The Cross-Border Biotech Blog

Biotechnology, Health and Business in Canada, the United States and Worldwide

Valuation and other biotech mysteries – Part 24: Event-Based Trading

[Ed. This is the twenty-fourth part in Wayne's series. You can access the whole thing by clicking here. Please leave comments or questions on the blog and Wayne will address them in future posts in this series. 

As with all commentary on this blog, the opinions expressed herein are the author’s own and are not to be construed as investment advice. The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog and may buy, sell or hold such securities at any time. Past share price performance may not be an indicator of future share price performance. This blog and its contents do not consider the investment objectives, financial situation or particular needs of any particular person. Investors should obtain professional advice based on their own individual circumstances before making an investment decision.]

Wayne Schnarr - seriousEvent-based trading is actually a very common investment strategy. For public companies in many industrial sectors, the key events are the quarterly and annual financial results. The timing of these announcements is regulated (no later than x days after period end) and, if the release date is not announced by the company, investors can approximate the short period within which the financial results will be released. Trading strategies are based on actual and anticipated shorter term share price movement and not necessarily on the longer term prospects for a product or company.

An investor may choose to adopt one of the following strategies.

  • Long term hold – no intention of selling or buying unless there is something major and unexpected in the statements or future guidance.
  • Momentum trade – an investor may see positive or negative share price momentum and choose to trade on that basis. The investment period may be days or weeks and any short or long position might be wound up before announcement of the financial results.
  • Expectations trade – an investor may believe that the share price has been impacted by other shareholders being either too optimistic or pessimistic about the financial results. The investment period could be days or weeks but any short or long position would probably be held until after the announcement of the results.

For companies developing novel therapeutic products, quarterly financial reports usually provide only an update on the cash and cash burn. The key events are the series of clinical and regulatory events which comprise a product’s pathway to commercialization. Investors need to ask the following questions about a company.

  • Which product contributes most to the valuation of the company?
  • Which clinical trials of the key product, if successful, will create the most value for the company?
  • What are the upcoming key events for the most important clinical trials of the key product?

Each clinical trial for each product is unique. However, for each clinical trial, a typical series of announcements could include:

  • Intention to start the trial;
  • Regulatory approval of the trial structure;
  • Start of enrolment;
  • Completion of enrolment;
  • Completion of patient treatment;
  • Announcement of safety data;
  • Announcement of efficacy data; and
  • Intentions regarding further product development.

Unlike financial results, the timing of many of these announcements is not predictable and, more often than not, they are not completed according to management’s initial schedule. Patient enrolment is the portion of the trial where management has the least control over the timing. For some clinical conditions, the number of potential sites may be limited by low patient numbers – it is not economical to run a trial at a site if fewer than X patients per month can be enrolled, where X will vary with factors such as the medical condition. If a large trial for a similar condition is ongoing, new trials may have difficulty getting sufficient sites and patients.

Once enrolment is complete, the timing generally becomes more predictable –the treatment period is defined by the clinical protocol, time is needed for patient assessment, and finally time is needed to compile and assess the clinical data. The announcement of the efficacy data and the decision on future clinical development are the two most important events. An investor could adopt one of the following trading strategies around the release of the efficacy data for a trial.

  • Sell before the data if the investor believes that the data will be negative or will not meet market expectations
  • Sell the day that the data is released, regardless of the outcome
  • Wait until a few weeks after the data is released before making an investment decision
  • Wait until the company announces its intention concerning future clinical development, including any financing needs, before making an investment decision

Efficacy data is not always black and white. It could be clearly negative – the product has no clinical activity or provides no clinical improvement or advantage over the standard of care. If further clinical development of that product is unlikely, the only other asset is any remaining cash. The valuation could drop to about 50% of current cash levels, assuming that restructuring and corporate costs will consume the other 50% of the cash. The data could be clearly positive – the trial met its primary efficacy endpoint, which indicates clinical activity and, depending on the trial structure, maybe superior clinical activity. Many clinical trial results are grey – some clinical activity but more analysis is needed to determine the best path forward, if there is one.

The next blog, which will be the next to last one in this series, will look at the statement “this stock is grossly under-valued compared to its peers.”

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