Speculating in the stock market can lead to either tremendous gains or calamitous results, often the latter. Any investor that lived through the dot-com bubble knows this truism all too well. As such, my personal trading strategy attempts to straddle the line of demarcation between pure speculating on the one hand, and investing in the other. In this way, I aim to benefit from the healthy gains in volatile, speculative stocks, but not their woeful downside.
With this strategy in mind, I am always on the lookout for two kinds of companies when putting capital to work: 1) Companies that are on the cusp of becoming investment-grade, but are not quite there for some easily discernible reason; 2) Clear-cut bubbles that can be entered and exited at well-defined times. Using these two criteria, I believe the following three companies can be gamed for their tremendous upside potentials by investors and speculators alike.
1) Hemispherx Biopharma (HEB). Hemispherx's New Drug Application for its flagship product Ampligen® is scheduled for review with the Arthritis Advisory Committee on December 20, 2012, and the review should be completed by February 2nd, 2013. Ampligen is an experimental anti-viral, immunotherapy administered intravenously for the treatment of chronic fatigue syndrome (CFS). Previously, the FDA rejected Ampligen in December 2009 as a potential CFS treatment due to a lack of clear efficacy in PIII clinical trials. As such, the FDA requested Hemispherx for a new round of clinical trials to address this efficacy issue prior to a resubmission. Instead of performing new clinical trials, however, the company focused their efforts on re-analyzing the data in their previous PIII trials. Specifically, the company used a repeated measures analysis of covariance design to examine how a patient improves against his/herself (intra-patient) while on Ampligen in regards to exercise tolerance. The previous analysis compared patients on Ampligen to a placebo group (inter-patient). The main take away from this reanalysis, published in the prestigious journal PlOS One, is that patients receiving Ampligen improved their placebo-adjusted exercise tolerance by 21.3% (p = 0.047) over a 40-week period, and this improvement is medically significant. The main crux of Hemispherx's pitch to the FDA will therefore be that there is no specific treatment for CFS/ME at this time, and Ampligen provides a statistically significant (albeit marginal) for patients suffering from this debilitating disease.
While Hemispherx investors may not like the negative conclusions drawn by analysts predicting another rejection, I believe this noise doesn't matter in terms of profiting from this stock. Nearly all biotechs show a considerable run-up in PPS prior to their PDUFA date, and Hemispherx should be no different. Last time around in 2009, HEB ran up over 400% on approval hopes, only to dive immediately after rejection. Presently, the stock is trading in a tight range of 70-80 cents, and should climb to at least $2 a share prior to the February 2, 2013 date. Moreover, the stock is showing strong support at 0.75, so I believe this is a fairly safe entry point. HEB is thus a strong buy for me right now, although I would caution that another denial is more likely than not. This downside risk of holding through the PDUFA date is therefore too high for the intelligent investor. Overall, a solid trading strategy to profit from HEB is to buy in at these levels, hold for the inevitable pre-PDUFA run-up, and subsequently exit before February 2nd, 2013. This strategy should yield a minimum 30% gain, if not much more, in only a few short months.
2) ACADIA Pharmaceuticals (ACAD). ACADIA is a biopharmaceutical company focused on developing small molecule drugs that address unmet medical needs in neurological and related central nervous system disorders. Their flagship product candidate is pimavanserin, a selective 5-HT2A inverse agonist aimed at being a first-in-class treatment for Parkinson's disease psychosis (PDP). The story surrounding pimavanserin, however, is a tad murky. Previously, pimavanserin failed the first PIII trial (Study -012) due to a high placebo response, leading the company to discontinue the second PIII 3 trial (Study-014) early. A closer inspection of their data nonetheless yielded some intriguing discrepancies between treatment centers inside versus outside of the United States, giving management new hope. Namely, the high placebo response was primarily observed in treatment centers outside the U.S, where standards of care are lower. These discrepancies led the management to conduct a new PIII clinical trial (Study-020) that was conducted only in the United States, and narrowed the primary endpoints with the blessing of the FDA. During the company's conference call on Nov. 5th, management stated that top-line data from the Study-020 (ClinicalTrial.gov Identifier: NCT01174004) would be announced later this month.
Analysts place roughly a $300M per year market valuation on pimavanserin, should it receive final FDA approval. Given that Acadia's market cap in only $125M, FDA approval would certainly cause the stock to move much higher, and investors are taking note. However, I do not like betting on risky prospects like FDA approval for any drug, much less one with an already unsuccessful PIII trial hanging over its head. Even so, there is a clear-cut opportunity here to profit from pimavaserin with limited downside risk. The stock is currently range bound between $2.20-2.40, and appears to be forming a solid base in anticipation of the company announcing a firm date for the release of its top-line results for pimavanserin. Once Acadia announces the date, I believe the stock will easily run up to $2.80-3.00, if not higher. As such, I believe a great entry point for this stock is $2.20-2.30, and should be a nice way to capture a 20% gain with limited risk. While I believe the PIII results will be positive this time around, I would caution traders from getting greedy and holding through the data announcement. The data announcement could easily be a "sell the news" type situation.
3) Vringo (VRNG). Vringo recently won its patent lawsuit against Google (GOOG) et al. in the Eastern District of Virginia Court, and was awarded $30M for past infringement and a 3.5% running royalty rate. Because investors were expecting a much higher amount for past infringement, the stock promptly plummeted immediately after the verdict was announced. Even so, the story is far from over, and this tremendous pullback in the PPS represents an excellent opportunity for strong gains with limited downside risk. Right now, the stock is trading in the low $3's (3.00-3.30's).
I believe the only reason for this low valuation is that the broader market is concerned that the Judge in this case (Judge Raymond Jackson) will ignore the 3.5% royalty rate, and simply extrapolate the Jury's award for past infringement for the next 4 years until the patent expires. Such an award would result in a total award of roughly $150M. If that turns out to be the case, the stock is indeed fairly valued in the mid to low $3 range based on its market cap and share structure. So the downside risk here is that the stock is already fairly valued. The much more likely scenario, however, is that Judge Jackson upholds the 3.5% royalty rate (there is no clear reason why the Judge would go against the jury). Such a royalty rate should yield a total award of between $500-700M, depending on Google's future revenues.
Indeed, Maxim Group's John Tinker has already announced a $10 price target if the royalty rate stands, and any miscalculations by the Jury are corrected by the Judge. The final verdict form should be out within 7 working days based on the noted efficiency of the "rocket docket", and this stock will take off to the upside if the royalty rate is confirmed. If confirmed, I look for the stock to immediately run to the high 4's, mid-5's based on short covering alone, and a continued climb to double digits based on the market giving a higher valuation. How high is anyone's guess, but $10 seems a safe bet with a $500M verdict. Overall, the limited downside is that the stock is already fairly valued due to a low award amount, but the upside from these levels, based on pure valuation alone, is easily 100%. Investors should thus calm their post-trial fears, and let the process work out. The market isn't going to give a higher valuation until the final verdict form is out. So patience is key for Vringo speculators/investors.