Shares of life sciences companies are affected by notices to the Tel Aviv Stock Exchange (TASE) and media reports much more than shares of high-tech companies and of non-technology companies, according to a study by Bioassociate Biotech Business Consulting Ltd. founder and managing partner Dr. Ofir Levi and Tiran Rothman. They add that this fact is indicative of an inefficient market.
The report's logic is that investors apparently do not understand the announcements, let alone the potential information in them, otherwise their reactions would not be so volatile. These characteristics indicate that information in the market is hidden and held only by a few experts and the companies themselves.
This does not mean that life sciences are concealing information from the public, but that investors do not fully comprehend how to interpret announcements into changes in a company's value. The result is volatile, even hysterical, reaction by buyers and sellers to every announcement.
"Globes": Why does such volatile reactions in the share indicate an inefficient market?
Levi: "It's true that this also happens to companies in other fields, besides the life sciences. We examined the reactions to announcements by a great many companies over a full year. This pattern of volatility was also characteristic of responses to not only really important announcements, but to almost all of them."
Low turnover plays a role
The study found that press releases affect tradability and volatility more than notices to the TASE. It also found that the tradability of life sciences companies is only a tenth of shares on the Yeter and Blue Tech indices, and is another possible factor for the volatility - a fairly strong effect on the share price by each buy or sell transaction, due to the share's low trading volume.
Life sciences companies apparently realize that their announcements can cause volatility in their shares, and they publish around ten announcements a month, compared with six by other companies on the Yeter and Blue Tech indices. "The flood of announcements creates more noise in the system, which investors already don’t understand," states Levi in the study. In contrast, in the economic press, life sciences companies examined in the study each had just six articles compared with 17 articles about companies on Yeter and Blue Tech indices.
"There is a dramatic herd mentality life sciences market acts," says Levi. "People buy on positive announcements and sell on negative ones. The question is whether big investors employ people who can shed light on the information. The answer is: usually no. That's a pity because the life sciences is actually a field with regulated information, with built-in stages that make it possible to hedge risks."
Bioassociate says that the solution for the market inefficiency is to create expert research to educate the market on how to read companies' announcements. This will result in a company "speaking from a position", as it was selected by the TASE for analysis to encourage investors and achieve a more sophisticated market.
Bioassociate is now writing guidelines for such analysis, partly funded by the TASE and Israel Securities Authority. The companies participating in the project must commit to paying for two years. To deal with the conflict of interest created by the companies' financing the reports, Levi says, "The TASE is the mediator. We're an independent agency. We have no underwriting or brokerage business and no plans to open any in the future."
Bioassociate's other proposals to make the market more sophisticated include setting threshold conditions, such a degree in the life sciences and financing for analysts in the sector, establishing a uniform format for important announcements (which the Securities Authority is already working on), publication of investor brochures, a financial threshold for going public; and supervision of underwriting to prevent inflated prices.
Published by Globes [online], Israel business news - www.globes-online.com - on April 10, 2012
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