A firework is for sure to play out tomorrow

Heard about ODAC? Probably not many of you unless you are familiar with the oncology drug development business. This is an external expert consulting committee for the US FDA, which at the request of the FDA will review oncology drugs that are submitted for approval but the FDA has something unsure about. While the FDA is not obliged to follow the ODAC recommendation, it often does. As such, the ODAC date is almost like a live or death decision date for small biotech companies, especially if they only have one or two drugs under development. Regardless of the eventual FDA decision for a drug, traders will go panic buying if with a positive ODAC recommendation or panic selling if with a negative recommendation. This may mean a 50%+ swing for a biotech stock on that day. We are going to see this tomorrow, Wednesday, May 24!

The company that is undergoing this ordeal is called Puma Biotech (PBYI). As one with first hand experience with ODAC, I can tell you this is really not a fun to go through, nothing short of a hell like process. Companies have to spend millions of dollars to be well prepared for the ODAC months before the meeting as they need to think about all kinds of potential questions that may be asked by the experts and prepare good slides for them that can be shown within seconds if asked. This often means hundreds to thousands of slides but most of which will never be presented at all! And then frequent rehearsals by inviting experts who have got previous ODAC experiences or even as the past ODAC members. Well, this is actually nothing to do with what I want to say about PBYI as a trading idea but just as a side story so that you at least learn something about why oncology drugs are so expensive! Now back to the real talk for PBYI. A JP Morgan analyst had made a prediction a few days ago that PBYI would have a 63% up or down swing based on the ODAC result. It turned out this was even too conservative. Yesterday, PBYI shot up 80% higher just because the FDA’s review report released before the meeting was perceived as better than expected. It ended up with “just” a 40% jump by closing. I was initially trying to play with dual speculative positions for either direction it might go on Wed. But I was too late to do so given the option prices have already been so much inflated, especially for the calls. A lot of upside swing should have already been priced in with a 40% jump yesterday. It is difficult to get a good risk reward setup for the upside now as the calls are simply too expensive. But how about the downside risk? ODAC is an unpredictable monster to say the least. Those experts have their own strong egos to show and they won’t care too much about what the FDA reviewers are saying. Based on the released data, there are still a lot of safety concerns for the breast cancer drug neratinib like serious diarrhea that caused most of patients stopped the treatment prematurely. More problematic is probably the unplanned changes about some statistical analysis. Will this become a black swan as a show stop for Puma? I don’t know but we will know for sure by tomorrow afternoon. If indeed we get a thumb down tomorrow, what kind of firework you can imagine for PBYI when so much hyper and euphoria have already been priced in. We may see a 80% plunge for it! I cannot help but want to play for this kind of possibility but with very limited cost of course. I placed a put order yesterday for Jun 2 $30/20 put spread. It costed me $1.5 per contract for a potential $8.5 profit, if indeed PBYI fails at the ODAC tomorrow. Honestly I did not think I could get the positions filled due to very much inflated option prices yesterday but to my surprise, I got them filled by luck! If you want to test your luck, you may still be able to do so in the morning tomorrow before the ODAC decision is announced. I’m excited to see what will happen by then!

Of course, don’t bet with your mortgage as this is purely a speculation with a high probability of losing all the money in it. After all, you rarely see the FDA has more positive notes on a drug that they are seeking an ODAC review. I merely want to test my lottery type of luck with very limited cost involved. Don’t blame me if you don’t see your money again!