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We've been seeing some pretty unusual trading activity in the cancer drug developer Celldex Therapeutics (NASDAQ: CLDX), which faced a massive selloff after the release of Q4 2012 earnings that brought the stock to ~$9.60/share in early trading on Thursday. Minutes later, the move was completely erased. The next day (Friday) we saw the stock move over 17% higher by the closing bell, putting it right at its 52-week highs. What happened here?

To analyze this confusing movement, the first thing we have to do is figure out why the earnings report provoked an initially negative reaction.

For the quarter ended December 31st 2012, Celldex reported a net loss of $16.8 million, or a net loss per share of $.27. These losses were just a bit higher than the average expectation of $15.6 million in losses, although this was blamed on increases in the company's R&D budget.

It's also worth noting that a jump in the company's royalty proceeds put quarterly revenue at $3.65 million - a bit higher than expectations.

All in all, these numbers were not that vital to the company's long-term success. Celldex is a 763 million dollar company, and the bulk of its valuation is based on the market potential for its flagship drug Rindopepimut and CDX-011. This is what the market should (and does) ultimately care about.

Rindopepimut (formerly known as CDX-110) is being developed as an immunotherapeutic treatment for glioblastoma, specifically targeting cells that express (or "turn on") a gene known as EGFRvIII.

CDX-011 is another immunotherapy that targets a gene/protein known as GPNMB, which has been linked heavily to breast cancer, melanoma, and glioma. While it's currently focusing on the breast cancer indication, GPNMB allows for an easy expansion into the melanoma and glioma indications as well.

YTD gains on CLDX just before the earnings announcement were about 60%. Considering that CLDX was at the highest point it had been in years, it's natural that some people would want to take some chips off the table (which could explain the short-term selling we saw right after the press release) but this was countered by a buying spree the next day.

While the CLDX pipeline has enormous potential in the long run, I think that the rally in CLDX is getting too strong to offer a low risk/reward play in the short run. The observation that the stock has been mostly flat this week also implies that the rally may be getting tired, and ready for a pullback. Given that we may not see additional news or bullish support from outside parties for a while, CLDX has yet another reason to run out of steam.

In terms of catalysts, Celldex investors are still awaiting completion of enrollment in ACT IV. This is the pivotal Phase III trial that would ultimately allow for the submission of the rindopepimut BLA.

This would set the company on track to produce interim data in mid-2014, and a potential BLA filing in 2015. Meanwhile, CDX-011 is starting a trial that might be given accelerated approval if lucky.

While CLDX has major catalysts down the road, the short/medium term looks too neutral for me to trust this year's 76% move. With overbought conditions in many areas of the biotech sector and overtly bullish speculation on CLDX, I think investors who are interested in playing the Rindopepimut catalysts may want to hold off on additional (or new) accumulation until we see a dip in share price.

Source: What's Going On With Celldex?