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Drug spec: Burned by GTXI

|Includes: BFRE, GTx, Inc. (GTXI)

I have posted three instablogs about stock and ETF investment plays.

My prediction for the S&P has proved substantially correct so far, as the melt up continued through my named range, and the current earnings season has produced some uncertain whipsawing action. My target for the Q12010 may prove too low, but three months out of nine is pretty good for an amateur, and sensible investors always revise based on new data.

My oil scissors proved profitable as described, even through the break-out to $84, and except for the relative tax inefficiency of those instruments, I am happy with the outcome.

Bluefire Ethanol (BFRE:OB) broke out on DOE news yesterday, also as predicted. I don't expect that spike to last more than a month, though, because it looks like a lot of short-term speculators are in there, similar to the spike in June. I remain long Bluefire, though, because my idea of speculation in their case is on the 3-5 year time window, and I believe that for 0.5% of a portfolio, a potential ten-bagger like Bluefire is an acceptable risk. Plus, the risk decreases for eacah major milestone the company demonstrably completes. Buy the brims of the witches hat after the day traders' attention wanders.

For this entry, though, I'd like to tell the story of a failure. A dismal failure- of judgement (mine), analysis (mine and others'), and of emotional committment. The failure was my 2% portfolio investment in the cancer drug developer GTX, Inc (NASDAQ:GTXI).

During the summer, I was researching small-cap spec plays. I believed the rally was intact and the liquidity from the FED was safely declared to be in place through March of 2010, so I wanted to have some fun while my large-cap/dividend heavy picks melted up.

I found Bluefire, whose story I believe in, and whose industry I understand from study and experience. I also found GTXI, whose industry I don't really understand, but whose story was compelling.

GTXI had submitted their drug/dose toremifene citrate 80mg to the FDA for approval in the treatment of certain kinds of bone fractures in prostate cancer patients. The same drug is working through a phase III clinical trial due to wrap in Q1 2010 at a 20mg dose for prevention of certain kinds of prostate tumors. The 80mg action date from FDA was October 30.

Sell-side analysts like S&P had valued GTXI at around $9-15 a share, based on a reported favorable/moderate disposition toward the drug from FDA, and noted that the same compound had already been on the market for 20 years treating post-menopausal breast cancer in women. Buy side analysts feared a black box warning would hurt sales post-approval, and valued the company at around $12. Notice both camps took approval for granted.

During September, I watched what I correctly believed to be a speculative ramp come and go, from a $9 handle the first week, up to the mid-$12s mid-month, and settling back to a low $10 handle first week of Oct.

Thinking to myself, "These guys have done this before. They know what they are doing. The drug has twenty years of track record. Analysts on both buy and sell sides think this is favorable for approval (maybe with a black box warning for certain groups), cancer drug makers do the work of humanity, and GTXI looks like a winner," I bought at $10.17.

Trick or treat?


The FDA did not approve. They asked for two more trials. The CEO on the special conference call said that would take 5 years and $35 million. He had no idea what had happened. He said the FDA betrayed prior understandings about the application for approval. He said FDA "moved the goalposts." He said he "was surprised," and "bigger surprised," by the FDA response. In all, he used the word "surprised" six times. These are the worst words investors could hear.

In short, he appeared to have no idea what he was doing. His response was to blame FDA. The expedited meeting for clarification he urgently said he urgently requested with FDA has not yet happened six weeks later (or if it has, no one at GTXI or FDA is talking about it).

I don't blame the CEO of GTXI for appearing naive to the point of incompetent about his own company's basic pipeline process. I blame myself for not discovering his naivety before I bought the stock at $10. I blame myself for over-weighting analyst opinion, especially on the sell-side. I blame myself for letting the humane benefits of the POTENTIAL success to influence my patience on pulling the trigger. After the special conference call on November 2, the stock closed at $4.56, a loss for me of nearly 60% on the position. Completely my fault.

The practical death knell for toremifene citrate 80mg also throws a death shroud over the prospects for toremifene citrate 20mg next year. If GTXI had no clue what data they needed to get the larger dose approved for bone fractures, then there is no reason to believe they have any idea what is required to get the lower dose approved for tumor prevention. Since they have provided ample evidence that their relationship with FDA is detached from reality, there is no reason to believe that their SARM program will produce a saleable drug in the next five years.

When asked if GTXI planned to do the necessary studies FDA requires in the CR letter, the CEO said, "I dont know," and "it would a 5-year, $35 million study." The FDA asked for two studies in their letter. He also did not rule out abandoning toremifene citrate altogether. The company operates at a net loss and had $45 million in cash on hand at the end of September. They can't afford two more studies for toremifene citrate.

Even if the Type A meeting happens in Q12010, and even if FDA says effectively, "we made a mistake, toremifene citrate is approved at 80mg," (both unlikely) my confidence in the company's management is shot. I suspect I am not alone. I feel safe predicting that GTXI will not see $10 again short of 2012. That's past my window for that portfolio allotment, so I realized the loss and took away these key reminders:

The story of a failed investment: emotion, sell-side cheerleading, insufficient knowledge of management.

Disclosure: the author is long a small, speculative position in BFRE:OB. No content in this article constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any person. An investment in any security is subject to risks and this article does not contain a list or description of all relevant risk factors. You alone are solely responsible for determining whether any investment, security, or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation.