Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
I have to admit, I had much the same sentiment when I read Adam Feuerstein's revealing article in The Street on December 10, 2012, entitled SAC's InterMune Trade Probe May Reveal Corrupted FDA Drug Review. Corruption within the FDA? I'm shocked! As someone who has followed the Dendreon (NASDAQ:DNDN) story since 2006, one cannot help but think about the events leading to, during, and following the Provenge Advisory Committee meeting of March 29, 2007. But before discussing those matters and how they relate to SAC (and they do), let's talk a little about SAC and InterMune. It is important for investors to understand what's going on here because if the probe bears fruit, it speaks volumes to the risks investors face from both the FDA (aside from those pertaining to drug approvals) and Wall Street in search of profits in the field of biotechnology.
According to Feuerstein, citing reports in Bloomberg (among others), 'the FBI and SEC are reviewing InterMune (NASDAQ:ITMN) trades in the first half of 2010 made by SAC, the $14 billion hedge fund managed by Steven Cohen." According to Bloomberg, "InterMune's stock soared in the first week of March after the drugmaker's experimental medicine for a deadly lung disease was reviewed more favorably by U.S. regulators than analysts had expected. Two months later, the stock slumped after the company's application for a potential $1 billion-a-year lung treatment was rejected by regulators."
Among the questions being asked by investigators is whether or not SAC received an insider tip about InterMune's drug pirfenidone from someone within the drug company, from an FDA official working on the drug's review, or possibly from an outside advisor to the FDA…a tip that allowed the company to reduced its 1.9 million share stake at the end of the first quarter of 2010 to 10,983 shares by the end of the second quarter of that year.
Not that this is news to anyone who has followed the saga of InterMune. On November 5, 2010, Tyler Durden wrote an article for Zero Hedge in which he cited unusual activity in ITMN based on a review of SAC's Form 13F filings. According to Durden: "What we do know, again courtesy of SAC's 13F filings, is that the firm which previously had rarely had a concentrated position in ITMN, suddenly went from zero as of December 31, 2010, to almost 2 million shares by the end of Q1... A quarter in which conveniently the stock tripled. Had SAC bought the stock ahead of the favorable press release from March 9 (InterMune's fortunes soared along with its stock to as high as $48 a share after a U.S. Food and Drug Administration advisory panel voted to recommend pirfenidone's approval), it would have made $60 million virtually overnight. Yet SAC's holding were back down to zero by the end of Q2, a quarter in which on May 4, the stock plunged by almost 80% on this adverse piece of news (The agency refused not only refused to go along with the advisory panel vote but told InterMune that another clinical trial would be required before the agency reconsidered the pirfenidone approval decision)."
This was not an isolated case. Durden also cites 'interesting' trades by SAC in Cyberonics (NASDAQ:CYBX) and Myriad Genetics (NASDAQ:MYGN), to name but two of several other stocks he discussed. Of course, nothing has been proven against SAC in any of these cases-including the InterMune case-and so, the financial community at large only can watch for the next shoe to drop as Preet Bharara, US Attorney for the Southern District of New York, continues his probe into SAC trading, including that of the various hedge funds operating under the corporation's umbrella.
But as I noted above, the mere mention of FDA corruption raises, again, issues relative to aberrations surrounding the FDA's review of Dendreon's Provenge in the early spring of 2007. Myriad articles have been written about this panel meeting and the aftermath. In SeekingAlpha, I addressed the issues here, here, and here.
Probably the most exhaustive exposé was written by Mark Mitchell for DeepCapture titled Michael Milken, 60,000 Deaths, and the Story of Dendreon. (The updated version is available in Kindle format from Amazon.) As you may recall, the advisory committee voted 17-0 that Provenge was Safe and 13-4 that the treatment demonstrated Substantial Efficacy…a strong, formal Recommendation if ever there was one for a treatment in an area where few if any options existed. Dendreon's shares responded positively. By the first week in April, shares, which had been depressed to $4 before the panel vote, soared to more than $20.
Now, here's where things got really strange. According to Mitchell: Out of "…the entire universe of 11,500 hedge funds, only ten held [counterintuitive] put options on large numbers (more than 150,000) of Dendreon shares at the end of March 2007. Two of those ten funds held put options on relatively few (200,000 each) Dendreon shares and cashed out soon after the FDA advisory panel meeting. They do not appear to have otherwise been major traders in Dendreon, so I will not mention their names." He discussed the third, and dismissed it for failure to uncover evidence needed to tie the fund to naked short sellers. But among the remaining seven was Steven A. Cohen's Sigma Capital. According to Mitchell: "Cohen's lesser known hedge fund, Sigma Capital, held put options on 750,000 shares of Dendreon at the end of March 2007. Another of Cohen's lesser known hedge funds, JL Advisors, owned 1.3 million shares of Dendreon as of the end of 2006. These shares were dumped sometime before March 31, 2007, contributing to the selling volume created by Joseph Edelman dumping more than 6 million Dendreon shares that he'd received by exercising call options -- and by the simultaneous appearance in the marketplace of at least 9 million more phantom shares, the result of rampant naked short selling which the SEC decries as illegal, but refuses to address, except to say that naked short selling is a big secret - a 'proprietary trading strategy.'"
At this time neither Sigma Capital nor JL Advisors has been cited in any documents related to the SAC inquiry by the US Attorney. But the stock and options positions cited above do raise interesting questions within the context of the market forces impacting Dendreon during the early part of 2007.
As I said above, it is important for investors to understand what's going on here because if the probe bears fruit, it speaks volumes to the risks investors face from both the FDA (aside from those pertaining to drug approvals) and Wall Street in search of profits in the field of biotechnology.
Disclosure: I am long DNDN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long both DNDN and the May 2013 $3 PUTS. I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, do your own research and reach your own conclusion. Investing involves risks, including loss of principal.