An investigative report in the Cleveland Plain Dealer looks at the FDA Fast Track. For those who don't know, the FDA Fast Track was created to accelerate the drug approval process for drugs targeted at under-treated diseases. Yet there is a bit of debate about whether Fast Track drugs are approved more quickly or are more likely to be approved than other drugs.

However, this report suggests that news that a drug has been Fast Tracked has created buying frenzies on Wall Street that have made people a lot of money:

Overall, since 1998, Fast Track announcements for nearly 200 drug treatments triggered one-day stock price increases that averaged 10 percent for biotechs and pharmaceutical companies, according to The Plain Dealer's analysis of publicly traded firms.

The announcements also frequently set off trading binges for the same stocks, one-day increases in shares bought and sold that average almost 1,300 percent. A Fast Track announcement from one Silicon Valley biotech firm in 2003 generated a one-day increase in trading volume of more than 52,000 percent.

That's a lot of wheeling and dealing to be sparked by a non-event.

The Fast Track designation is not an indication that a drug willbe proven safe and effective. In fact, half of these drugs have been scrapped by developers or have had serious setbacks. Most will never win FDA approval.

Those outcomes also can be disappointing for patients who believe that Fast Track status gives hope of a promising treatment. And the few time-saving advantages of the designation were available five years before the FDA introduced it. They are still available to drug makers without the designation.

Many companies didn't use the Fast Track tag en route to quick approvals for breakthrough drugs that treat life-threatening conditions, such as advanced kidney cancer and a rare form of stomach cancer.

Dr. John Jenkins, director of the FDA's Office of New Drugs, acknowledged that the Fast Track designation only gives companies the same access to FDA programs that was already in place when they lobbied Congress for the provision in 1997.

"There's really not much other, if any, benefit for Fast Track," he said.

The debate about whether Fast Track really does accelerate approval is ongoing:

It's not clear what Fast Track designation has accomplished for consumers, if anything.

A study published in 2003 by the Tufts Center for the Study of Drug Development at Tufts University comparing the development time of approved Fast Track drugs with other drugs concluded that Fast-Tracked drugs were developed 2 1/2 years quicker.

The FDA and representatives of the drug industry have cited this analysis as evidence of the designation's success, but the early numbers looked so good because many of the Fast Track approvals were for drugs to treat HIV, which generally have a shorter development time.

In revisiting the subject early last year, the Tufts center found the total development time for drugs that were Fast Tracked through 2005 to be the same as for other drugs - about eight years, on average.

Tufts drug center officials interpret those results to mean that the Fast Track designation is helping save time, given that the Fast Track drugs are "highly innovative products," according to the U.S. Drug Approval Trends and Yearbook.

Basically, the core question here is whether the market is being fooled about the true value of Fast Tracking. If Fast Tracking is indeed valuable, then the market should rise to reflect this. If it isn't, then day-traders and hedge funds are trying to make money off the widespread assumption that it is.

It reminds me of Keynes example of a beauty pageant from his General Theory of Employment Interest and Money (1936). Say you ask a set of people to judge a which of a hundred faces is the most beautiful. The individuals that select the face that is later judged to be the most beautiful by the group are all entered into a raffle.

There are two ways to approach the problem from the point of view of an individual wanting to be entered in the raffle. You can guess which face you think is the most beautiful. In this sense, you are trying to determine the actual correct answer. Or you can guess which face the majority of people will think is the most beautiful. In this sense, you are trying to guess the aggregate correct answer. The problem with the second choice is that if everyone did this the market for picking the most beautiful face would be in degrees circular. Everyone is looking at everyone else for information. On the other hand, your tastes for beauty could differ widely from the group, so using the first strategy might not work either.

Keynes analogizes this to the problem of predicting changes in stock prices. If you think a stock is valuable, you could vote for it with your money. If it is valuable -- a well-run company that sells a product that has a market -- the price of the stock will probably rise to reflect this. On the other hand, you could look at what other traders are interested in. If they buy stocks the prices of those stocks will rise.

Keynes uses this to argue how markets can behave irrationally. If the majority of agents are looking at what everyone else is doing, the market will never find the truly valuable stocks. Applying Keynes to this situation, the drug companies that are seeking Fast Track approval and the day-traders that invest in them are essentially trying to fake value to the market to get a rise in their stock price. (Assuming that Fast Track is valueless which is by no means clear.)

On the other hand, you can criticize the authors of this article -- and Keynes for that matter -- on the grounds that markets are not so easily faked. This is the argument that Alex Tabarrok makes over on Marginal Revolution:

But I'm also skeptical of stories that suggest markets are systematically fooled by non-events and the numbers presented do not seem wildly inconsistent with a modest but real positive signal from being listed as Fast Track.

Stock prices of companies that trade on the New York Stock Exchange rose just 1 percent after Fast Track announcements... Excluding these companies, most of which are major pharmaceutical firms, Fast Track announcements boosted stock prices 11.5 percent.

What do people think? Is the market being faked by non-events or is Fast Tracking actually of value? Fundamentally, it is an economic question of how valuable you think dubious regulatory acceleration can be and how much you think its dubious nature can be hidden from investors.

Hat-tip: Marginal Revolution