Brandon's Think Tank

There are two stocks that are approaching FDA decisions. Coincidentally , both of these companies are looking to gain FDA approval for their drugs designed to fight Obesity. As you know, obesity is an epidemic and according to a just released analysis by BNY ConvergEx' Nicholas Colas, the OECD predicts, by 2020 75% of US the population will be obese. (zerohedge.com)
Taking this into consideration, if these get approved there should be a lot of fanfare and thus the stock should shoot up, which its already doing without one key factor. It still hasn't been APPROVED!

But let's get on with it...

The first is Arena Pharmaceuticals, ticker symbol, ARNA. Their decision date is on June 27, 2012.

The second, is Vivus Pharmaceuticals, ticker symbol, VVUS. Their decision date is on July 17, 2012.

If you know nothing about biotech stocks. You should know the FDA (Food & Drug Admin) is expected to rule on that date, called the PDUFA date. The FDA is rarely early, meaning they usually don't issue a response earlier than the PDUFA date. So, expect the two decisions to come on those dates.

On the PDUFA date, the FDA has 3 options at their disposal:

1. Approval - usually the stock price jumps up

2. Complete Response Letter (aka Denied) - usually the stock price plummets.

3. Delay - (Typically 1-3 months) usually the stock will fall a little bit, because no decision is rendered, but it is dead money for 1-3 months. And Wall St. does not like dead money.

Disclaimer: For learning purposes only. This is a hypothetical play, I do not and am not recommending the following investment for any individual(s). Invest with at your own risk. Please consult the help of a licensed financial advisor/representative. The below strategy is for experienced investors. Options are extremely complex financial instruments, you could lose your entire investment.

With that said, if I were planning to play the upcoming FDA decision dates. I would likely Buy PUTS on both ARNA and VVUS. Buying Puts means I'm betting the stock to go down in price.

Let's start with ARNA.

See Graph #1: ARNA went up for approval about 1 1/2 years ago. See that yellow arrow? The arrow indicates during that period of time and hype, which is when investors, like you or I, get excited about approval. Real quick, flashback to ECO 101: When Demand is greater than Supply you see an increase in price. ARNA did not get approval last time around, crushing the stock price. Ultimately, the company had to re-submit more data to justify approval. At this time, it was dead money for over a year. Hence the $1.30-$1.50 stock price. So...now they submitted the additional data and they are back up for FDA approval on June 27th, 2012.
On this date, the FDA will either Accept, Deny, or Delay their application.

If I were a betting man and I sure as fuck am, I'd bet on either a delay or denial. My rationale is that I don't like obesity drugs. I don't like them because the market is sooooo big and it would affect millions of people and the FDA can't take any chances or make any mistakes, so they will and always will, error on the side of caution. In the past they approved drugs that lead to a lot of problems and they got reamed out, lawsuits, etc. Currently, all this hype leading up to the FDA decision is great for me, excuse the cliche, but the bigger they are, the harder they fall.

My price expectations on the 3 scenarios, with potential profit / (loss) calculations.
Current stock price as of 6/13/2012 is $8.07.

1. Approval - Stock price shoots to $13-16 and probably settles around $12.50-$13.00.

       a. Stock @ $16 ~ 100% gain: If you purchased $1000 worth of stock, you made $1000.
       b. Stock @ $13 ~ 62.5% gain: If you purchased $1000 worth of stock, you made $625.
       c. Stock @ $10 ~ 25% gain: If you purchased $1000 worth of stock, you made a whopping $250.

2. Delay - 1-3 month delay and we go through this again in 1-3 months. but in the mean time the price usually falls ( *There has never been two delays consecutively - that I know of ARNA has not been delayed but Stock # 2 aka VVUS was delayed)

      a. Stock @ $7 ~ You lose if you sell, I don't feel like doing the math. You either wait it out or take a loss
      b. Stock @ $6 ~ lose money

      c. Stock @ 5 ~ lose money

3. Denial (CRL) - If they have to re-run trials, expect to see this stock at a value of $1.25 (Yes, you read correctly - the price of an Aquafina 20oz water) and no more.

a/b/c. If you Short Sell a stock, that means your betting against it. The most you can ever make is 100%, meaning the stock went to ZERO, VERY RARE for a stock to ever trade at zero.

So are you asking why the hell would I bet against it? Your probably not, because you most likely have no idea WTF I'm talking about. I digress.

Let's continue...

I'm betting/hoping that ARNA gets DENIED by the FDA. If this happens, the stock can fall anywhere from $8 to $0, as mentioned, zero never really occurs. However, I can guesstimate/hypothesize/forecast/predict that the stock will likely fall to around $1.25 (remember Aquafina 20oz).

Look at Graph #3 and that horizontal line, it represents "support" or where the normal trading range is for this particular stock OR where it was trading the last time they didn't get approved. Let's hope history repeats itself.

I play options. These are some of the riskiest things out there. You can either lose your entire investment or you can make a shitload with little amounts of money.

Now go to the graph called *MONEYBALLS* [(cough... it takes balls to play these) two puns] PEMDAS

Hypothetically, I want to invest $1,000.

I can Buy PUT options, JULY Expiration. If you bought June they would expire and you'd have wasted your money.

So I buy JULY 21st, 2012 put options. The strike prices are the 3 circles on the left side.

Strikes               Cost / option                Total if purchasing $1000 worth (excl. commissions)

$4                        $35/option                   1000/35= 28 contracts

$4.50                   $46/option                   1000/46= 21 contracts

$5.00                   $55/option                  1000/55= 18 contracts

PROFIT / LOSS = assuming I buy at value in blue (above)

Stock falls to....

a. $7 = I will lose entire $1000 I put in.

b. $5 = I will lose entire $1000 I put in.

c. $3 = $4 strike - $3 stock price = 1/.35 (how many times does .35 go into 1) = 2.85 = 285% GAIN. When its all said and done, I turned $1000 into $2,850.
Hypothetically, If you had $10,000 in these options, you would have made $28,500. But You still must subtract the $10,000 you put in,so technically, you profited $18,500.

Here's where it gets good..

d. $1.25 = $4 strike - $1.25 = 2.75/.35 ( the # of times .35 go into 2.75) = 7.85 = 785% GAIN.
If this happened, you just turned $1000 into $7,850. Hypothetically, if you had $10,000 in these options , you would have made $78,500. Again, subtract your $10,000 you invested, you end up profiting a nice $68,500.

Don't forget Choice E. If you put $10,000 in either Choice A or B you lost $10,000 - CAUTION: You likely will throw up after that.

Keep in mind...These biotech events happen often, however there is more hype associated with these because they are for obesity and if they get approval its will be pretty big.

2nd thing to keep in mind. ARNA had a panel vote, favoring approval. This by no means, means they will or should get approval. The biotech stock market is corrupt. VVUS had a panel recommend 22-1. Investors are very optimistic that it will be approved, which is why it will get slaughtered if it doesn't. Keep that in mind. Its a crapshoot.

CONCLUSION:

I'm too lazy to write up the VVUS part, but its essentially the same. I'm going to split $1000 and buy puts on both ARNA and VVUS. It's completely a roll of the dice for me.

I added a chart on MNKD (Mannkind Corp) They are developing a diabetes inhaler the size of a whistle. I made over $100k on that stock and then lost it all b/c I was greedy. There are a million ways to buy protection so that you can keep gains you made or prevent you from losing your shirt. I made that mistake once. Know wtf your doing and don't get greedy. ...... I still haven't found my shirt :)

Graph # 1 (SCROLL RIGHT FOR MORE DETAILS)