As a Chartered Accountant, I cannot provide specific investment advice. However, the saga I am going to relate can only be construed as a cautionary tale in investing. I don’t think that any of you can construe this as advice.
The saga began in the fall of 1996 when I was made aware of a biotech stock out of Calgary called Resverlogix (“RVX”), RVXCF.PK in the US. The company was working on a drug called RVX-208, which was meant to turn on Apolipoprotein A-I (“ApoA-). ApoA-1 is the major protein component of high density lipoprotein (HDL) in plasma. The protein promotes cholesterol efflux from tissues to the liver for excretion. In English, ApoA-1 helps increase functional HDL (the good cholesterol) to hopefully remove plaque from the arteries by reverse cholesterol transport (cholesterol is removed from the arteries and delivered to the liver for excretion).
With my eyes wide open that biotechs are very risky, I dipped my toe into RVX, as the concept denoted above was very novel and extremely exciting. In addition, the CEO Don McCaffrey had stated his intention to sell RVX pre-clinical, which in my mind removed substantial biotech risk.
In early December 2006, Pfizer (PFE) announced that its cholesterol drug Torcetrapib has failed its clinical tests and Pfizer stock plummeted. If I had done more than tip my toes in RVX, I would be writing this blog from the Turks and Caicos, since RVX, at this point seen as a possible successor for Pfizer and fueled by rumours out of Calgary of a sale, saw its stock go from $5 to $30 within about ten weeks. Helping fuel the fun was a press release that RVX had hired an investment banker to help with a potential sale. Not a bad profit for a ten week investment. It should be noted that rumours had always abounded on the various stock bulletin boards since day one on RVX, which was a problem in itself.
What follows is the roller coaster ride from hell. The stock went from $30 to $13 in two months as no deal emerged. It then went from $13 to $9 by August of 2007, then all the way down to $2.30 by the end of the October 2008 crash. I blew most of my gains on the initial huge run by buying back shares as I thought the price was a bargain.
The reasons for the dramatic stock drop range from RVX not receiving any offers (at least any made public), to Big Pharma backing off multi-million and billion dollar purchases due to numerous drug failures to probably the most significant, financing issues.
Anyone ever involved with a small-cap stock and most especially a small-cap biotech stock is aware that financing is an issue. RVX needing financing ended up doing a “death spiral financing”. In general, a death spiral financing is a process where convertible financing used to fund a small-cap company can be used against it in the marketplace to cause the company’s stock fall dramatically and can lead to the company’s ultimate downfall.
Wikipedia states that
Under the typical “death spiral” scenario the holder of the convertible debt initially shorts the issuer’s common stock which often causes the stock price to decline at which time the debt holder converts some of the convertible debt to common shares with which he then covers his short position. The debt holder continues to sell short and cover with converted stock which along with selling by other shareholders alarmed by the falling price continually weakens the share price making the shares unattractive to new investors and can severely limit the company’s ability to obtain new financing if the need arises.
What is interesting is that while RVX stock stayed low, the science moved along tremendously with positive Green Monkey testing and good results in Phase 1B/2A in August 2009. RVX then moved ahead with parallel tests called Assert and Assure announced in October 2009. These studies were to be chaired by Dr. Steven Nissen, chairman of Cardiovascular Medicine at the Cleveland Clinic, and the principal investigator was Dr. Stephen Nicholls also of the Cleveland Clinic. The participation of the Cleveland Clinic, and in particular Dr. Nissen, was considered to be important confirmation that RVX had a potential blockbuster drug, since the Cleveland Clinic and Dr. Nissen would not waste their time or reputation unless they felt there substance to RVX-208.
The primary endpoint of Assert was to determine if RVX 208 would produce an increase in ApoA-1 and to examine safety and tolerability. Assure was going to use a process called Intravascular ultrasound (“IVUS”), which is a medical imaging using a miniature catheter that can detect changes in plaque to examine early lipid effects and atheroma plaque on the coronary vessel.
Assert moved ahead quickly, dosing patients ahead of schedule in late 2009.
What was extremely interesting to investors was that at the beginning of 2010, even though the stock price of RVX was only $2.40, the science had moved at a rapid pace and it was assumed following the completion of Assure that, if successful (a big if), there would be a bidding war for RVX with estimates in the range of $30-$60. Of course, if Assure failed, RVX would most likely fall to less then $1.
I personally felt that $2.40 was a ridiculously low price for a drug with a $10-$20 billion dollar potential and purchased more shares at that point; score one for my investing intelligence.
The stock floated around the $2-$3 range until out of nowhere in March, the stock took off up to $7.50, propelled mostly when Ellen Gibson of Bloomberg penned an article March 5th saying
Resverlogix without a marketed product, may accomplish what Pfizer Inc. the world’s biggest drugmaker, couldn’t: Creating a new medicine that fights heart disease by raising so-called good cholesterol.
There was some additional publicity that followed and the stock jumped around in the $5 to $8 range.
In May 2010 it was announced that the Assure trial would be delayed as RVX was having trouble recruiting patients (the test required a patient to have a heart attack within the past four weeks). As a lay person, it seemed that Assure was poorly planned by the Cleveland Clinic, since finding a person with a heart attack within four weeks is a onerous task, let alone the fact that the average person who just had a heart attack wouldn't want to have an IVUS catheter stuck in them twice. But, since Assert had finished early, the researchers could now use what they learned in Assert to plan Assure; nevertheless, many months were wasted.
The market did not appreciate the delay in Assure and the stock price fell from $6.80 to $2.80 in late June.
I cannot recall the exact date, but it was announced or became known that RVX would not present the Assert data until November 17th at the American Heart Association (“AHA”)conference. Most importantly, RVX had been granted a Late Breaking Trial Session to present this news. These session slots are supposedly only provided to those companies providing significant trial results, whether good or bad.
At RVX’s Annual General Meeting in early September, Dr. Nicholls flew in and spoke. I was not at the AGM and Dr. Nicholls could not speak about Assert results, but those there felt his appearance and apparent enthusiasm for RVX 208 bode well for the AHA presentation.
As noted above, Assert was more of a safety and toxicology trial and therefore investors were hoping for something greater than safety to have been found during Assert, possibly some indication of plaque regression happening, a plausible conclusion considering that Assure was going to be changed to incorporate what was learned in Assert to an endpoint of reflecting plaque regression.
After the AGM, the stock rose from the high-2s into the mid-4s over the next several weeks as all investor attention was directed towards the November 17th AHA presentation. It was not really known or clear to many investors that Merck (MRK) would also be presenting results on a HDL drug they were working on known as Anacetrapib, apparently from the same family of inhibitors as Pfizer's Torcetrapib which, as noted above, had failed miserably. Thus, most investors were not looking for much from them.
A cause of concern for RVX investors from August onwards was that the short position grew from 440,000 at July 31st to 1,770,000 at September 15th and then ultimately to 2,160,000 at October 31st. While generally hated for their means and methods, shorts are considered to be fairly sophisticated investors and an increase in shorts prior to the most significant trial results in RVX’s history was reason to raise an eyebrow. I for one was could not understand this, but figured it was perhaps related to the people who had financed RVX the previous year, using shorts as a hedge on their warrants; either way, I was unsure and wary of this increase.
It should be noted that because RVX was part of the late breaking sessions, there was an embargo on any information being released prior to the presentation and RVX would lose their presentation spot if any information was released.
I for one anticipated an increase in RVX’s stock price as they approached the AHA with hopes of positive results that would put them one step closer to Assure testing, and the small possibility that the Assert results would bring an offer from Big Pharma.
Not much happened until the week of November 14th, a week I will never forget and what lead to the title of this article.
Starting Monday, on anticipation of the AHA presentation, RVX ran from $5.72 to a high of $6.98 around 10:30 on Wednesday and then settled at $6.70 or so for the rest of the day until 3:30, at which time, out of nowhere, the stock dropped to $4.50 on significant volume.
Needless to say, it was a shocking last half hour of trading and rumours on the stock boards ran from a leak to the shorts pulling a “Bear Raid”, a tactic in which shorts try and push the stock down to cover their position. This “Bear Raid” theory seemed to make the most sense at the time, since the shorts had a large position with RVX’s presentation now due the next day at 12:30pm or so. A leak did not seem to make sense based on the embargo by the AHA.
Apparently the embargo on the late breaking sessions at the AHA on Wednesday was lifted first thing Wednesday morning, since early the next morning Bloomberg reported that
Resverlogix Corp.’s most advanced experimental medicine, a cholesterol pill called RVX-208, failed to raise levels of a protein thought to help clear plaque from arteries in a study.
The Bloomberg report was followed by an RVX press release that said the
ASSERT trial data demonstrated that the three key biomarkers in the reverse cholesterol transport (RCT) process showed dose dependant and consistent improvement.
Following the RVX release, the Dow Jones reported
A study involving a new type of drug being developed by Resverlogix Corp. (RVX.T, RVXCF) showed it failed to meet a goal of boosting levels of a specific protein the drug was designed to raise.
To put the final nail in the RVX’s coffin for the day, Merck reported tremendous results in increasing HDL and also reducing LDL, the bad cholesterol.
The stock opened at around $5.30 with investors obviously thinking that the shorts had caused the prior day's stock price drop, but after the press releases, the stock quickly dropped to a low of $3.35 by 9:45 am. At this point, investors were clearly not sure what to believe - the headlines by Bloomberg and Dow Jones or RVX’s press release - and the stock rebounded to $4 by the time of RVX’s actual presentation. From all accounts the presentation was very factual by Nicholls, with the emphasis that the primary endpoint of Assert being a significant % change in ApoA1 was not achieved, and RVX did not achieve statistical significance. Supposedly, to be statistically significant the p (probability value) would have to be less than 0.05 and RVX’s was 0.06.
Following the presentation, RVX’s stock slide to $2.73. On Thursday it slid to $2.14 before rebounding on Friday to $2.34.
Notwithstanding the fact that I probably will need RVX 208 to combat the heart attack symptoms this experience caused, the story still has more twists and turns.
Supposedly the slides for the presentations were available online prior to Nicholls' presentation, and researchers, in disclosing conflicts of interest, were paid by both Merck and RVX. The cold cut statistical significant comments made by Nicholls were now buffered in a RVX conference call discussing that RVX 208 worked well with statins, the numbers for HDL alpha particles and large HDL was promising and if the trial had continued longer, it may have become statistically significant. More importantly, he made a couple comments that RVX-208 could have a “profound effect” on reducing plaque volume. It was clearly more a “could” than a “would”, but a far more positive spin than the presentation.
The bottom line was mass confusion, for both the layman and the educated scientist, and a huge paper or actual stock losses for RVX shareholders.
In the bloody aftermath (besides the obvious - I should have sold the day before the AHA, although I was going for a home run here and would accept a strike out) came a more detailed analysis of RVX 208 and Merck’s Anacetrapib. The analysis ranged from optimism for Anacetrapib to comments that the HDL levels were out of line for nature, implying it may never achieve clinical success.
Meanwhile, RVX, which created a significant amount of its own problems by having an endpoint that appeared to be somewhat meaningless and/or not having a longer trial period (as the trending implied that RVX 208 would have achieved statistical significance with a longer trial), made comments in medical publication, including the discussant for the trial, Eliot Brinton, saying that
a drug like RVX-208 “that has a modest effect on HDL levels might have a large clinical effect.
MedPage Today quoted Elliott Antman, MD, professor of medicine at Harvard Medical School (a very well respected researcher, according to a doctor friend of mine) as saying
The important thing that we saw here with RVX-208 was the dose response.That means that something is happening with the drug. I think that the dose response trumps P-values.
Following the AHA debacle, RVX management appeared to retreat into the RVX bunker. They finally resurfaced on November 29th with a two pronged attack. At market opening they issued a press release stating that based on novel findings from the Assert trial they were filing a new patent for novel dosing combinations of RVX-208 and leading statin therapeutics. Later in the release, RVX states the
effects seem most efficacious in the leading statins, being Pfizer’s Lipitor and Astra Zeneca’s Crestor.
RVX also hosted a live teleconference on the 29th in which Don McCaffrey addressed many of the issues surrounding RVX. McCaffrey spoke with confidence about RVX and specifically went after the media and Merck. McCaffrey reported that RVX was on track for the Assure trial, presented a Cleveland Clinic press release about RVX saying that “new drug may clear plaque from arteries” and addressed the liver enzyme issue.
More specifically, he repeatedly made reference to Merck’s 138% increase in HDL being a meaningless number as it is HDL not leaving the system and being retained and has no effect on chronic plaque regression. He also clarified that in regard to the liver enzymes, the liver signal ALTs are only a liver marker and not injury on its own. He stressed that only when ALT’s rise in conjunction with Bilirubin are there liver injury issues. McCaffrey stated that the changes in liver markers are in fact a positive sign, as they are indicative of a change in the liver and very possibly plaque regression.
In addition to the press release and conference call, McCaffrey was interviewed on BNN (Canada’s equivalent to CNBC) coming off as confident in RVX. The market turned on a dime. From a low of $1.80 on November 25th, the stock rebounded to as high as $3.78 on December 1st. However, with no further news or press releases, the stock price has reversed and is currently sitting at $2.26.
What is a non-scientist to think? At the end of the day, RVX’s stock price was hit so hard that it may cause severe financing issues in the future. Some may say that, though accurate in reporting, RVX did not achieve statistical significance, the Bloomberg and Dow Jones writers went for headlines instead of researching the facts and that RVX does indeed have a drug that Big Pharma wants, and that Big Pharma will either buy it or partner with RVX. That may or may not be correct.
I am not sure there is a moral to this story; like I said, it was a saga - a saga that is ongoing and I guess, if anything, a cautionary tale about investing in biotechs specifically and investing in general.
Disclosure: I am long RVXCF.PK.