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Heisenberg Principle is a full time private individual investor and trader.
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  • Why The Feuerstein-Ratain Rule Doesn't Apply To Celsion

    Shares of Celsion (NASDAQ:CLSN) took a hit in Friday in part over concern over what the self-named "Feuerstein-Ratain Rule." Essentially this rule states that 120 days before the release of Phase III data for cancer drugs that if a company has a market cap under $300 million, the trial will be a failure. The research behind the rule spans 10 years and finds 21 such examples and in each of the 21 cases the Phase III trial failed or a 0% success rate. At the same time, for companies with market caps over $1 billion, 21 actually succeeded out of 27 for a 78% success rate. The theory behind the rule is that companies with a market cap under $300 million would be bid up by smart investors and institutions if they had a realistic good chance of showing positive Phase III data and that those trading over $1 billion trade there before smart investors and institutions already know the odds of success are high and bid up the prices of the stocks of those companies there.

    The problem with that theory: the reason why those companies who are successful are "bid up" is because investors typically well in advance have already been given the crown jewel: results of Phase II data in their hands in which to analyze and make such an intelligent, reasonable determination about the odds of success and the market size for the drug. In CLSN's specific case, however, 11 regulatory bodies around the world including the FDA were so confident, so excited, and so encouraged by CLSN's Phase I data, they were allowed to skip the Phase II trials entirely and move onto Phase III. If the Phase III data is positive, CLSN may very well indeed rise to a market cap of over $1 billion, which would ironically support the theory behind the Feuerstein-Ratain Rule since CLSN's Phase III trials are really only its second Phase, which typically the Phase that gives investors enough information to bid up (or not) biotech stocks whether you refer to that Phase as "Phase II" or "Phase III."

    If and when CLSN reports positive Phase III data, perhaps it won't be a violation of the rule at all. Perhaps the rule would make more sense if it states that a company's market cap foretells its odd of success for its third Phase, rather than Phase III, given that the whole basis for this rule is investor knowledge of the results of a second Phase, which is always much larger in trial population size than Phase I. In CLSN's unique case, there was no Phase II and therefore no chance to get that post-Phase-II rally in market cap that is the very foundation behind the rule. In short, I believe investors got spooked and confused by the analyst downgrade plus the mischaracterized generalization of this rule.

    As my previous two articles here and here have shown, I believe positive data conclusions about Phase III is already easily calculable as highly probable degree, therefore CLSN will therefore rise again like a phoenix from the ashes despite the "Feuerstein-Ratain Rule" since the rule, at least as it is being presented, would not apply to CLSN.

    Disclosure: I am long CLSN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: CLSN, long-ideas
    Jan 20 6:33 AM | Link | 11 Comments
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