Markets & Finance

The Wisdom of the Medical Crowd


Sermo, a social-networking site for physicians, thinks large investors may be willing to pay big bucks for doctors' collective insight

In late March, Sermo, an upstart social network for doctors, tried an experiment. It polled member physicians on whether an experimental drug for advanced prostate cancer would win approval from the Food & Drug Administration.

According to a Mar. 28 screenshot provided by the company, 82 doctors had responded, and a large majority said Dendreon's (DNDN) Provenge drug would be approved or deemed approvable, meaning that it would win the agency's O.K. with some more clinical data.

Drugs used to treat advanced terminal illness, like Provenge, are considered to have an easier path to government approval than drugs for more easily treated conditions. When patients are desperately ill and no other treatments exist, the regulator may be more likely to overlook side effects observed in clinical trials.

The Ayes Have It

Even so, Dendreon looked risky. Questions still remain about its effectiveness, and many analysts doubted that Provenge would win approval. Until recently, Dendreon stock languished around $5, a level it had barely topped in more than a year.

However, when the FDA panel convened on Mar. 29, it issued a nonbinding, advisory opinion that Provenge was safe and effective. (The regulator is expected to make a final decision in May but usually follows the advisory panel.)

When Dendreon's shares resumed trading the next day, they blasted up 148%, to close at $12.93. Sermo CEO Daniel Palestrant says a Sermo client with access to the poll "made a tremendous amount of money."

Physicians' Roundtable

Backed by an investment from Longworth Venture Partners, the Cambridge (Mass.) company thinks clients will pay plenty for a look inside doctors' heads. The price? One package starts at $150,000 per year.

The social network has two main components. One is a bulletin board where doctors, without disclosing their names, can ask questions and post comments about medical practice, drugs, and other information. Doctors get to join for free.

As on Amazon (AMZN) or eBay (EBAY), the docs rank each other based on their answers. This sort of information sharing might help doctors improve patient care, but as with so many social networks, the question is: "Where's the business model?"

The answer is the second component, AlphaMD, a product officially launched earlier in April. Sermo clients including investment and financial firms can now poll doctors on specific questions and get exclusive access to the answers weeks before they become available to the entire community.

"Community Arbitrage"

Pharmaceutical companies, who would presumably like a voice in discussing their products, are not permitted to be clients, yet. The company says six hedge funds have signed up. And in rare cases, after activity on the site, doctors learn that they will receive a nominal payment.

Sermo, which is Latin for conversation, believes the information doctors provide will be more accurate than that of the experts often trotted out to investment firms and hedge funds. The idea that answers from a larger number of respondents will be more accurate than a few elite experts owes a debt to journalist James Surowiecki's book The Wisdom of Crowds. But in this case, the crowd comes equipped with an awful lot of advanced degrees. For Sermo, Palestrant calls the idea "community arbitrage."

Actually, the company aims to deliver responses from its membership, which includes more than 12,000 doctors. It sees working physicians as a sweet spot between the handful of medical specialists often used as consultants by Wall Street and the entire stock market, which knows very little about experimental drugs—a bigger, but presumably less-well-informed crowd.

And it can get a group of answers almost instantly, offering an edge for traders. If the information doctors provide proves effective, Sermo might expand its service to industries outside health care, says investor and board member Paul Margolis of Longworth.

The Softer Side

But will it work better than the other tools in an institutional investor's arsenal? Well, in the case of Dendreon, a couple dozen doctors on Sermo predicted a finite result far more accurately than Wall Street. The company's future will rest on how often it can provide similar information.

Emily Riley, an analyst with JupiterResearch, says the wisdom of crowds model is most effective in cases that would illuminate shifting marketplace trends or patient needs. Still, even the best-informed crowd can be wrong. And in some cases, a single expert's insight will be more valuable.

AlphaMD might be used more frequently for softer questions to measure trends. One analyst working for a Sermo client says that through the site, it was possible to poll doctors on why Lasik laser surgery isn't more popular (the response: it's too expensive, and insurers are reluctant to cover it) and what upcoming drugs have docs' hearts pumping (unsurprisingly, the analyst declined to reveal the names). Thus far, however, the analyst says his firm has yet to trade based on information obtained from Sermo.

Without an extensive track record, Sermo remains an intriguing new possibility in the race to gather the most precious commodity of all on Wall Street: useful information. As the site grows, Sermo has to hope the crowd stays ahead of the pack.

Halperin is a reporter for BusinessWeek.com in New York.

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