The Intercept Snafu

A 50% haircut is no fun for anyone, especially for those who have been heavily tied into it. That’s what has happened for Intercept (ICPT) and is still ongoing. Intercept is a biopharmaceutical company focused on the development and commercialization of novel therapeutics to treat progressive non-viral liver diseases. It is a quite successful company with at least one approved drug in the market, called Ocaliva for the indication of primary biliary cholangitis (PBC). Ocaliva is also being evaluated for potential indications across a variety of additional chronic liver diseases, including a very lucrative indication, nonalcoholic steatohepatitis (NASH). The hope was very high for ICPT, reflected in its stock prices constantly above $100 in the past year. Then a sudden blow hit it without notice.

 

On September 12, Intercept disclosed that it released a "Dear Doctor" letter warning of cases of "about 10 cases" of liver failure and related deaths, a the majority of which were said to have occurred in patients with severe PBC who had been treated with higher-than-indicated doses of Ocaliva. Well, it turned out that the safety risk was more than that as per the FDA, they have received a total of 30 reports of serious liver injury, including 19 deaths –and at least five of the cases occurred in PBC patients with no or mild decreases in liver function prior to initiating therapy. The panic hit the ICPT investors and they dumped its shares like the end of the world, wiping out its market cap by 50% just within days. The question is if this is an overreaction?

 

My initial contrarian feeling was Yes that this was an overreaction. You see, serious liver injury is already noted in Ocaliva’s label although it’s almost certain the recent fatality data will need to be added to the label, even a black box warning. The updated new serious safety risk for Ocaliva will certainly impact on its sales but PBC is a chronic liver disease with no cure and eventually patients will progress to cirrhosis that is fatal unless with liver transplantation. Such patients also have high risk of liver cancer. Given the limited treatment options available for PBC, the company will overcome the short-term setback to gain its market share again soon. But after the second thought, three more significant concerns came up that stopped me from jumping into it immediately.

• The unintended overdose leading to death may trigger a much more severe action mandated by the FDA that could be potentially fatal for the drug. The FDA may mandate a Risk Evaluation and Mitigation Strategy (REMS) for any drug that is deemed to have some specific serious safety concerns. For most of drugs that require a REMS, it only involves the basic requirement that requires the company to update the label and also distributes so-called educational materials that will inform physicians, pharmacists and/or patients regarding the risks involved and how to manage to minimize them. This is not so much a big deal and ICPT has already announced to take such actions immediately. But the real concern is the more stringent measures for drugs that have the risks so severe that the basic label plus education won’t be sufficient per the FDA. Then they may mandate a certification process for health care providers like physicians and pharmacists to study the educational materials and pass a test before they can prescribe a drug. More brutally, it can even go so far to impose a limited supply of the drug to only those who are deemed safe to get access to the drug. If such things happen, the sales of the drug will dive to the hell. What’s the chance for Ocaliva to get such stringent REMS measures? Probably not very high as the initial mandate from the FDA but the risk is still there that I cannot totally discount it.
• As I said, the NASH indication is more lucrative as there is no approved treatment yet and the market is huge for it. The expectation for Ocaliva was high before the snafu but with such a serious fatal risk involved, it will at least slow down its ongoing trials for NASH and may also make it less competitive due to the safety concern.
• Then I saw an interview with the CEO of ICPT. It is no surprise that he was defending their drug but the way he did it was really surprising and unethical. He told the reporter that these patients who died of the overdose were very sick and would die anyway. I almost fell off the chair when I saw this. I must say he is really stupid to say this in public and I’m almost sure that there will be a flood of lawsuits for ICPT in the months ahead.

 

In short, it is still too early to tell whether ICPT has already priced in all the potential risks. It is not a good idea to catch the falling knife even though it could turn out to be a good entry point. Better to let the dust settle before jumping in.

A double in the work

This is year is a year of semiconductors as the whole sector has been on fire continuously, thanks to the fast advancing in the life-changing technologies such as mobile computing, auto-driving, and artificial intelligence etc. All of them will need chips. Micron (MU) is one of those high-flying chip stocks and has almost doubled this year. It is making a new high as I’m writing following another strong earnings report and forward guidance. Some analyst has upgraded it with a price target double from the current level around $38. I agree that MU will double in the next year or so but jumping in immediately may not be a great idea and here is why.

 

You see, as with all the tech stocks during the dot.com bubble, MU had a moonshot run to almost touch $100 back in 2000. Following the bubble burst, it crashed down to low single digit in 2008 and started to move up nicely after the financial crisis, reaching $36 in 2014. But it didn’t hold. Rather it got killed again with a 50% decline in early 2016. So with the current price about $38, it is just making a 2 year high, which is impressive. The thing is, the $40ish price is a strong resistance, a 15 year high that it has to break out. While anything is possible, in general, it is quite difficult for a stock to challenge its 15 year long resistance successfully with just one attempt. More often than not, a few attempts will be required to gain sufficient momentum to  break it. I think this is likely the case for MU as well. Its technical setup has also given some hint on this: there is apparent negative divergence with MACD in both of its daily and weekly charts. It often suggests that MU has not gain enough momentum at the moment to push through the overhead resistance right now. I think the more likely scenario will be that MU may lose its momentum for now and then declines towards its breakout level around $32 to test the support. That will be a more favorable price to get in to me. With this plan in mind, I entered a $37/32 bearish call spread, wishing to make some money if it indeed follows the downward path as I expected. If I’m lucky enough, I will use the gain from this short-term shorting to fund my next long position for MU.  

It is real or false?

I closed my short arm for NVDA today (puts) and leave the long arm as is ($155 naked puts). The sudden jump a week ago caused some pain for my combo short position but as I said, I expected NVDA to come down towards $175 quickly. Apparently I was even too conservative as it almost touched 170 today. My short arm has recovered most of the paper loss due to the jump, so as planned I closed it now. Looking at its chart, I'm not sure this correction is already done by now. It is a really possibility that NVDA may go down toward 165 or even lower but I doubt it will go below 155. So I hold my 155 naked puts till it is expired in Dec, which will give me a great profit from it and several times more than the small loss from the short part. I'm still holding the short with 190/185 bearish call spread that I entered when it jumped to 190. It is now showing good profit as well and I'm betting there may be more gain for it if indeed NVDA continues to go down a bit.

I hope the recent breakout is real for NVDA but technically it is difficult to say for sure as the weekly chart dose not support a quick uptrend. It is often the case that a sudden up move due to analyst upgrading can quickly fade without other more fundamental support. Will see how NVDA behaviors in the next few weeks to get a more clear sense whether NVDA is already in a new uptrend. So far I'm not fully convinced yet, especially after it falls back below its support ($175) so quickly after the recent breakout. It bears the question whether it is a real breakout or a false one. I can argue both ways; so will let the market tell me where it wants to go.

Where is the limit?

Have you heard “Synthetic Embroys”? Most likely not. It is basically an artificial human embryo that can be created automatically from stem cells by their self-organizing into structure that mimic embryos. This is another scientific finding that may potential open the door to create a human baby in the lab without a sperm and egg, following the sheep cloning 2 decades ago.  Just difficult to imagine what the world will look like if this really happens down the road! There are simply too many unanswered moral and ethical questions in this front. You may read more detail here with videos. It is fascinating to watch.

 

Now putting aside the ethical questions, one thing I think is very likely emerging from this new technology is to develop human organs if the technology can be further developed that can be well and appropriately controlled. After all, there is a huge demand for organ transplantation but the supply is vastly in shortage. I won’t be surprised to see some new biotech companies created by using the technology for developing human organs. I hope this is the direction it will go to solve an urgent unmet medical need facing the world. I can see a path way for it similar to CRISPR, a technology that can edit human genes and maybe used for treating genetic diseases. There are already many biotech companies created in this area and the most promising one is probably Editas (EDIT). It is beyond me to see where the boundary is for both of the technologies as either of them may be harmful if not used appropriately. Nevertheless, I sincerely hope we human beings have enough wisdom to surround their potential harms but pursue their good benefits!

Where are the bears?

It is Sep/Oct, a notoriously bearish time period of a year for the stock market but so far, we have only seen a 1% decline that has quickly recovered. And now we are seeing new highs one after another. It is really difficult to look for a bearish prospect. Even a unexpectedly hawkish FED decision to start earlier unwinding QE could barely move the market down. People are just feeling good now. The AAII survey indicates that bulls are more than double the bears. The VIX is moving back down below 10 again. I start to see a widespread complacence again. This is exactly the time when the bear will strike without notice, folks. Looking for a sudden jump of VIX that may come any day for now. After all, it is Sep and Oct. The market tends to keep its rhythm, although it has a habit to camouflage itself to hoax traders into an opposite direction. Be cautious, friends!

Can one short a market leader?

Just came back from a busy trip and thought to write something that is fast moving.

 

You probably often heard this kind of statement and I was even told that this is the trading 101 that one should not short a market leader. Really? If someone tells that with certainty, then he is either an ignorant who does not really understand what is trading about or even foolish! Here is why.

 

Trading is mostly about short term speculation on a temporary trend that may or may not last long. You may have heard about swing trade, which is basically to bet for a short term fluctuations of a stock. Regardless how strong a stock is in its uptrend, it would be foolish to think that it will only go a straight line up. There is basically no such thing in the stock market. So to me anything can be shorted, strong or weak. It is not a matter of whether or not market leaders are “shortable”, what really matters is how one short them at the right time. No doubt it is extremely dangerous to short a market leader outright or naked as a sudden trend change can wipe you out. We are just witnessing a real life example last week. It is about NVDA, the Street darling and a clear market leader for the past year. But even a great market leader like NVDA may go too much ahead of itself from time to time and it could be a good short candidate when it goes into a short term downtrend. I have talked about my shorting on NVDA a few times here. It was clearly trending down in the past couple months and I took the opportunity to short it. However, I definitely did not short it naked. As I said, I had a clear exit point for this trade with the understanding that NVDA is a great company and may jump high easily. The sand line is $175 for me, as above it, it would break out the downtrend line and likely will resume its uptrend thereafter. While I was not expecting the trend would change so soon, it did so about a week ago following a very bullish upgrade by an analyst. NVDA bulls were certainly happy to hear that and they pushed the stock up by $20 in two days, from $170 to $190. Congrats to those being long on NVDA. The real pain should be those who aggressively shorted NVDA outright as this $20 jump would have certainly kill them. I think the large part of this up run was likely due to a short squeeze, namely those who shorted NVDA naked had to buy to cover their shorts to minimize further pain or loss. But this sudden trending change does not mean everyone who shorted NVDA must have experienced a great pain. If so, I’m an exception :)

 

As I have explained in more detail before, I took a stepwise approach to set up my combo short position, aiming to gain a lot if I’m right and lose little or no loss at all if I’m wrong. As presented, my current combo short position has locked me in for a certainty of gain regardless how NVDA goes, i.e. no downside risk whatsoever for me. As such, I don’t need to rush to cover my short. Actually I’m still holding my combo short position as of now, giving the rationale that I believe this sharp up move was more to do with short squeeze and if so, it may come down soon. My plan now is to cover my short arm when NVDA indeed retreats from the current high and will keep my long arm to its maximal gain. If it goes well as planned, my net result will still be a great profit even though the trend has changed against me now. To further enhance my potential gain expecting a quick “correction” of NVDA, I even entered a new bearish call spread that will allow me to gain if NVDA did not go beyond $190 in the near term. I believe NVDA may come down towards $175 in the next week or so and I’ll unwind my short positions totally if that happens. Of course, by no means I will continue to short NVDA for a sustainable period as the market has clearly told me, it wants NVDA to go up moving forward. When the market speaks, I listen and change my mind accordingly!  

A short term bottom for dollar

I'm travelling this week and therefore will be quick with a brief note of the dollar trade. As I said back in July, US$ is likely entering a long-last downtrend that may be a few years before its end. At that time, US$ was at around $100 and now it is in low 90s. You may not feel it is a big deal but for a major currency, 5-10% move within months is actually very significant. The question is whether we have seen its bottom by now? Yes and No depending on your time horizon. I still believe that there is a lot more for US$ to go down in the next couple of years, probably another 10% or so at least. Having said that, the current fast downward drafting for dollar may come to a pause in the short term. From the technical perspective, dollar has shown a bottoming pattern on its daily chart with a clear negative MACD divergence. This often suggests a turnaround is near if not already in. This may last a few weeks to months depending on how strong the rebound will be. But its weekly chart is still very bearish and has not shown any bottoming sign! That's why I strongly believe it will resume its downtrend following a rebound and reach a much lower point in the next 1-2 years.


This aligns very well with the price actions for precious metals like gold and silver. They have got a very strong upward move lately along with the weakening dollar and has broken out its several years' downward trend line. This is very impressive but it needs some rest in order for more sustainable appreciation for the long run. So I think gold/silver will be weak in the near term but will continue to move up more strongly after the weakness.

The new pioneer in CAR-T therapy

Now the dust has settled that CAR-therapy is definitely effective at least in treating hematologic malignancies. Novartis has won the gold metal by securing the first ever approval of its CAR-T product and Kite will soon to follow. While it is revolutionary in cancer treatment, it has its own limitation and challenges, mostly the difficulties in harvesting the useable T cells from the patient and then genetically modify them before infusing back into the patient’s body. It is a very time and labor-consuming process and therefore is very difficult to be widely used like other medications that can be simply swollen or injected. That’s why it costs so much and will be limited in use with the current modality. But as with any innovation, it will evolve and be modified to be more use-friendly as long as it is proved to be useful and I have no doubt that CAR-T therapy will see a lot of more innovative changes as the time goes by. One of the innovative explorations is to try to collect the T cells from the healthy donors, modify them and make them ready for use for patients. If this proves to be successful, CAR-T therapy will become something similar to other traditional medicines that are easily accessible to patients when needed.

 

Cellectis (CLLS), a France-based biotech, is one of a handful of companies at the forefront of so-called allogeneic CAR T-cell therapies, i.e. it uses mass production of compatible T cells from donors rather than individually modifying cells for each patient. If you want to be a visionary in investment, you got to be a bit thinking ahead. I’m excited about this new technology but with the understanding that its path to success won’t be easy and smooth. CLLS is indeed facing some significant challenges at the moment.

 

After its initial promising result from an 11 year girl with aggressive acute lymphoblastic leukaemia (ALL) with its wholly-owned candidate, UCART19, the company has already licensed it to Pfizer and Servier. Unfortunately its first Phase I trial is just being put on hold due to the death of a patient. As we all know now for the current autologous CAR-T therapy (using self T cells), it may induce a life-threatening side effect, cytokine release syndrome (CRS). While it sounds exciting by using the allogenic T cells (from others), it faces a lot more challenges associated with this foreign source of cells. You see, CAR-T therapy is very similar to the organ transplantation in the sense that it is much safer to use one’s own tissue (if possible) than to use other’s tissue. With the allogenic CAR-T therapy, it is not only susceptible to the same type of CRS, it may also be associated with other life-threatening side effects that the autologous CAR-T is not prone to, namely the capillary leak syndrome (CLS), graft versus host disease, and other autoimmune reactions. All of them could be fatal if not managed appropriately and timely. Cellectis is seeing the first dose of pain at the moment and for sure it will see more along the way in developing this exciting but more challenging next generation of CAR-T therapy. But believe me, eventually this new technology will be successfully developed, as these side effects, although life-threatening, are nothing new to hematologists/oncologists and can be managed with appropriate measures and interventions. It is just a matter of time to find the best risk-minimization approach to release its full clinical benefit potential with manageable risks. I don’t know how long it will take but I’m very confident to see it become a reality in just a few years either via CLLS or other biotech companies in exploring this new frontier.  

Think ahead

It is a natural disaster, a historical record never seen before still ongoing as I’m writing. I’m talking about the largest tropical rainstorm, Harvey, which has hit the continental U.S. and has turned many places of Texans & Louisiana into lakes and rivers. The damage is astonishing, estimated at least over $50 Billion. I feel really sorry for all the people impacted, including some friends of mine living there.

 

While this slow-moving water torture is still ongoing, what will happen after it is gone? You bet, it will be a flourishing rebuilding activities that may last for years! As the famous Chinese word implies, crisis also means opportunity. If you can think ahead, yes, there will be many opportunities arising from this humongous disaster. One way to play with this opportunity is to invest in the infrastructure sector as virtually all the major infrastructure will need to be repaired at least or totally rebuilt in this area. One easy way to do so is via the Guggenheim S&P High Income Infrastructure ETF (GHII). GHII that follows the S&P High Income Infrastructure Index aims to deliver to investors exposure to the 50 highest-yielding global infrastructure stocks. Yes, it is not a US only ETF but about 40% of the stocks are US companies. I’m pretty sure that many, if not all of them will actively participate in this intensive infrastructure rebuilding in Texas and Louisiana in the next few years. Even better, you are paid to participate in the rebuilding effort as GHII is paying over a 4% dividend at the current price. You may consider this is one way to support the recovery effort for  Texas and Louisiana, a win-win situation!

I wish JUNO has been out of woods now

Over a year ago, I started to talk about Juno, a clinical stage biotech company specialized in one of the most exciting new immunotherapies for cancer, the CAR-T therapy. I’m a big fan of this new technology and has no doubt whatsoever that it will work and also being commercialized successfully. Here is what I said then: If I can further make a bold prediction, I think the FDA will work with the companies for CAR-T therapies to make the development and submission/approval process as smooth as possible, since they want to see it commercialized as early as possible for the patients' benefit. I liked Juno at that time as it used to be the leading company in CAR-T development and I bet on it when it first ran into some crisis. Unfortunately the path for Juno is nothing less than dramatic or even tragic to some extent. A few patients died and its leading project has finally been tossed out. Juno, once the front runner, is now far behind its competitors like Kite.

 

While Juno seems to be left dead for almost a year, all the sudden it has jumped 40% higher in the past few days. Has Juno revived and come out of the woods by now? Maybe not yet! As I said, CAT-T will soon be available commercially as a maturing new therapy, first by Novartis and then by Kite in the next few months. Due to its bright prospects, the biotech giant, Gilead, has decided to acquire Kite with a whopping $11.9 Billion price tag, a huge confident vote for CAR-T! The success of Kite makes many investors believe that Juno could be the next target for M&A and hence a panic buying to push it up nearly doubling. But I think this is nothing more than a speculation, even though I really wish Juno will soon be acquired as its investor! For sure I’m still holding the faith for Juno and I certainly believe it will revive to bring its CAR-T product to patients. But we are talking about at least a year later before Juno can release any clinically meaningful data from its ongoing trials. Before that, there is still too much uncertainty involved, especially with what Juno has experienced so far with fatality. I’m not sure any company would pay big money to buy Juno at this stage before they know for sure it has something ready for marketing. I think the hype for Juno now will fade soon after people cool down. For my money in Juno? I’m still holding my 2018 options. As I explained with some details, I’m currently holding it for free and I’m using this opportunity to try to extract more money from this euphoric move. You see, investing is art, not science. Even though I’m betting for an uptrend for long term, nothing can stop me from doing some short-term trading that may be even shorting it from time to time. I have already done so several times for my Juno calls and my short-term income has already been way more than what I paid for the long calls (more than double). I have luckily managed to do so during the time while Juno has been doing nothing but down most of the past year. One thing I’m always interested to do is to short something when it is apparently in a euphoric state. Since I’m holding the Juno calls for free, which are just breaking even at the moment due to its 40% move last week, I added a short arm now to create a bearish call spread, expecting that Juno may soon come down. If so, I will again gain nicely from the short arm while I can continue to hold my long calls till its maturity in Jan 2018. Between now and next Jan, Juno is likely just a dead cat that may bounce from time to time. I’m trying to turn the dead cat into an ATM as much as possible :)