Potential Short Trades on Pending FDA Decisions

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The accompanying table presents an updated calendar of expected FDA decisions along with the trailing 52-week stock price change for each company. In addition to higher volatility, the companies with pending FDA decisions tend to perform worse as a group compared to benchmark ETFs in the past two years that I have tracked this index – making the index an ideal candidate for a new short ETF to provide investors with inverse exposure to this underperformance.

Some likely near-term movers on the FDA's decision date calendar for 70 different items include Cypress Bioscience (CYPB) plus partner Forest Labs (FRX) with a pending decision on milnacipran in the treatment of fibromyalgia slated for the end of October (which is likely to be delayed until early 2009) in addition to results from a Phase 3 trial for the drug some time before year-end.

Also, Discovery Labs (DSCO) is not listed on the calendar, but expects to file a complete response to a May 1st FDA approvable letter for Surfaxin by the end of September and expects a Class I review by the agency with a potential decision in just two months.

Another company not listed on the calendar is BioDelivery Sciences (BDSI), which expects approval for Onsolis [BEMA fentanyl] during the first half of 2009 after making modifications to the risk management program it previously submitted as required by the FDA for approval of the high-potency opioid pain medication.

The current slide in shares of Eli Lilly (LLY) could prove to be a good entry point assuming the issues surrounding the delay are minor or just caused by the FDA being understaffed. Analysts are forecasting blockbuster sales for Effient, which could eventually reach $2 billion by some estimates; so approval for the drug is important to fuel the future growth of Eli Lilly in the face of looming generic competition for Zyprexa.

Effient would represent new competition for the multi-billion dollar blood thinner Plavix, which is marketed by Bristol-Myers (BMY) and Sanofi-Aventis (SNY). Given the complexity of the regulatory filing for Effient and the previous three month delay, it appears the FDA probably just needs more time to review the application rather than something more ominous such as requiring additional clinical trials. Also, many companies have faced similar delays by the agency, such as Cardiome's (CRME) wait of over six months for an approvable ruling on Kynapid.

Comments

[User 279269:]

When this stock is valued at $4.10 based on cash holdings alone...
When the initial Phase 3 trials showed a positive response with no side-effects.
When we know that malnicprin already is approved in Europe for years
When we know new data is coming in the next couple months from further Phase 3 trials
When we know the FDA holds a decision that could send the stock soaring
When we know Forrest LAbs is a potential buy-out partner
When we know the stock is trading only $1.50 above its cash value...

Where on earth is the potential short-trade on this stock? From $6 to $5. Are you crazy?

Are you just trying to drive up the short-interest on this stock. We could see $15-20 in 3 weeks...or we might go from $6 to $5....Yeah, I totally see the downside risk.

Idiot.

2008 Oct 14 10:43 AM

[Mike Havrilla:]

You missed the point of the article which is developing a short ETF for the entire group of companies with pending FDA decisions since they tend to underperform their benchmark funds as a GROUP - I have already written positively about CYPB, but it is only one company in the entire group
:
seekingalpha.com/artic...

2008 Oct 14 11:28 AM

[User 279269:]

I understand you are talking about the group as a whole and you make a fair,argument, but your first mention is that of CYPB in a negative light as the FDA decision "is likely to be delayed until early 2009" casting doubt for investors. That is not consistent with you saying you already wrote a positive article. Also, The potential downside risk for CYPB is just not there and if approved would greatly affect my short position in the ETF of these biotechs in the next few weeks. We already have analysts giving CYPB a 70-80% chance of first approval with no delay.

So, on the whole I'd have to disagree with you on the ETF position as many of these stocks are oversold, are recovering, and have potential upside more than down - CYPB is just one example. This stock should be near 8 or 9 right now.

2008 Oct 14 11:39 AM

[Mike Havrilla:]

Good chance to pick up some shares of Cypress Bio today - I bought some around $5.40 - looks like the delay will be minor as FDA expects to decide in a "matter of weeks"

2008 Oct 21 03:15 PM