Empirical Finance Spring II 2024
Assignment 1 - Presentation 200 pts
IMPORTANT: Each member of the group is expected to deliver a 15-minute
presentation during the 3rd week.
Here are five small-cap bio stocks, with tickers PLX, EYEN, SPRY, OTLK, VTGN. Each
of these bio companies has either experienced a PDUFA event or released phase 3 results
within the past year.
PLX: PDUFA May 9, 2023 - FDA accepted
EYEN: PDUFA May 8, 2023 - FDA accepted
SPRY: PDUFA September 19, 2023 - FDA declined
OTLK: PDUFA August 29, 2023 - FDA declined
VTGN: Phase 3 trial results August 7, 2023 - N/A
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Although certain PDUFA decisions are endorsed by the FDA, there are instances where their
associated share prices barely go up after the announcement but rather undergo a decline
post-decision. Conversely, some companies witness a significant surge in their stock prices
following FDA acceptance (as seen in the case of KALA in December 2022). Occasionally,
positive Phase 3 trial results caused share prices to skyrocket (see, VTGN). Nevertheless, in
nearly every instance, unfavorable PDUFA decisions led to a notable decrease in share prices
(see, OTLK). These examples shed light on certain dynamics within the small-cap bio stock
market, appearing somewhat random at first glance. However, upon closer examination, one
must question whether this randomness is truly the prevailing pattern.
The objective of this assignment is to undertake a comprehensive case study on small-cap
bio stocks and develop a robust investment strategy.
First, it is imperative to collect existing cases (the more the better) and analyze summary
statistics. To accomplish this, you’ll gather numerous instances of PDUFA decisions and
analyze the corresponding movements in share prices. Subsequently, summarize the percentage of price increases on average upon approval compared to the opposite trend (price drop
when rejected). This analysis should investigate whether the “sell the news” phenomenon
is evident or if other contributing factors are in play. For instance, it is essential to consider
variables such as the time required to bring a product to market and the potential for the
company to issue more stocks (public offering), which could result in a decline in share prices
despite positive news. The maximum points allocated to this part of the presentation is 120.
I will assess the comprehensiveness of the summary regarding stylized facts in your analysis.
Secondly, it’s crucial to develop a convincing investment strategy. One relatively safer approach would involve selling just before the news to capitalize on the pre-announcement
drift and avoid exposure to the “sell-the-news” phenomenon. However, this strategy means
missing out on potential gains if there’s a significant price surge, despite mitigating the risk
of substantial downturns. I request that you select a few new bio stocks, including SPRY,
OTLK, and VTGN, and demonstrate how you would strategize for their upcoming PDUFA
events. To broaden your investment opportunities, I encourage you to also explore the potential impact of phase 2/3 trial results announcements. This analysis must be firmly rooted
in concrete evidence, devoid of conjecture. It is essential to illustrate the superiority of your
strategy by leveraging all accessible information. This requires conducting comprehensive
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testing and substantiating claims with empirical evidence. For instance, demonstrating how
investing in small-cap bio stocks ahead of anticipated PDUFA or phase 3 results announcements could have led to a significant AA% gain over a specified time interval of BB months
using real examples. Finally, you will craft an investment strategy tailored for the second
half of 2024, focusing specifically on small bio stocks. The maximum points allocated to this
part of the presentation is 80.
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