I missed this post somehow. I don't think structure IMPROVEMENT is the target, but structure PRESERVATION. Whatever, Joint structure wasn't a primary endpoint in the Tofa trials and that caused a lot of trouble. I agree that Incyte investors were spoiled by the rapid approvals of Ruxo with both an FDA blessed protocol and orphan designation. But the whole point of the pivotal trials program is to generate a compelling submission package. We pretty well KNOW that the softer parts of the clinical response are going to be super. Since TNF acts largely through JAK-mediated pathways (and other inflammatory pathways are also damped by JAK inhibition), there's every reason to hope for structural protection comparable to the anti-TNFs. And that'll be out before drug approval. and called out on the label. In addition, Bari has a humongous therapeutic index (spectacularly unlike Tofa). I expect the sell-in to be rapid. This isn't some subtly different me-too drug.
Ok, just kicking this around. Normally, I HATE buying time value; the term is "wasting asset." But I see some points in favor of this. Obviously, the transaction is open to the upside, which is nice with Incyte. And it closes before the projected fireworks around November (I want freedom of action come November). Nothing foreseeable threatens to make those options die worthless, and that's a comfort. A hostile offer could blow INCY past the top limit of any hedged strategy (and I think we differ on estimating likelihood of that). I don't see any other event likely to put INCY above 120 by late Sept, though, and there are less risky ways to capture that much upside. And even if I was hell-for-leather bullish, the $90 strike doesn't list with terribly much more time value, and [since a transaction this big had to be negotiated] you could easily have gotten a decent share of the time premium back through greater liquidity.
Basically, I'll give you credit for making a transaction that fits a high [say 30%] likelihood of an offer without being dependent on it. I just wouldn't figure the odds that way.
Historically, most of the short interest in INCY has been connected with the convertible bonds. So I'll speculate that this has some connection with financing activities.
$40bln isn't the easiest thing in the world to rustle up. And anyway, that probably wouldn't be enough to get management endorsement.
Interesting item in that note: Ruxo ointment for immune alopecia to be tried this year. There's a little gimmick: development of Ruxo ointment for psoriasis was halted back when because it messed up the immune drug = Bari means Lilly equation. Results had been fairly good. (Ruxo penetrates skin a lot better than Bari). If the ointment reaches market, it has good off-label potential for psoriasis. Lilly IS looking at Bari pills for psoriasis, but RA has to come first.
Such things have happened. But usually in a 'corner' situation. The supply and demand situation would still tend to be good for TROU (think of the purest case: company sells new stock to the shorts in a negotiated secondary. That's a 50% capital infusion effectively without dilution.) In a less pure case, the money ends up in the hands of Myriad bulls. They'd be inclined to replenish depleted positions, just not as quickly as shorts with the market running against them.
Hey. I'm delighted. But 2 years ago I was reading the vibe in shareholder presentations as management wanting desperately to stay independent, to the point that it'd take $220 a share to get wholehearted support from them. I Think that with the stock on the order of 4x as high, the happy buyout price has roughly doubled.
I'm probably too optimistic--I expect Bari to preserve joint structure, and to be the biggest new drug introduction EVER in about 18 months. I expect something that can be called success from Janus 1, and that should open a market as big as Jakafi has now, total--even if it just lets people die about the same time with less unpleasantness along the way (and I expect better things than that). Don't bother offering me a 100% premium to the present stock price; we'll have that soon enough organically.
We may be seeing a bit of a game of chicken. Journalists paid by people who don't want to make the FIRST bid for Incite making noises to rush someone else into making the first bid.
I'd like to see management come up with a mildly dilutive split: say 2 shares and half a right per share.
Still, nothing addressing the magnitude of the premium needed to do a friendly deal. Basically, that comes down to the expected success rate of pipeline candidates. I actually think that dark pipeline is being revealed at a rate to maintain the gap.
DO listen to the BoA/ML presentation. While the stuff on the ASCO abstracts isn't terribly stirring, there were some nuggets. Most interesting is that Incyte's 30% contribution toward Bari development for RA ends with the year. That is a BIG R&D item going away. Also interesting: first read from Lilly on Bari vs diabetic nephropathy is expected late Fall. Let's put just a 25% chance on anything at all encouraging. But because the condition is common, costly to manage, and has shrugged off so many drug candidates. the potential is worth keeping in mind.
One more piece of the story: my personal proxy for health care stocks at large is the closed-end fund HQL (which has recently changed its name, but kept the symbol)(top 3 holdings Celgene, Gilead and Vertex). If you look at a 5-year chart, it has had a magnificent run, but presently looks kinda toppy. Holders of a very large hedge with something resembling HQL on the long side and Myriad on the short side might easily be thinking about unwinding even if Myriad didn't look as good as it does going forward.
Naked shorting (the bad name is stock watering) is, of course, against the law. It happens, but this would be too visible. In any event, nominal float + short interest comes close enough to apparent float to rule out a large rate of naked shorting. Anyway, borrowing stock in a swap against treasuries is inexpensive enough (I'm weak on nomenclature of derivatives; I'd call it a double repo if left to my own devices, but it's probably a term swap or some such. A puts up bonds, B puts up stock, each takes ownership of what the other puts up. There are fees paid depending on bond interest vs dividend and other considerations. Collateral is put up if the deal goes too out of balance. The deal expires on date X and needs to be re-done then)
Most likely, the shorts on Myriad are mostly part of "unrelated hedges" ('unrelated' is a term of art here; it just means not the same company) Presuming that the long side of the hedge was biomedical it has probably done well enough to make the total positions profitable, but being short a company with big question marks ahead of it is very different from being short one with a new principal product hitting its stride and bright prospects ahead. If you concede market-matching performance for Myriad going forward, it is too expensive to keep it on the short side of a hedge (and its service rather than product nature makes it a poor representative of the industry you want a weak member of). I am not aware of any tax reason to short "against the box" for longer than a quarter.
Even li'l ol' I have partially liquidated a hedge to get out when one side turned bad (sold part of the stock covered by calls to buy back the in=the-money calls).Sometimes you just have to re-mobilize the dead money in a too-hedged position.
I was looking at old posts to see if I ever "patted myself on the back" over Intermune. I guess I sorta did, but not in an aggressive way. Basically, I said that I only recommend "sure things" to friends, and that Myriad is as sure a thing as Intermune once was. And the only date I ever gave for when the short position would become untenable was August, based partly on debottlenecking of myRisk and partly on commercial arrival of Prolaris. I shouldn't and don't feel the least bit embarrassed that the stock price hasn't made a big + move yet, although I'm a bit embarrassed by having mistaken a volume change (that reduced days-to-cover) for actual covering. Prolaris pricing is delayed 2-6 weeks, so there is a brief reprieve, no more. But I also found a bit of history compiled by into_something_good.
"The numbers tell the story: 6/14/13, at the time of the Supreme Court decision, the shorts were only 5.75M with 1.26 days to cover. The number hit 35.5M 12/31/13 with 13.78 days to cover. The CS report drove the number to 37.8M on 1/15/14. The peak wasn't reached until 3/31/14 at 39.9M, days before the CMS surprise that drove the stock to the 52 week high of 42.50. On 2/14, the number was 38M, but the price didn't top 35 until 2/18, which indicates that most shorts are now at least $4/share underwater."
Looking at prices and volumes around those dates, my estimate of an average short sale price around $28 looks generous. I'll keep referring to it, but $24 looks more plausible. Anyway, the shorts are feeling a hot boardwalk under their feet already, and it's hard to see them NOT jumping in response to a full quarter of as-expected myRisk sales and a major new product starting to show its worth. Since I'm not aware of anyone projecting meaningful earnings from either Vectra or the cdx business, those can't generate negative surprises.
Hence the previously-announced effort to build a curated public variant database with help from the French government. Actually doing this will take more than 5 years. The major players have negotiated away their right to sue to force disclosure of Myriad's database. There MAY be an effort to use a straw plaintiff (like that under $500 gene testing startup) to get into court. There is likely to be an effort to get a government to seize Myriad's database. Plain theft wouldn't suffice, because a business can't be seen running on stolen property.
There's a quicker way to get into contention, but it's both expensive and less reliable. Observed variants can be assayed for DNA-repair functionality. Instead of reporting in terms of risk within a population, you can report in terms of proportion of normal function. This will have some trouble accounting for variants that interact with mechanisms that control level of gene expression, but it's better than nothing.
In Derik de Briun's report for BoA/ML I find "Overall, we see shares trading lower, and until there’s a multi-qtr rebound we expect the Street to stay skeptical." (de Bruin is a good, but not star, analyst). I take that to mean that stock price movement after the predictably-good August CC is likely to be muted. Partly, the planted WSJ story maintained the negative aura around Myriad, so the recent very good CC was read as negative (and of course there will be more). That stupid challenge about "wasn't the bad weather over before your last CC" can stand as a symbol. Pardon the foam around my mouth...
Anyway, closing time for the shorts is now beyond the August CC, although probably not ALL the way to the November one.
Good or bad for Myriad?
Lynparza was approved with a particular cdx actually included in 'the label.' Until there's a label extension or it goes off patent (and even then, it would require a petition by a manufacturer), Myriad owns the business. In future, FDA may not necessarily continue naming the cdx on labels; they may specify it functionally, or even require multiple suppliers in the future. But the agency's tendency has certainly been to distrust "equivalents," so a change isn't likely to happen suddenly.
Validating a cdx is no small task, but it's a great deal easier than validating a prognostic test. Instead of needing to match variants with whole life histories, you just have to match them to an acceptable model of drug effectiveness. A library of genes is a big help, and Myriad figures to have the best, but in a pinch you can build it on the fly. Big enough stakes, you do that.
As with most other Myriad vs 'other' comparisons, you have to think about the competitor's business. The Quests and Labcorps of the world are not in the business of maintaining gene libraries [physically, in liquid nitrogen. Not just records of sequences]. Not that they can't, but having to add that function cuts into margins. And a dedicated cdx company would face a daunting barrier trying to build market against Myriad's selling and hand-holding.
Anyway, at least for a few years [past anyone's investing time horizon except maybe Warren Buffett's], a big cdx opportunity would figure to play to Myriad's strength.
In the CEO's discussion of the purchase of an MVZ clinic (I know something about drug reimbursement in Germany, and it's incredibly convoluted (partly redeemed by some long grace periods). It appears that test reimbursement extracts only the worst features of drug reimbursement and uses those. but I digress...) there's this throw-away:
"Third, we see a significant opportunity with companion diagnostics for PARP inhibitors in Europe, which are currently being studied in most solid tumor cancers. This represents a multibillion dollar market opportunity for our companion diagnostic products and the MVZ's facility will play an important strategic role in allowing Myriad to capture a larger portion of this significant market opportunity."
In other words, Myriad's internal view of what we (Or at least I) have been thinking of as a low-volume but high-margin bag on the side of the business estimates that it can become substantially bigger than the existing business. Something to keep an eye on.
Another stealth item from their comparison of in-house against public databases:
"In the study, a team of Myriad scientists analyzed the content of several public databases to compare and contrast calls on the set of 2017 BRCA1 and BRCA2 mutations from 24,650 consecutively tested patient samples received by our laboratory that were representative of a real-world data set."
So a shade over 8% of the tests submitted showed variants (we won't go too closely into the intended point that fair use of the public databases would categorize nearly all of those as VUSs).
Guys who play that big are running computer models. This has to be a hedge of some sort. Still, rule of thumb is that transactions involving calls reflect bullish sentiment.
Listened again (not BADLY hung over). Prolaris delay only a couple weeks; reimbursement should still be announced for the August CC. Potential companion diagnostics business starting to look very interesting but big numbers at the far horizon of investment time scale). I suspect along with a junior analyst that the apparent inflection in Vectra has more to do with improved selling than with publications (although the publications are the ore that selling is refined from).
Weather cutting into the prediction business won't please investors. But the guy who didn't remember how bad it was subsequent to the last CC was just dense. Interesting that high-deductible insurance is becoming a lot more common, by the way.
I hope Mr Capone moves Myriad to a January fiscal year. I think this is the last company I watch closely to retain the once-predominant July fiscal year, and I can't be the only one out of practice at translating.
Very quick reaction (Girlfriend, ex-girlfriend, autodialer and heating oil company called me during the CC, so I missed a bit): myRisk progress is the most important thing, and it beat expectation. Prolaris reimbursement is second most important, and it is delayed--that could give shorts extra time to cover. Vectra did better than I had expected. Market dominance for hereditary cancer remains absolute. Interesting from Q&A: no second round of AJ effect.