Cadence: Patient Investors Should Watch Short Sellers Before FDA Decision on Thursday

Includes: AVNR, MNK, POZN
by: Sheff Station

Cadence has a PDUFA [Prescription Drug User Fee Act] date of November 4th for its drug Ofirmev. Investors are anticipating it will receive approval. Ofirmev (intravenous acetaminophen) is a new drug formulation in development for the treatment of acute pain and fever in adults and children. If approved, it would be the the only injectable non-opiod, non-NSAID pain product available in the U.S.

Ofirmed received a complete response letter from the FDA in 2010 and stated in the complete response letter that:

The FDA only indicated that deficiencies were observed during the FDA’s facility inspection of Cadence’s third party manufacturer, which was completed on Feb 5th, 2010. The FDA did not site any safety or efficacy issues, nor did it request any additional studies to be conducted prior to approval.

It is widely expected that the FDA will approve Ofirmev barring any setbacks with regards to the manufacturing facility.

What has happened in the past 3 months is that a large short position in CADX has been accrued. With 48 million shares in the float and 50 million outstanding, there is a short position of almost 10 million shares. That would be a little over 20% of the float.

Avanir (NASDAQ:AVNR), which received an FDA approval on Friday (Oct 30th), had 26% of its float shorted before a bear raid occurred in the final 90 minutes of trading action. This took AVNR shares down from $2.90 to a low of $1.31. The stock traded under $2.60 to close the day at $2.43. A few hours later Avanir's drug, Nuedexta, was approved for pseudobulbar affect and the stock traded at over $5 in after-hours trading.

The same thing happened with POZEN (NASDAQ:POZN), back in April, on the day of Pozen's PDUFA date, and also within a few hours left in the trading day. That stock traded over $11 when the market-makers dropped it under $5 that day as well. They then moved it back up to close it over $10 for the day. A lot of stop losses were triggered and short covering took place in both instances with POZN and AVNR.

What investors need to look at is the potential that CADX could possibly be taken down similar to the other stocks I mentioned above because of its large short position going into the approval date. The short position has increased 2 million shares since July as it has moved higher into the decision date. The 10-day average volume has only been about 433,000 shares, so any significant volume (outside of a bear raid) could cause some short covering and cause the stock to appreciate in share price. Based on the short position it would take approximately 22 days to cover. The volatility could create good fortune for opportunistic investors who have potentially low bids in an effort to acquire some lower cost shares.

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In the remaining days until an approval decision is given, the price action in CADX will be of special interest to investors. In September, Wedbush Securities started coverage on CADX with an outperform rating and a $12 price target. Investors will be watching Cadence Pharmaceutical closely in the days to come as a decision either way is imminent. Thursday the 4th of November is fast approaching.

Disclosure: Long CADX but position could change at any time