By Jake King
On the American equity exchanges, trading halts occur primarily for two reasons: news dissemination and extreme volatility. Halting an equity for a pending regulatory decision is often the case in healthcare, including FDA drug approvals (see Isis (ISIS) in October '12), FDA advisory committee (AdCom) meetings (recall Arena (NASDAQ:ARNA) last May), and even major reimbursement decisions (Dendreon (NASDAQ:DNDN) was halted in 2010 as Medicare advisers deliberated over Provenge).
But it's particularly unusual to see trading continue during FDA advisory committee meetings, which are publicly available, easily accessible, and can have a highly material impact on the equity markets. The back-and-forth and day-long style of advisory panels make them particularly conducive to high volatility during a single trading session. For an equity not to be halted during an advisory meeting means major price swings -- and opportunity for traders with a quick trigger finger.
That was the case with Titan Pharmaceuticals (NASDAQ:TTNP) on the 21st of March. It's a name that has garnered significant attention since late in 2012, as the stock traded from $0.75 to $2.50 in less than six months. PropThink contributor and analyst Jason Napodano has covered Titan in detail (see here and here), and he even submitted to a brief interview ahead of the company's advisory panel. On the 21st, despite the volatility that would undoubtedly accompany the day-long FDA Psychopharmacologic Advisory Panel meeting, TTNP was not halted, and trading continued as normal. At the advisory committee meeting, FDA advisers met with company representatives to discuss the benefits and risks of Probuphine, Titan's subcutaneous implantation for the treatment of opioid dependence that goes before the FDA for approval at the end of April. The discussions took place throughout the entire day, roughly nine hours all-in-all, from 8:00 AM to 5:00 PM; as attitudes shifted during the discussion, Titan's stock dropped as low as $1.00 and climbed as high as $1.60 in the trading session.
But what many traders failed to recognize was the clear-cut path to profit during the session, even with the unexpected outcome of this regulatory decision-making process. Coming into the meeting, there were a number of issues that the FDA had outlined in briefing documents released just two days before, issues that were daunting enough to send shares tumbling 50%. It was clear that there were questions to be answered, specifically about the benefit of Probuphine over existing therapies. Thus in recognition of these potential hurdles, investors could reasonably anticipate that FDA panel members would raise numerous concerns, ask tough questions, and in large-part carry an air of negativity throughout the meeting. At the same time, traders should have assumed that, as company representatives, Titan Pharmaceuticals' executives would speak confidently, offer the most rosy outlook, and discuss in-depth the benefits of Probuphine. Based on the traditionally hard-nosed approach of the FDA and the positivity of company sponsors, the enthusiastic and negative attitudes that would move TTNP throughout the day were largely predictable in advance of the panel meeting. Below, we'll look at TTNP's intra-day chart and compare it to the FDA's agenda (see here) for the Probuphine advisory panel meeting. Although the panel strayed on a few occasions, the ongoing discussion was mostly in-line with the planned timeline for the day, which created a relatively simple trading plan.
- 8:20 AM: Sponsor Presentation (Titan Pharmaceuticals). included an introduction, presentation of the background, the medical need for Probuphine, clinical efficacy, clinical safety, and Probuphine's Risk Evaluation and Mitigation Strategy (REMS).
- 10:25 AM: FDA Presentation, including a review of Probuphine's clinical efficacy, safety, similar contraceptive implants, and the REMS.
- 1:30 PM: Open Public Hearing. Primarily persons advocating for Probuphine's availability: addicts, family members, etc. Included comments and stories from patients and potential beneficiaries of Probuphine.
- 2:50 PM Questions to the Committee, Discussion, and Voting. Finished close to 5:30PM.
Below is TTNP's intra-day 5m chart for Thursday the 21st. We've highlighted the most important agenda items/shifts in sentiment at the panel meeting, relatively predictable based on the provided agenda.
- Knowing that the panel would begin with Titan's presentation -- a predictably positive and compelling portion of the meeting -- suggested that a long position at or before the open would make sense. Traders could have ridden that from $1.26 to ~$1.60, a 26% gain.
- Following that, traders should have anticipated the negativity that would purvey the FDA's presentation -- comprised mostly of push-back on Probuphine's risks/benefits -- and taken a short position. Getting short around 10:20 ($1.47) in expectation of the FDA's presentation at 10:25 could have pulled in a fast 18% had traders covered the position, realistically, around $1.20.
- The meeting broke for lunch from 12:05 to 1:00 (note the slim volume and side-ways trading during the break), and following that, discussion of the REMS was more benign than anticipated, which began the rally into the Public Hearing a little early.
- In expectation of compelling testimonies from the public around 1:30PM, traders could have again gone long at approximately $1.30. As the public hearing progressed, shares traded to $1.55, and a realistic exit point may have been $1.47 -- a 13% gain.
- At this point, the most predictable of the day's trading was done. Nevertheless, the risk-tolerant investor, weighing the sentiment of the panel throughout the day and knowing that the program was behind schedule, could have anticipated that the final and most important vote -- "...do the efficacy, safety, and risk/benefit profile of Probuphine support the approval of this application?" -- would not occur by the close. As the Public Hearing wrapped up and the Questions to the Committee got underway, traders could have again shorted TTNP (albeit with higher risk), understanding that TTNP investors would not have an anser to the most pressing question of the day. In addition, most traders were exiting after 3:00PM to avoid getting stuck before the close. Covering opportunistically before 4:00 could have netted another 13%.
The takeaway here is that the positive and negative attitudes that moved TTNP during the trading session were highly predictable in advance of the panel meeting. The first three major agenda items -- Titan's presentation, FDA's presentation, and the Public Hearing -- could have been traded with relative ease and little risk -- it's almost a cookie-cutter strategy given the FDA's pre-released agenda. With the risk of over-simplifying, going long before sponsor and public sections of the advisory committee meeting, and short before the FDA took the floor, would have worked quite well for the first part of the day. Conservatively, traders could have pulled in a 50% return within this single trading session.
Although Titan's non-halted advisory panel meeting was an oddity, being aware of this strategy, the predictability of the FDA and company sponsors, and the unsurprising reactions of traders under this scenario is worth filing away for future reference. PropThink, however, is primarily focused on fundamental analysis; you can read more of our research here, sign up for a free trial of our Premium Subscription, or find the latest takeaway on Titan Pharmaceuticals' development program here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relation ships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.