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Douglas Krohn is a physician in private practice who provides biotechnology analysis. Dr. Krohn employs an evidence-based, peer-reviewed approach to his evaluation of pipeline biotechnology products. He is a graduate of the Albert Einstein College of Medicine, completed his pediatric residency... More
  • How to Spot a Short Biotech Opportunity, Part III 2 comments
    Jun 7, 2010 11:00 AM | about stocks: PARD
    Sometimes when looking at an investigational drug, it doesn’t even matter if the new therapy is going to work or not: even if successful in a pivotal trial, nobody is ever going to use it, and so its data will only be of academic interest.
                    Such were my conclusions when I first looked at Poniard (OTCPK:PARD) Pharmaceuticals‘ picoplatin, a platinum-based chemotherapy agent proposed for use in small cell lung cancer. I had my doubts about whether the drug could really do anything for this indication (my reasons are detailed in the report I have included below), but from the standpoint of predicting whether the stock would ever derive fundamental value from the product, it didn’t really matter: the drug was never going to be able to penetrate the market for small cell lung cancer, and so I viewed picoplatin as little more than a drain on company resources (at least in regard to a lung cancer indication). 
    Were it not for the fact that stocks like PARD often have jumps in its stock price due to positive news flow (marginally useful announcements that trial recruitment has been completed,or that the data safety monitoring board has allowed the trial to continue, etc.), picoplatin and its small cell lung cancer initiative made PARD look like a safe short, if there is such a thing. And, eventually, from the time I first looked in August of 2008, picoplatin and PARD earned a short bias, the most immediate reasons why having been reviewed this past weekend at ASCO.
    I have included my initial report on PARD from August 2008 as a third case study in identifying short opportunities in the biotech sector. Before diving into the report, I have included five basic principles, relevant to the case of picoplatin and PARD, and often relevant to other investigational drugs as well:
    1)      Early and mid-stage trials recruited patients with baseline characteristics more favorable than the pivotal trial. I don’t know that this scenario universally predicts failure for later stage and pivotal trials, but certainly it cannot be used in support of a long position.
    2)      A competitor has a nearly simulataneous trial that is likely to produce better results. If this is the case, the only reason to have a long position at all is because you are playing the binary event of pivotal data release, and betting on positive results. Though this approach might work, it should be recognized that this is a calculated gamble on data release, and not really a belief that the drug has a significant sales potential.
    3)      There are comparable competitors with more convenient formulations.
    4)      The infusion rate of the drug is relatively long, and would thus command a higher CPT code than that of competitors. This, in turn, would put unwelcome financial pressure on both insurance companies and infusion centers that might offer the drug. This is something that those outside of clinical medicine – and, particularly, outside of private practice clinical medicine – might not think about. Rapidly infused drugs (less than five minutes) get lower reimbursements for drug administration than more slowly infused drugs. If two drugs have similar efficacy, but one is pushed right into an intravenous line, and the other one takes an hour to infuse, which one do you think insurance companies are going to want to cover?
    5)      There is emerging importance to health care policy makers of comparative effectiveness, and expensive drugs will not be judged on their efficacy alone, but on the cost of producing a particular outcome. This is already the case in England, where they use what is referred to as the quality-adjusted life year standard, and the writing is on the wall that we might be seeing this soon in the United States. Drugs that add several weeks of life onto one’s life expectancy are unlikely to be covered if their acquisition costs are in the tens of thousands.
    The full report I prepared on picoplatin is included below:
    Small cell lung cancer (SCLC) represents approximately 15% of all lung cancer diagnoses. Though SCLC is extremely sensitive to chemotherapy, and response rates to initial platinum-based therapies (cisplatin, carboplatin) are high, there is a significant number of patients who are refractory to first-line therapy, and a vast majority of patients relapse soon after their response to first-line therapy (which is usually the combination of a platinum drug with either etoposide, a topoisomerase-II inhibitor, or irinotecan, a topoisomerase-I inhibitor). Until recently, options for second-line therapy for SCLC were limited: basic supportive care (NYSE:BSC), which comprises of therapy aimed at the patient’s comfort and palliation, produces median overall survival (OS) rates of approximately 13 weeks. The long-standing alternative to BSC was the combination of the chemotherapy agents cyclophosphamide, doxorubicin and vincristine (CAV), which produced OS rates of about 25 weeks, but was highly toxic. In recent years, intravenous topotecan, a topoisomerase-I inhibitor, has gained approval for second-line SCLC therapy; like CAV, the drug produces OS rates of approximately 25 weeks, but with a far more favorable toxicity profile. Last year, oral topotecan gained approval for the second-line SCLC indication, as it was able to demonstrate similar therapeutic and adverse event profiles as its intravenous formulation. Currently, two important drugs are in phase III trials for use as second-line therapy in SCLC: amrubicin, an anthracycline agent that produces potent topoisomerase-II inhibition; and picoplatin, which is the focus of this paper, a sterically hindered platinum agent that has been designed to circumvent the inherent and acquired resistance patterns to platinum drugs that has proven a great obstacle in the treatment of patients with SCLC. Picoplatin is a bulkier molecule than cisplatin, carboplatin and oxaliplatin, and thus is more resistant to inactivation by tumors producing thiols, and perhaps to inactivation by other mechanisms of both inherent and acquired resistance. Picoplatin is currently being evaluated in the SPEAR trial (Study of Picoplatin Efficacy After Relapse) sponsored by Poniard Pharmaceuticals (OTCPK:PARD).
     
    Arguments in Favor of Picoplatin Achieving Positive Phase III Results
     
    • The dose of picoplatin in the phase III trial (150 mg/m2) has two favorable characteristics that would predict its clinical success: 1) this was determined to be the maximally tolerated dose during the phase I trials of the drug; and 2) the patient population in the phase III trial will have baseline characteristics that would minimize the chances of having an adverse event at the maximally tolerated dose – namely, they will have an ECOG performance status of 2 or less (a worse performance status is an exclusion criterion in the SPEAR trial), and the patients will have only one previous course of chemotherapy (more than one previous course is also an exclusion criterion). It was the phase I picoplatin study, in fact, that determined performance status and exposure to previous chemotherapy as being the two most important factors for experiencing toxicity at the maximally tolerated dose. Since the phase II trial did not exclude patients who had had multiple chemotherapy courses, it might be anticipated that the side-effect (and efficacy) profile in the phase III trial will be even more favorable.
     
    • The side-effect profile of picoplatin is likely to be similar (or improved) in its comparison to intravenous topotecan, oral topotecan, and intravenous amrubicin. Like most cytotoxic agents, picoplatin has a relatively high rate of toxic side-effects. However, in its mid-stage trials to date, its rate of toxicities is very similar to oral and intravenous topotecan and amrubicin: of these agents, picoplatin has the lowest rate of Grade IV neutropenia (14%, as opposed to about 33% for toptecan and 83% for amrubicin); picoplatin has a similar rate of Grade IV thrombocytopenia as the other agents (Grade III/IV combined of 33%); and a lower rate of anemia (18% vs. 25-33% for the other agents).
     
    • Picoplatin appears to effectively bypass the thiol-mediated inactivation associated with platinum-resistant tumors. One of the principal mechanisms of platinum resistance in SCLC is decreased accumulation of the platinum drug in the tumor cytoplasm via inactivation by thiol-containing compounds, and subsequent export from the cell. It has been shown with cisplatin, carboplatin and oxaliplatin that increasing levels of glutathione, glutathione S-transferase, and metallothionein decrease the activities of these drugs. Picoplatin, on the other hand, has been demonstrated to operate more or less independently of these thiol compounds. There is one notable exception, however: though picoplatin can overcome inactivation by increased metallothionein levels, SCLC cells begin to produce more metallothionein upon exposure to picoplatin and, over relatively short periods of time, picoplatin is less able to circumvent thiol-mediated inactivation.
     
     
    Arguments Against Picoplatin’s Clinical Efficacy and Adoption
     
    • Picoplatin is unlikely to produce phase III results with efficacy as impressive as those likely to be produced by the on-going amrubicin phase III trial. Mid-stage studies with amrubicin suggest that the drug can produce a median OS of 40 weeks (9.4 months) as second-line therapy for SCLC. Interestingly, the phase II amrubicin trial appears to have very different clinical benefits depending on whether the patient has refractory disease (disease progression less than 60 days after completion of first-line chemotherapy) or sensitive disease (disease progression more than 60 days after initial chemotherapy). In the refractory group, amrubicin produced a median OS of 24 weeks (5.7 months), which is similar to both topotecan and picoplatin in phase II; and in the sensitive group amrubicin produced a median OS of 47 weeks. But Pharmion, the manufacturer of amrubicin recently acquired by Celgene, has made a clever change in patient distinction in the phase III trial: refractory disease will now be defined as progression less than 90 (and not 60) days after initial chemotherapy (the same as in the SPEAR trial). What this means from a practical standpoint is that those patients who progressed after day 60 but before day 90 (who were considered “chemo-sensitive” in the phase II trial) will now be considered refractory – however, they will bring their favorable survival characteristics (median OS of 47 weeks) with them into the refractory group. Meanwhile, those who progress more than 90 days after initial chemotherapy – who were always considered sensitive, even in phase II – will retain their favorable characteristics. This should result in phase III data in which sensitive patients still have equally favorable survival statistics on amrubicin, while refractory patients “do better” because of the change in classification criteria. The SPEAR trial and the phase III amrubicin trial have another distinction that favors amrubicin over picoplatin: the SPEAR trial did not exclude mixed-type SCLC/NSCLC from the study, whereas the phase III amrubicin trial did. This was not a wise move on the part of PARD, as mixed-type SCLC does not respond as well to platinum-based drugs (and chemotherapy in general). In any case, it appears that amrubicin is well-positioned to dominate the second-line indication for chemo-sensitive relapses (>90 days), and at least split the market for second-line refractory disease (<90 days) with topotecan and picoplatin.
     
    • The phase II picoplatin study had patient baseline characteristics that were far too favorable to predict a phase III outcome with any accuracy. A personal communication with the investor relations division of PARD revealed that greater than 50% of the patients in the single-arm, open-label phase II picoplatin study had limited (as opposed to extensive) disease. This is a troubling baseline characteristic: only 30% or so of patients with SCLC have limited disease at diagnosis. Considering that both the phase II and phase III picoplatin studies are looking at patients with relapse, and the rate of limited disease in the phase II study was more than 50% greater than the rate of those naïve to treatment, it is clear that phase II looked at a group of patients at an uncommonly early stage in their disease process, which would predict a greater overall survival even without treatment. The phase III study will have a relatively large recruitment (approximately 400 patients), and it is therefore unlikely that such a high rate of limited disease patients will enter the study – as a result, it is equally unlikely the study will result in such positive survival benefits as demonstrated in phase II, especially when it is considered that the control group will be active supportive care, and not a historical norm.
     
    • Though the previous phase II picoplatin trials have enrolled patients with some baseline characteristics that are more stringent than in the phase III topotecan trials, the phase II picoplatin trials had a patient enrollment with characteristics that are less stringent and realistic than those seen in the phase II amrubicin trials. The phase II amrubicin trial, like the phase II picoplatin trial, had a very realistic female representation (23%). The phase II amrubicin trial also had a slightly high, but still realistic, rate of patients with prior radiotherapy (30%) – a personal communication with PARD revealed that the prior radiotherapy rate in the phase II picoplatin trials was equal to this number. But the one statistic which clearly establishes a different set of rigor for amrubicin is average patient age: the phase II amrubicin trial had an average patient age of 67, while the picoplatin (and topotecan) trials had average ages of about 57. Older age is associated with poorer prognosis in SCLC, and so amrubicin was able to achieve its favorable results despite a much older patient population. In addition, most patients with SCLC are over the age of 65, and so only amrubicin has been able to produce favorable data in second-line SCLC in patient groups that are truly representative in terms of both age and gender. If picoplatin’s phase III trial were to have an older, more representative SCLC patient population, there is no guarantee that its results would be as good – this would compound the problem, already stated, that the phase III picoplatin trial is unlikely to recruit as many limited disease patients as it did in phase II. Likewise, if the phase III amrubicin trial has a patient population as young as those for picoplatin and topotecan, you might expect amrubicin to do even better. In addition, the phase II amrubicin trial had a very high rate of patients with brain metastasis at entry (35%), and the drug still achieved good results – so good that brain metastasis is not an exclusion criterion in the phase III study. This speaks to an impressive result in a sick population – and, if replicated in phase III, might secure the indication for those with the most advanced disease.
     
    • Picoplatin is likely to have a significant marketing problem in the second-line SCLC landscape: there will be an oral agent (topotecan) with similar efficacy available as a clinical alternative, and there will probably be an intravenous agent (amrubicin) with superior efficacy also available – this could squeeze picoplatin out of substantial clinical use. Even if it is assumed that picoplatin is approved by the FDA, and it proves to have a survival advantage similar to that demonstrated in its phase II trial, the drug is still going to face the difficult task of finding its own market niche. Topotecan, for example, is already approved for the second-line SCLC indication, and available in an oral formulation that, at the phase III level, has already demonstrated OS data similar to that of picoplatin’s phase II results. Given similar efficacy, cancer patients will choose (by a 9:1 margin) a drug that is orally available, as opposed to an intravenous formulation. Insurance companies and other entities that pay for healthcare, too, will prefer an oral medication and its lesser associated costs, which will put a further squeeze on picoplatin’s market share. For those patients who cannot tolerate oral topotecan (due to chemotherapy-induced vomiting), the drug will still be available intravenously, which will preserve that drug’s market share. At the same time, it appears that amrubicin is probably heading toward a successful phase III trial, and if it replicates its phase II data, it will claim superior survival data – so on one side, picoplatin will be squeezed by a competitor with similar survival data but a more convenient method of delivery (topotecan), and on the other side picoplatin will be challenged by another intravenous drug that may achieve better results. In addition, if both picoplatin and amrubicin put forth positive phase III data, oncologists will probably be drawn to the more rigorous trial design of amrubicin’s phase III trial: amrubicin’s trial is larger than picoplatin’s (620 patients vs. 399), and has a standard-of-care active comparator as its control medication (topotecan), as opposed to basic supportive care.
     
    • Picoplatin cannot overcome two of the most important factors in SCLC platinum-resistance: BCL-2 gene products or CTR1 membrane protein deficiency. Though picoplatin can overcome the decreased accumulation mediated by thiols, that is not the only mechanism of platinum resistance. DNA mismatch repair with the BCL-2 gene product is another mechanism by which tumor cells grow resistant to platinum drugs, and picoplatin is unable to overcome BCL-2-mediated resistance. This is a major limitation on picoplatin’s efficacy, as 77% of SCLC cells express BCL-2. In addition, BCL-2 expression increases upon exposure to picoplatin, which further limits its activity. The most important mediator of platinum resistance in SCLC is decreased uptake through the copper transport membrane channel CTR1; cells that do not express CTR1 cannot take up platinum-based drugs (including picoplatin), and there is no platinum therapy that has been able to bypass a dependency on CTR1. About one in five SCLC lines have decreased CTR1.
     
    • The frequency and length of picoplatin infusions will not be favored by U.S.-based payors, who will balance clinical efficacy with considerations of cost-containment. Picoplatin will become available, assuming it is approved, as a 15 minute intravenous infusion. This route of administration would command a substantially higher cost of administration from insurance companies when compared to the 5 minute infusion of amrubicin (assuming that drug is approved) or the oral administration of topotecan.  In the United States, medication administration, particularly for chemotherapy, receives a Current Procedural Terminology (NYSE:CPT) code that determines its reimbursement. Doctors and hospital centers that give medications that require an administration of 15 minutes or more receive a CPT code that increases their reimbursement for the procedure by 30-50% over infusions that are less than 15 minutes. Picoplatin is a 15 minute infusion, and thus would command a higher reimbursement rate than amrubicin, which is only a five minute infusion, and oral topotecan, which does not require professional administration at all. In addition, picoplatin is given five times per cycle, whereas amrubicin would only be given three times per cycle. Assuming all survival statistics are equal, this would make oral topotecan the preferred drug by U.S. insurance companies – who will bear the direct cost of therapy and thus determine which drug they will cover – followed by amrubicin, with picoplatin and intravenous topotecan representing the last choice from the standpoint of administration cost. For this reason, in the U.S., picoplatin would be at a further marketing disadvantage in comparison to oral topotecan and short-infusion amrubicin.
     
    • Amrubicin seems to be gaining preference in Asian markets (particularly in Japan), where its use is more routine. In addition, first-line therapy in Japan often prefers irinotecan over etoposide, and the more logical agent to follow a irinotecan-containing regimen would be amrubicin. Most of the work on amrubicin in the setting of SCLC has been in Japan, where the drug has already been accepted by oncologists there as the drug of choice for second-line SCLC. Japan and other nearby Asian countries have substantial rates of lung cancer, and so this is a significant segment of the global market that is already leaning heavily toward the adoption of amrubicin in the second-line SCLC setting. There is even speculation that the drug may work better in Asian populations (a concern that is being taken head on by Pharmion, which is conducting its phase III trial for amrubicin in North America, Europe and Australia). Furthermore, irinotecan is rapidly becoming a first-line agent globally – particularly in Japan. As a topoisomerase I inhibitor, it would be expected that irinotecan therapy would cause an up-regulation of topoisomerase II, which would render resistant tumors that follow irinotecan therapy to be most susceptible to topoisomerase II inhibitors like amrubicin. On the other hand, tumors exposed to etoposide, a topoisomerase II inhibitor, would subsequently be rendered most susceptible to topotecan (a topoisomerase I inhibitor). In conclusion, the emergence of irinotecan as a first-line alternative to etoposide is directly assisting the emergence of topoisomerase inhibitors like amrubicin and topotecan in second-line therapy, and leaving less space for a platinum-based drug like picoplatin.
     
    • Picoplatin will face fierce competition in the international (non-U.S.) marketplace not only because of the preference of Asian oncologists to use amrubicin and irinotecan, but because of the economic pressures exerted by the health services of European nations and others with socialized healthcare. The National Health Service (NYSEMKT:NHS) of the U.K. has already determined that intravenous topotecan is too expensive for a drug that adds only a twelve week survival benefit to basic supportive care. The NHS has stated as policy that it will not pay for topotecan as second-line therapy for SCLC. Other nations with socialized medical systems – for example, Holland and Germany – often rule in a similar manner to the U.K.’s NHS. It is reasonable to assume that, in a best case scenario, picoplatin will produce similar survival statistics, at a similar cost, to topotecan – and will likely be rejected by nations with socialized healthcare plans. Oral topotecan, which was just made available in 2008, has not yet been ruled on by the NHS, though might stand a better chance of approval if its administration costs are significantly lower than its intravenous formulation. Even amrubicin, which is likely to maintain a cost similar to topotecan and picoplatin, will not be viewed as a justified expense by socialized healthcare systems unless it can produce significantly better survival data than that seen with topotecan.
     
    • Though picoplatin addresses the issue of platinum resistance, it does not address the issue of topoisomerase resistance. Standard first-line therapy for SCLC combines a platinum drug (cisplatin or carboplatin) with either etoposide (a topoisomerase II inhibitor) or, more recently, irinotecan (a topoisomerase I inhibitor). Exposure to platinum therapy, of course, induces platinum resistance, and that is the chief aspect of second-line therapy that picoplatin addresses. But exposure to etoposide causes tumor to increase its expression of topoisomerase I (the enzyme that etoposide does not inhibit) and decrease its topoisomerase II expression; likewise, exposure to irinotecan induces tumor to increase its expression of topoisomerase II and decrease its expression of topoisomerase I. Picoplatin cannot address either of these changes in tumor enzyme expression. Topotecan, however, is a topoisomerase I inhibitor, and thus is a logical second-line agent to follow etoposide. As mentioned above, amrubicin is a topoisomerase II inhibitor, and thus a logical choice to follow irinotecan as second-line therapy (in fact, amrubicin did just as well in its phase II trial when following either irinotecan or etoposide). In summary, amrubicin and topotecan together address the importance of topoisomerase resistance, whereas picoplatin does not. In addition, as irinotecan gains increasing use in first-line treatment, it is indirectly setting amrubicin up as the preferred agent for second-line therapy (and, as mentioned, amrubicin does just as well when following etoposide).
     
    The Central Issues in the Evaluation of Picoplatin: Efficacy vs. Adoption
     
                    As detailed above, the future of picoplatin – and, therefore, the future of PARD – is not as simple as stratifying the drug’s chances of producing positive results in a phase III trial. Though efficacy (will the drug work?) is central to any investment thesis, adoption (will the drug be used?) is just as critical.
    The first question – will it work? – is difficult to answer in light of the poor methodology of the phase II trial. Since the design of the phase II trial is hampered by the unrealistic baseline characteristics of the study participants – the study had too many patients with limited disease, and thus it is impossible to tell if the overall survival data reflects the therapy or the relative heartiness of the study population – prediction of any phase III outcome is at best guesswork.
    The second question – will it be used? – is a complex issue to address. Though picoplatin might generate a modest survival benefit, its benefit is unlikely to be significantly better than that of topotecan – which has a head start on it in terms of clinical use, and is available in two different formulations. To that end, picoplatin is unlikely to distinguish itself as superior in clinical efficacy to oral topotecan: given cancer patients’ preference for oral over intravenous therapy (when efficacy is equivalent), this is a factor that is likely to restrict the practical use of picoplatin. In addition, topotecan is available in both oral and intravenous formulations with equivalent efficacy, which means that patients who cannot tolerate one formulation can be switched to the other without ceding market share to a competitor.
    Another issue that picoplatin will have to face, particularly outside of the United States, is the heavy burden of its cost for a survival benefit that is, at an absolute best, only 12 weeks longer than palliative care. The National Health Service of the United Kingdom, for example, has already weighed in on intravenous topotecan and has declared that it is not worth the cost of its additional life expectancy, and so will not pay for it. Given that picoplatin is likely to have no better than a similar survival rate and cost as intravenous topotecan, it might be anticipated that countries with socialized healthcare like the U.K. will also reject the routine use of picoplatin for second-line SCLC.
    But perhaps the biggest issue that picoplatin will have to face is the imminent ascendancy of amrubicin. It appears that amrubicin has a better chance than picoplatin at producing positive phase III results for second-line SCLC, and its historical norms suggest that it might extend life by as much as 25% more than picoplatin did in its imbalanced phase II trial. If these historical norms for both picoplatin and amrubicin hold true, then picoplatin will be faced with the cold truth that amrubicin might just be the better drug. At that point, independent of economic factors, amrubicin would become the first intravenous drug choice of patients and their physicians, and perhaps shrink the practical market for second-line SCLC to two drugs: amrubicin and oral topotecan.
    In conclusion, though picoplatin might produce positive phase III results (and therefore generate a possible bump in its market capitalization due to the temporary effects of positive news flow), it appears that picoplatin will then have to wage a war for its market share on two different fronts: on one side, an orally available and more convenient drug with similar activity (topotecan), and on the other, a drug with better survival characteristics (amrubicin).
     
    ________________________________________________________________________
     
    Source Material and Correspondence
     
    1. Brendan Doherty, Manager, Corporate Communications/Investor Relations, Poniard Pharmaceuticals
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  • ruyi22
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    Brilliant Article,

     

    Firstly the poniard trial was based on 401 patients, well you might say a difference of 2,thought it would be better to emphasis as it's just over 400.

     

    Secondly as an ordinary citiizen with a donkeys expertise in your field I would rather use a drug with lower toxic side effects.

     

    Well Poniard are in the process of pursuing FDA approval, we will wait and see.
    22 Jun 2010, 03:39 AM Reply Like
  • 1stock2stocks
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    You make good points about spotting companies that will ultimately fail, but you are mistaken in calling these shorts. If one were to short on the basis of your fundamentally sound analyses, you would have shorted SVNT years ago at $5 or $10 because market is quite small and had your face blown off as it climbed for years before finally imploding (only down to $12) when it became clear that they weren't going to be acquired. You might have shorted DNDN because there was no clear mechanism and prior data were dodgy, and yet you would have lost twice... once many years ago when FDA advisory panel voted "favorably" and stock shot up 400% and then again when the last Phase 3 trial actually worked on ITT basis. You would have lost a lot on VNDA before finally being proven right because no one actually wanted to buy them (because market opportunity sucked). You would have lost money on AUXL if you thought Xiaflex would have a small market (although I suspect market is bigger than it looks and AUXL is just messing up the launch) unless you waited to short until after approval. And consider ITMN; whether you thought the drug was good or bad, likely to be approved or rejected, you would have been wrong at least once in a short period of time (if you bet against it before panel, the positive panel docs would have hurt you).

     

    The point is that shorting requires an understanding of when investors are going to care about your thesis and start to see things your way. The market can be irrational far longer than you can stay solvent. If you think the market is small but most investors won't think this way for many years, then you could be wrong for a long time before finally being right (e.g. like shorting SVNT at $15 in 2007). And even then you might lose a fortune if the company is acquired by a big dummy that disagrees with you (e.g. Eyetech's drug Macugen was clearly a dog, but Eyetech was acquired by OSI, costing Eyetech shorts and OSI longs dearly).

     

    If you want to bet against a binary event, then short just before the event, because the news will prove you right. But even then, make sure that the failure isn't anticipated (e.g. SGEN barely even flinched when their most advanced program SGN-33 failed because investors had expected this and were all waiting for bad news to pass so they could buy for SGN-35, which yielded strong data soon after, causing stock to climb 25%). So just like a stock drops on widely anticipated good news, it might even go up on widely anticipated bad news.

     

    If want to be short because of some fundamental conceptual flaw with the program, then short when that analysis becomes relevant (e.g. best time to short a company if you think market is small is right after approval, when market size is the only thing that investors will be talking about). But again, make sure you're not in the consensus. It's hard to make money betting a drug will fail if failure is already priced in.

     

    And lest you think that you can just take a long-term view of a short, realize that shorting costs you money (you have to pay to borrow shares). You may get margin calls or otherwise be bought in, forcing you to lock in your interim paper losses waiting to be proven right in the end, and these losses can be staggering multiples of your principal. If you think a trial will fail, realize that even snake oil will yield a two-side p value of 0.05 at least 1 in 40 times, if not more due to all sorts of biases, and that management will do their best to spin data to make it look as good as possible, so even if you were fundamentally right, you might get really unlucky (e.g. what if Provenge really doesn't work and yet DNDN's Phase 3 results were a false-positive fluke - that short probably killed more than one manager). And what are you trying to gain? Max you'll make is 100% if a stock goes to ZERO overnight, which it never does, so you won't even make that much. But when some binaries work, particularly those that many people think are unlikely, they gap up a lot (e.g. ACOR, VNDA, DNDN, HGSI, ITMN), sometimes more than 2x.

     

    So your shorts will have to be small if you are going to tolerate this much variance. But if you make your shorts small, is it worth doing this much homework for them? Isn't it better to devote all this effort to finding a good long where your losses are capped at 100% but your gains can be multiples of your investment?

     

    So my main point is that there is a difference between believing that a company/drug will ultimately fail and making money shorting the stock. Most people, including professional investors, lose money shorting because they can't translate their fundamental analysis into a trading strategy.
    15 Dec 2010, 06:27 PM Reply Like
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