the hedge fund SAC Capital, who then made a $276 million profit on that trade and earned a nearly $10 million bonus in 2009.

However, federal investigators discovered the insider trading scheme, and Dr. Gilman, in exchange for leniency, testified against Martoma in the insider trading trial, leading to Martoma’s conviction. Had he not flipped to become an informant for the government, the physicians in his 80s faced potentially more than a decade in prison.

Probably the most famous case of insider trading involving a drug company trial result was the Martha Stewart insider-trading trial of ImClone stock. Imclone’s CEO, Samuel Waksal, shared information that its possible blockbuster drug, cetuximab (Erbitux), would not be FDA-approved to family and associates. Martha Stewart sold ImClone stock a day before the FDA announcement on a tip from her stockbroker, and she served 5 months in prison for insider trading.

Ensnared in this insider-trading scandal was Dr. Zvi Fuks, then the chairman of radiation oncology at Memorial Sloan-Kettering Cancer Center. According to federal authorities, after also being tipped by ImClone CEO Sam Waksal of the Erbitux results, Dr. Fuks allegedly sold $5 million dollars worth of ImClone stock based off of this insider information. The case was eventually settled out of court, but Dr. Fuks left his position as radiation oncology at MSKCC following the scandal.


Clinical physicians have little to no edge when it comes to evaluating the stocks of health care companies. Even if physicians are regular prescribers of a company’s drugs, they have little idea about the company’s drug pipeline or how much profit the company is making for every pill that is dispensed.

Just as I am skeptical that a teenage girl would make a superior analyst for fashion and retail stocks, I don’t believe physicians possess any material advantage over other professional investors. Some physicians may have insider information, but the use of that information for financial gain is illegal, and physicians have been prosecuted for insider trading.

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

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