Gbrown,
Exactly. And your general summary of the combined / collective theory was excellent.
But it should be noted, that while we may not ever know all the details, or that our collective theory may not be 100% correct in all respects...the overall premise is common practice.
The idea that hedge funds (who are judged on annual returns) take early stakes in Biotech's and profit from trading it both ways while they sometimes wait years for the ultimate payoff has been documented and discussed for years. It's not that big of an industry secret.
These funds aren't just going to park Millions or even Tens of Millions of dollars in a biotech and then wait years before they see even $1 in return profit (a profit that may never come if the company or drug ultimately fails). They could invest in Treasuries instead. No, instead they invest early, gain some influence on or even control of the BOD, and then actively work the PPS in both directions. This ensures their profits from trading ends up more than paying for their initial investment plus some profit on top of that. Then they get to play with house money from that point forward.
Whatever one's opinion might be of whether this is ethical or unethical, from their vantage point they probably feel that taking advantage of the loopholes that exist in the system that allow them to do this is just smart money management. In fact they might even argue it is part of their fiduciary responsibility to their clients to maximize annual returns. Much the way highly paid accountants are compensated to squeeze out every last dollar of tax savings available based on the tax code and any loopholes that exist that can be exploited.
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