Hollis-Eden: Government Contract Cancellation Could Mean Reorganization

I wrote last week that March 7th would be an exciting day for Hollis Eden Pharmaceuticals (HEPH). This was its fourth tentative award date for a contract to provide Neumune as a potential treatment for acute radiation sickness under Project Bioshield.

The stock was trading heavily yesterday morning, reaching nearly $6, on higher than average volume, before crashing below $3.50 in after hours trading. According to a report from Reuters, the government has canceled the RFP on which Hollis Eden had been bidding.

I wrote last week that I'm little impressed by Hollis Eden’s pipeline, and that in my opinion this contract was a "sink or swim" decision for HEPH. I purchased March 7.5 puts in anticipation of no contract award.

The next few days will be interesting for Hollis Eden. It raised $26M in a secondary offering in November (one of the reasons I was not confident it would get a contract). It will have to release its 2006 10K by March 16th, and will likely report at least $70M in cash. This gives it money to operate for a couple of years (average annual burn rate over the past few years has been $20M), but it is really going to have to focus on getting something into late stage clinical trials, something it has not excelled at. I would expect some type of "reorganization" in the next few months.

My take is this stock has farther to fall (in my post on February 1st I wrote: "Based on my, admittedly limited, chartist skills, I think if this stock closes below $5 in the next couple of days it will drop to the low 4s/high 3s.." The stock didn’t close below 5 until yesterday - I didn’t specify a timeframe - we’ll see if HEPH makes it back to 4 tomorrow). I think I'll hold off a day or so before selling the puts. If it holds a conference call in conjunction with filing its 10K it will be an interesting one.

HEPH 1-yr chart