BUY Dendreon (DNDN)—potential cure for cancer (again)

Yep, we are once again dipping into the Dendreon well. If you were not around in 2007, please read our original pitch for buying DNDN stock, as we do not propose to rehash all the basic reasoning, most of which remains valid.

What happened in 2007 is that the FDA granted the company fast track status to review their application for approval based on two relatively underpowered Phase 3 studies for Provenge, Dendreon’s anti-prostate cancer immunotherapy, despite the fact that both studies failed to meet their primary endpoint, which was time-to-progression for tumors. This unusual step was taken because [a] there was compelling evidence that the men who had been treated with Provenge were significantly outliving the men in the placebo arms in both studies and [b] there is not good alternative for patients with advanced prostate cancer, which kills 30,000 men a year in the USA.

In March 2007, an advisory committee (“AC”) assembled by the FDA to consider Provenge concluded 13-4 that it is efficacious and 17-0 that is safe. Expectations had been low as approval of a drug that fails the primary endpoint of two Phase 3 studies is not common, and as is di riguer with development stage biotech companies, the stock was heavily shorted and the shorts had spent considerable energy debunking/trashing Provenge. However, it was virtually unheard of for the FDA to go against the recommendation of their own AC, and so the stock promptly soared from $4 to the mid-teens, with spikes as high as $25.

Then in May, the FDA did go against their AC and required that Dendreon successfully complete the third, larger Phase 3 trial—which was already enrolling patients and has survival as the primary endpoint—in order for them to approve Provenge. The stock instantly tanked back to  the $3-to-$7 range.

Today, the company announced that this third trial—which recently concluded earlier than anticipated—“resulted in the study successfully achieving the pre-specified level of statistical significance defined by the study’s design,” according to a press release issued prior to the market open.

This new information substantively changes the nature of game here. Yesterday, a purchase of DNDN stock was a bet on a two-time loser drug and a company with no other cards to play (in that all the other potential products were immunotherapies based on the same science, so if Provenge failed…). Today, it is still a speculative venture—the company has no revenue and limited cash, a novel and complex production process (they need dendritic cells from each patient to process customized dosages of Provenge), no sales force in the USA or partner in Europe, and still only one product within sight of commercialization—but if management’s conclusion that the FDA requirement for approval has been met, that product is a blockbuster with $1B+ potential in the USA and again in Europe (presumably split 50-50 with a partner-to-be-named-later). Furthermore, this is the first immunotherapy to successfully complete Phase 3 trials and—by this time next year—would be the first to be approved. It is a whole new approach to fighting cancer, focusing on marshaling the body’s own defenses to fight the disease, with potential applicability to breast cancer, kidney cancer, colon cancer, etcetera. And their complex production/delivery process is patented and potentially licensable for use with other immunotherapeutic products.

In short, we have a $1.8B company that could easily be worth $9B five years down the road, a company doing important, ground-breaking biotech work that is worth watching, and rooting for.

Not to mention we are so far ahead on our two DNDN option straddle plays that even if we lose 100% here, we’ll still be ahead overall.

Previous DNDN-related posts:

• BUY Dendreon (DNDN)—potential cure for cancer (10 Jan 07)
• Dendreon (DNDN) update #1—FDA agrees to fast-track review for Provenge (16 Jan 07)
• Dendreon (DNDN) update #2—FDA appoints advisory committee to review Provenge (2 Mar 07)
• BUY Dendreon puts and calls—straddle play (9 Mar 07)
• Dendreon (DNDN) update #3—Feuerstein’s revenue projections (23 Mar 07)
• Dendreon (DNDN) update #4—reviewing the bidding heading into the AC meeting (28 Mar 07)
• SELL Dendreon (DNDN) puts and calls—AC recommends approval! (30 Mar 07)
• Dendreon (DNDN) update #5—we got lucky (30 Mar 07)
• Dendreon (DNDN) update #6—+488% in four months! (10 Apr 07)
• Dendreon (DNDN) update #7—any buy here is speculative (11 Apr 07)
• Dendreon (DNDN) update #8—intelligent debate on Provenge (12 Apr 07)
• Dendreon (DNDN) update #9—why Provenge should be approved (26 Apr 07)
• SELL Dendreon (DNDN)—FDA issues approvable letter (9 May 07)
• Provenge and the FDA—frog meets scorpion (25 May 07)
• The Provenge ad in the Washington Post (15 Jul 07)
• BUY Dendreon (DNDN) puts and calls—straddle play (again) (29 Jan 09)
• Dendreon options (UKOHA & UKOTA) straddle play update #1—4Q08 results (12 Mar 09)
• Dendreon options (UKOHA & UKOTA) straddle play update #2—did interim data release compromise IMPACT? (25 Mar 09)
• Dendreon options (UKOHA & UKOTA) straddle play update #3—DNDN shares surge 38% (3 Apr 09)
• Dendreon options (UKOHA & UKOTA) straddle play update #4—IMPACT results tomorrow! (13 Apr 09)
• SELL Dendreon options (part UHOHA & all UKOTA)—IMPACT study “met its primary end point”! (14 Apr 09)

SELL Neurocrine Biosciences (NBIX)

Neurocrine Biosciences, our biotech play with the snakebit insomnia remedy—which the FDA rejected twice despite strong data showing efficacy and safety—announced top line results of a Phase 2 study of their Gonadotropin-Releasing Hormone (GnRH) receptor antagonist, elagolix, for treatment of endometriosis today after the close of the market. The results were mixed, but bottom line according to the press release: “Although the daily pain scores improved numerically over the course of treatment on the primary endpoint NRS, the change from baseline was not statistically significant compared to placebo.”

Now it so happens that NRS—“numeric rating system”—daily pain measurement is considered to be “experimental” according to management, because it had never been used before…and elagolix did show statistically significant superior results to the placebo when measured by several other monthly pain measurement methodologies which have been used in prior studies. “The decoupling of these exploratory daily scales from the established monthly validated scales will prompt us to seek input from regulatory authorities and our expert clinical consultants,” said Dr. Chris O’Brien, NBIX’s chief medical officer. Do tell; the NRS was the primary endpoint because it was proposed by the FDA. (Results also fell short on another novel measurement suggested by the National Institutes of Health, non-menstrual pelvic pain.)

It seems likely to us that elagolix is efficacious, and most definitely there are no safety concerns so far. However, given the company’s history of difficult relations with the FDA, we are disinclined to bet on management effectively explaining to the agency folks why they are wrong here. And, frankly, we are not disposed to continue to pay attention to this story for another two years minimum before the drug could be approved when we have more macro-relevant fish to fry. Accordingly, we are putting in a sell order to unload our shares at the market open tomorrow (which will most likely be down from today’s close at $3.97, down 65% for us).

Takeaways from this failed play: [a] betting on an FDA approval is risky (as if we didn’t already know this) and [b] when your Plan A investment thesis fails—as ours did here in December 2007 when the FDA did not approve indiplon—you should  probably admit defeat immediately and move on. Had we done that, we would’ve been out at $5.25 and onto greener pastures 15 months ago.

BUY Dendreon (DNDN) puts and calls—straddle play (again)

Yep, we implemented this same trade two years ago prior to the FDA advisory committee meeting that endorsed Provenge, pushing DNDN stock from $4 to $25…a month before it was—shockingly—not approved by the FDA itself, crashing the stock back down to $5—and it was our best speculative play so far, with a 307% ROI in 21 days. The time horizon here is a bit longer, but the principle is the same: there is a binary event approaching on a predictable time frame that is highly likely to materially effect the stock price of Dendreon (DNDN), the biotech developer of Provenge, a vaccine for prostate cancer.

OK, first we suggest you check out this Minionville article which summarizes what is at stake for Dendreon and their prostate cancer product, Provenge and frames the eventualities. Essentially, if the data from the IMPACT Phase III study meet the 22% threshold (with respect to improved survival for the Provenge arm as compared with the placebo arm), then FDA approval is all-but assured and DNDN stock, currently around $3.50, is likely to double or triple at least on the expectation that Dendreon will get revenues starting this year and be profitable by 2011 or even late 2010.

If the data don’t pass muster, the company will probably have to put themselves up for sale, as they lack the funds for another costly Phase III trial—to say nothing of another two-to-three years of paying the electric bill—and are not likely to be able to raise them for what would at that point be a two-time loser vaccine. (They have other candidate drugs in their pipeline, but they are all “active cellular immunotherapies” based on the same process as Provenge, so if Provenge doesn’t work….) Whether any other company would be willing to pay anything for the privilege of sinking more money into funding another study of a two-time loser drug is unknowable, but at that point, DNDN shareholders would be begging, not choosing…and in this event, the stock is likely to plunge 80% or more.

So, we are going with an options straddle play: looking to buy eight Aug $5 calls (UKOHA) for $1.25 or better and six Aug $5 puts (UKOTA) for $3.35 or better. There is healthy open interest for both options. Remember that option prices are quoted in “per share” terms, but each option covers 100 shares; thus one UKOHA August $5 call will give us the right to purchase 100 shares of DNDN for $5/share between whenever we buy it and the day the option expires (21 Aug 09 in this case). Thus the total investment (not counting transaction costs) should be around $1,000 for the eight calls plus $2,010 for the six puts for a total of $3,010.

If the data fail to meet the 22% survivability advantage for Provenge and the stock tanks the expected 80% to 70 cents or so, then the calls will expire worthless but the puts will be worth $430 each for a total of $2,580, or a net loss of (coincidentally) $430. If the stock goes down below ten cents, we will just about break even.

If the data are good and the stock goes up to $14—we don’t think $25 is likely this time until there is actual FDA approval, investors having been burned once—then the puts expire worthless and the calls will be worth $900 each for a total of $7,200, or a net profit of $4,190. If the stock reachs $18, then the calls are worth $1,300 each for a total of $10,400 (net profit of $7,390).

Of course, the risk is that there will be some sort of grey result that only modestly boosts or hurts the stock. For example, there might be a delay in the release of the data, or the results might be fractionally below 22% such that the company elects to apply for approval again anyway based on these results, thus delaying a resolution. Worst case is the stock going up from the current $3.50 to $5, in which case both the puts and calls expire worthless.

Our bet, however, is that even if delayed, the data will be available by mid-August and that any result other than an unequivocal 22% survival edge for the Provenge arm will tank the stock. (And, of course, good results will send it soaring.)

This is a relatively unusual situation where the timing of an event that is likely to have a huge effect on the stock price is known about beforehand: you don’t get better straddle opportunities than this. The way we see it, we are buying a 50%(?) chance to make four-to-seven thousand dollars at a probable risk of $400…pretty attractive odds.

Previous DNDN-related posts:

• BUY Dendreon (DNDN)—potential cure for cancer (10 Jan 07)
• Dendreon (DNDN) update #1—FDA agrees to fast-track review for Provenge (16 Jan 07)
• Dendreon (DNDN) update #2—FDA appoints advisory committee to review Provenge (2 Mar 07)
• BUY Dendreon puts and calls—straddle play (9 Mar 07)
• Dendreon (DNDN) update #3—Feuerstein’s revenue projections (23 Mar 07)
• Dendreon (DNDN) update #4—reviewing the bidding heading into the AC meeting (28 Mar 07)
• SELL Dendreon (DNDN) puts and calls—AC recommends approval! (30 Mar 07)
• Dendreon (DNDN) update #5—we got lucky (30 Mar 07)
• Dendreon (DNDN) update #6—+488% in four months! (10 Apr 07)
• Dendreon (DNDN) update #7—any buy here is speculative (11 Apr 07)
• Dendreon (DNDN) update #8—intelligent debate on Provenge (12 Apr 07)
• Dendreon (DNDN) update #9—why Provenge should be approved (26 Apr 07)
• SELL Dendreon (DNDN)—FDA issues approvable letter (9 May 07)
• Provenge and the FDA—frog meets scorpion (25 May 07)
• The Provenge ad in the Washington Post (15 Jul 07)

BUY TO COVER Wachovia (WB)

Wow.

Amid the sturm and drang of the bailout vote and the market crash after the U.S. House decided “no,” an important subplot today was the demise of Wachovia (WB), the fourth-largest USA bank, shares of whom we have been short intermittently since last November.

Although WB stock traded as high as $24/share intraday just ten days ago on misplaced optimism, it became evident over the weekend that the weight of the toxic paper WB acquired when they purchased Golden West two years ago—compounded by bad loans and other inauspicious financial transactions the company made on their own—were dragging Wachovia into insolvency. Following emergency weekend negotiations, Wachovia issued a joint announcement with Citibank (C) this morning detailing an agreement for C to purchase WB’s retail bank, corporate and investment bank, and wealth management businesses for $2.1B.

As part of the transaction, Citibank will assume Wachovia’s $53B in senior and subordinated debt. Citi will acquire more than $700B of assets of Wachovia’s banking subsidiaries, and related liabilities. The catalyst for the deal is a government guarantee (reportedly U.S. Treasury officials inveigled Citibank to participate in the negotiations). The Federal Deposit Insurance Corporation (FDIC) has agreed to provide loss protection in connection with approximately $312B of mortgage-related and other Wachovia assets. Citibank is responsible for the first $42B in losses; the U.S. Treasury is responsible for anything beyond that. U.S. taxpayers get $12B in preferred stock.

WB will be left with their minor player brokerage business and their Evergreen Asset Management subsidiary. The deal was announced just before the market opened  and it was unclear how investors would value the remaining Wachovia entity. The stock opened at $1.26—down from the $10 close last Friday—and rose as high as $5 before crashing down with the rest of the market following the failed bailout vote, sinking as low as one cent(!!) before settling at $1.84.

Wish we had been nimble enough to score that one cent price, but with the effective demise of Wachovia here, there’s no reason to maintain this short position, and we are putting in a buy-to-cover limit order for tomorrow at $3.68 (twice today’s close). This will result in us covering our short position if WB opens at or below $3.68 tomorrow. If it opens higher, then we will still cover if it trades at or below $3.68 during the day tomorrow. If our position is still open after trading closes tomorrow, then we will reconsider what to do after the close.

SELL Oilsands Quest (BQI)

Well…sorry to see this one go. Those of you who have been following BQI along with us here know that we really like this company. What they are doing is good work: work that will help

• People on the planet in general, by significantly extending our supply of hydrocarbon-based energy
• North Americans, in making us less dependent on overseas energy
• Saskatchewans in particular, by boosting their economy (and the company has excellent relations with the local natives)
• Management and shareholders, who stand to get rich (or, at least, richer)…in the long run

Plus, of course, the story of how this gets accomplished is intrinsically an interesting one. And it’s always a pleasure to be able to observe competent managers at work.

However…“timing is everything” goes the cliché, and today we are following the lead of the Intelledgement Macro Strategy Investment Portfolio (IMSIP) and dumping everything associated with energy in light of the developing financial crisis. 

As we write. oil is still selling for over $100/BBLS. BQI is a potential goldmine with oil at $60/BBLS…but the problem is that the demand for energy is highly likely to decline here. In fact, it already has: the price of oil has declined nearly 30% in just the last two months. Admittedly from all-time highs that most likely overshot the “true value” of crude (whatever the heck that might be LOL), but we foresee additional demand destruction ahead, and if the market behaves as it usually does, an excellent chance of an overshoot to the down side in the value of oil…and, by extension, BQI. 

For many reasons, we hope to be back here soon. That would mean that the developing crisis is resolved quickly and the world’s economy gets back on a healthy growth path. But be it sooner or later, given the way the wind is blowing, we expect to be back here (or with some successor company who picks up the thread of developing the Saskatchewan oil sands) at a lower price.

We actually hope it is not too much lower, as that would likely only result from a bigtime general downturn. But that risk is large enough to militate selling here.

SELL Transmeridian Exploration (TMY)

We have been reluctant to give up on TMY despite the manifest incompetence of management, near insolvency of the company, and intractability of the their South Alibek concession in Kazakhstan because we have always believed that the underlying value of the oil (at least 67 million BBLS) would eventually justify the extraordinary efforts required to get it out of the ground, given that demand was rising and supply…well they ain’t makin’ any new dinosaurs these days, so what we got is what we got.

Problem is, in light of the developing financial meltdown, we see demand for energy in general—and oil in particular—taking a powder here, for at least two or three quarters and possibly two or three years. Consequently, the underlying value of South Alibek is going to be discounted here and most likely the shaky financing deal with UEG—which values TMY stock at $1.23—won’t be consummated as presently constituted. (We say “shaky” as there have already been problems doing prerequisite preferred stock transactions and note retirements, the deadlines for which have been extended a half dozen times already, most recently Monday.) Without additional financing, there is no way to increase production from the current 1800 or so BBLS/day to the 4000 BBLS/day needed to sustain ongoing operations and service the debt from past misadventures.

This has been a terribly educational investment, in that the ROI is terrible and the lesson very valuable: the best “story”—and TMY had a great story—can be undone by human error and bad luck. TMY is a poster child for the “investing in individual stocks is inherently risky” campaign. We are sorry, on that account at least, to see it go, but there is just no remaining shred of an excuse to hang on here.

SELL Sterlite Industries India Ltd. (SLT)

We still like Sterlite Industries long term. However, while we have been expecting the markets to remain stable-to-bullish through the US presidential elections, last weekend’s move by the federal government to take over Fannie Mae and Freddie Mac—in effect, undertaking potentially $1 trillion in obligations by guaranteeing those failed companies’ obligations—is a wake up call that the market is going to have to attend to some serious issues sooner rather than later. Accordingly, the risks just got a lot higher that a lot of air is going to be deflated from the economic activity balloon, and a mining company such as Sterlite has nowhere to hide in such circumstances. We are in the red here, but we expect to have a chance to get back in here at even lower levels.

SELL Élan (ELN)—AAB-001 graded an “F”

ELN researches presented their full Phase 2 findings at the International Conference on Alzheimer’s Disease in Chicago today, and while there were no surprizes—basically, the drug appears to help patients who are not carriers of the ApoE4 gene, which means it doesn’t help those most at risk of developing AD—researchers at the conference were unexpectedly negative on the ramifications of the results. In essence, the entire theory the drug is based on—that counteracting amyloid plaques in the brains of Alzheimer’s patients should ameliorate symptoms because these plaques are causing the disease—is now being called into question, as detailed in this report on the conference published by Forbes.

Obviously if eliminating the plaques is not efficacious, then AAB-001 is a blind alley.

ELN is down 20% in post-market trading today (this information was not available until after 4pm) to around $27/share. Given our analysis that without AAB-001 the stock should be worth around $15 or so, we are going to cash in our profits here (that is, at the open tomorrow), as obviously the conservative thing to do is to discount the value of AAB-001 pending further data.

If the market overreacts and drives the price down below $15, we may well jump back in. We still expect the stock should be worth $16-to-$18 by the end of the year, strictly on tysabri.

SELL Ultrashort Oil & Gas ETF (DUG)

OK, time’s up…enough messing around. Losing money when we take a position consistent with our macro analysis but our timing is off or a particular company has problems that we did not foresee is one thing. Losing money betting against the macro is dumb. We are willing to be dumb in pursuit of an intuition up to 10%, but that limit was reached here with yesterday’s close (in four trading days!) so we are hitting the eject button today on this trade. In theory the notion that increased price yields demand destruction sounds good, and a short play will undoubtedly be viable at some point down the road…but for now, until there is hard evidence of demand moderating to south of the 85MM barrels of oil that the world’s producers can pump at full capacity, we are back to the sidelines (or the long side) here.

BUY Ultrashort Oil & Gas ETF (DUG)

OK, this is against the macro. Medium term, we expect the US consumer economy and the dollar to collapse and precious metals to be the place to ride out the economic storm, and long term with the Asian buildout (after a pause to adjust to the demise of American demand) continuing to drive demand, for commodity prices in general and energy in particular to head north.

At this point, however, the price of oil appears to be way ahead of itself. Demand is moderating (and will moderate more as the US consumer pulls back). While the pace of new supply coming online is slowing, we are not nearly out of oil yet. In the short term, the Fed is not likely to cut interest rates any further—and the ECB is likely to—which should result in a rally in the price of the dollar.

Therefore, we think that $125 oil is unsustainable in the short term, and are looking to ride DUG here for a reverse spike to near the $100 mark, and perhaps below it.

Proshares’ UltraShort Oil & Gas ETF seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas Index^SM.