My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, November 29, 2010

Resverlogix- A Cautionary Tale

This blog will recount the saga of my share ownership of  Resverlogix Corp. (“RVX”), a TSX-listed company. This is a cautionary tale in investing and a very interesting story and it should not be construed as advice. If I had the inclination, there is enough gossip and innuendo surrounding this stock that I could spin this story into one that could be printed in the National Enquirer; however, it is my intent to be mostly matter of fact and reflect the investment element.
The saga begins in the spring of 1996 when I was made aware of a bio-tech stock out of Calgary called Resverlogix Corp. (“RVX”). The company was working on a drug (RVX-208) to turn on Apolipoprotein A-1 (“ApoA-1”). ApoA-1 is the major protein component of high density lipoprotein (HDL). HDL is known as the “good cholesterol.” In extremely simplistic terms it is hoped that the protein will promote the removal of plaque from the arteries by reverse cholesterol transport (cholesterol is removed from the arteries and delivered to the liver for excretion).
With my eyes wide open to the fact that bio-techs are very risky, I dipped my toe into RVX as the concept denoted above was very novel and extremely exciting. In addition, the CEO Don McCaffrey stated it was the intention of RVX to sell pre-clinical, which in my mind removed substantial bio-tech risk.
In early December 2006, Pfizer announced that its cholesterol drug Torcetrapib failed its clinical tests and Pfizer’s stock plummeted. If I had done more then dip my toes in RVX, I would be writing this blog from the Turks and Caicos because after Pfizer’s failure, RVX was seen as a possible successor and, fueled by rumours of a sale, RVX stock went from $5 to $30 within about ten weeks. Helping fuel the fun was a press release stating that RVX has hired UBS Securities as an investment banker to help with a “strategic alternatives.” Not a bad profit for a ten week timeframe.
What follows is the roller coaster ride from hell. The stock drops from $30 to $13 in two months as no deal emerges and by August of 2007 it is at $9.  By the end of the October 2008 crash RVX is down to $2.30. I blow most of my gains on the initial huge run by buying back shares as I think the price is a bargain. This story includes my ignorance.
The dramatic stock drop is blamed on RVX not receiving any public offers and Big Pharma’s reluctance to make purchases due to numerous drug failures and, probably more significantly, financing issues.
Anyone who has ever been involved with a small-cap stock, and especially a small-cap bio-tech stock, is aware that financing is a huge issue. RVX engaged in “death spiral financing,” a process where the convertible financing used to fund a small-cap company can be used against the company in the marketplace causing the company’s stock to fall dramatically. It can lead to the company’s ultimate downfall.
While RVX stock stayed low, the science moved along tremendously with positive testing and good results in Phase 1B/2A testing . In October 2009, RVX announced it would move ahead with parallel tests called Assert and Assure. These studies were to be run by renowned researchers  at the Cleveland Clinic. This was considered to be important confirmation that RVX had a potential blockbuster drug.
The primary endpoint of Assert was to determine if RVX-208 would increase ApoA-1 and to examine safety and tolerability. Assure was going to use a process called intravascular ultrasound to detect changes in plaque and examine early lipid effects and plaque on the coronary vessels. Assert moved ahead quickly, dosing patients ahead of schedule in late 2009.
What was extremely interesting to investors was that at the beginning of 2010, even though the stock price of RVX was only $2.40, the science had moved at a rapid pace and  if Assure was successful, a “big if,” there would be a bidding war for RVX with estimates in the range of $30-$60. Of course, if Assure failed, RVX would most likely fall to less then $1.
I personally felt that $2.40 was a ridiculously low price for a drug with potential yearly sales of 10-20 billion dollar and purchased more shares at that point. Score one for my investing intelligence.
The stock floated around the $2-$3 range until March 2010 when the stock took off up to $7.50, mostly propelled by an article by Ellen Gibson of Bloomberg stating “Resverlogix Corp., without a marketed product, may accomplish what Pfizer Inc., the world’s biggest drug maker, couldn’t: Creating a new medicine that fights heart disease by raising so-called good cholesterol.” There was some additional publicity that followed and the stock jumped around in the $5 to $8 range. At this point I sold a portion of my stock and bought call options. The options provided me high leverage but could expire worthless, but most importantly, the options allowed me to remove a significant amount of my cash investment, while retaining potential upside to the stock.
In May 2010 it was announced that the Assure trial would be delayed as RVX was having trouble recruiting patients. The RVX spin was positive saying that since Assert had finished early, the researchers could now use what they learned in Assert to plan Assure; however, many months were wasted. The market did not appreciate the delay in Assure and the stock price fell from $6.80 to $2.80 in late June.
RVX decided to present the Assert data at a Late Breaking Trial Session on November 17th at the American Heart Association (“AHA”) conference. These session slots are supposedly only provided to those companies providing significant trial results, whether good or bad, and there is an embargo on any information being released prior to the presentation. RVX would lose their presentation spot if any information was released.
At RVX’s Annual General Meeting in early September, which I did not attend, the trial’s principal investigator Dr. Stephen Nicholls of the Cleveland Clinic spoke, and while he could not speak about Assert results, those there blogged about his appearance and said that his apparent enthusiasm for RVX 208 bode well for the AHA presentation. After the AGM, the stock rose from the high twos into the mid-fours over the next several weeks as attention was directed towards the November 17th AHA presentation.
Many investors were unaware that Merck would also be presenting results on a HDL drug they were working on known as Anacetrapib, a drug from the same family of inhibitors as Pfizer’s Torcetrapib which, as noted above, had failed miserably. Thus, investors who had heard of Merck’s presentation were not expecting much.
A cause of concern for RVX investors from August onwards was that the short position grew from 440,000 at July 31st to 1,770,000 at September 15th and ultimately to 2,160,000 at October 31st. An increase in shorts prior to the most significant trial results in RVX’s history was reason to raise an eyebrow. I figured the increase might have something to do with the people who had financed RVX the last year using shorts as a hedge on their warrants, but I was unsure and sort of wary of this increase.
I expected an increase in RVX’s stock price as the AHA approached on anticipation of positive results that would put them one step closer to Assure testing and the small possibility that the Assert results would bring an offer from Big Pharma. Not much happened until the week of November 14th, which is now a week I will never forget and leads to the title of this article.
On Monday, November 16th, in anticipation of the AHA presentation, RVX stock ran from $5.72 to $6.39. On Tuesday, the day before the presentation, the stock ran to a high of $6.98 in the morning and then settled at $6.70 or so until 3:30, at which time, out of nowhere, the stock dropped to $4.50 on significant volume. Needless to say, it was a shocking last half hour of trading and rumours on the stock bullboards ran from a leak of bad results to the shorts pulling a “Bear Raid;” a tactic where shorts try and push the stock down to cover their shorts. This “Bear Raid” theory seemed to make the most sense at the time, since the shorts had a large position with RVX’s presentation scheduled for the next day. A leak did not seem to make sense based on the embargo by the AHA.
Apparently the embargo on the late breaking sessions at the AHA on Wednesday was lifted first thing Wednesday morning. Early Wednesday morning Bloomberg reported that “Resverlogix Corp.’s most advanced experimental medicine, a cholesterol pill called RVX-208, failed to raise levels of a protein thought to help clear plaque from arteries in a study.”
The Bloomberg report was followed by an RVX press release that said the “Assert trial data demonstrated that the three key biomarkers in the reverse cholesterol transport (RCT) process showed dose dependant and consistent improvement.”
Following the RVX release, the Dow Jones reported “A study involving a new type of drug being developed by Resverlogix Corp. showed it failed to meet a goal of boosting levels of a specific protein the drug was designed to raise.”
To put the final nail in the RVX’s coffin for the day, Merck reported its Anacetrapib had tremendous results in increasing HDL and also reducing LDL the bad cholesterol.
The stock opened around $5.30 on Wednesday morning with investors obviously thinking the shorts had caused the prior day’s stock price drop, but after the press releases, the stock quickly dropped to a low of $3.35 by 9:45 am. However, investors were clearly now not sure what to believe; the headlines by Bloomberg and the Dow Jones, or RVX’s press release. The stock rebounded to $4 by the time of RVX’s actual presentation. By all accounts the presentation was very factual emphasizing that RVX did not achieve a statistically significant  % change in ApoA-1. Supposedly, to be statistically significant the p (probability value) would have to be less than 0.05 and RVX’s was 0.06.
Following the presentation, RVX’s stock slid to $2.73. It then slid Thursday to $2.14 before rebounding on the Friday to $2.34. As of today’s writing, the stock is $2.00.
Notwithstanding the fact I probably will need RVX-208 to combat the heart attack symptoms this experience caused, the story still has more twists and turns.
Some questions arise in relation to the AHA conference itself. Supposedly video clips of presenter interviews were made days before the presentations, and supposedly the slides for Dr. Nicholls’ presentation were available online before the presentation.
The conclusions presented by Dr. Nicholls were buffered somewhat in a post presentation RVX conference call on Wednesday with statements that some of the data RVX noted in their press release was promising and, if the trial had continued, the results may have become statistically significant. More importantly, Nicholls made a couple comments that RVX-208 could still have a “profound effect” on reducing plaque volume. It was clearly a “could” and not a “would,” but a far more positive spin than the media was reporting.
All in all, there was mass confusion and huge paper or actual stock losses for RVX shareholders.
You are probably thinking “Why the heck did Mark not sell the day before the AHA?” In retrospect, that would have been prudent, however, I had decided I was going for a home run and would accept a strike out. In the bloody aftermath, more detailed analysis of RVX-208 and Merck’s Anacetrapib were reported. The analysis ranged from optimism for Anacetrapib to comments that the HDL levels were out of line and may never achieve clinical success.
Meanwhile, RVX created significant problems for itself with its endpoint selection, especially since there was evidence that a longer trial may have given the drug time to   achieve statistical significance. RVX also had an increase in liver enzymes not highlighted in its press release that led to further unanswered questions. The uncertainty around RVX-208 became cloudier as AHA clips and Medical publications said such things as: 
"The discussant for the trial, Eliot Brinton, said “that a drug like RVX-208 that has a modest effect on HDL levels might have a large clinical effect.”"
MedPage Today, quoted Elliott Antman, MD, professor of medicine at Harvard Medical School (a very well respected researcher according to a doctor friend of mine) as saying
"The important thing that we saw here with RVX-208 was the dose response. That means that something is happening with the drug. I think that the dose response trumps P-values."
What is a non scientist to think? At the end of the day, RVX’s stock price was hit so badly that it may cause financing issues in the future. Some may say that although the Bloomberg and Dow Jones writers were accurate in reporting that RVX did not achieve statistical significance, they also went for headlines instead of researching the more hidden or complicated facts. It remains to be seen whether RVX does indeed have a drug that will inspire Big Pharma to either buy or partner with RVX .
I am not sure there is a moral to this story; this was cathartic to write and like I said, it is a saga, a saga that is still ongoing. I guess, if anything, this is just a cautionary tale about investing in biotech’s and investing in general.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

6 comments:

  1. "...if Assure was successful, a "big if", there would be a bidding war for RVX with estimates in the range of $30-$60. Of course, if Assure failed, RVX would most likely fall to less then $1."

    What you've called an investment is really speculation. This strategy would not be advisable to anyone unwilling to potentially wipe out their capital.

    "Your goal as an investor should be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now."
    -Warren Buffett

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  2. Skuj,I cannot dispute your comment in anyway. Although I think it was clear when I say "With my eyes wide open to the fact that bio-techs are very risky" that this was a speculative investment and some of us like a little spice in our investment portfolio; as long as it is a very small proportion.

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  3. Its a good story. It seems to me that investing in bio tech firms like this, with such lengthy trials (for good reasons) on new medical 'breakthroughs' is a 'long term speculation' - is that a paradox?

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  4. Robert- I am not sure a speculation or a breakthrough has to be short term, thus I don’t necesarily think it is a paradox, but I get your point. Bio-techs are clearly risky and should only form a very small part of your speculative portfolio. But the interesting aspect of being a long term spec. is that if the company is successful in at least its initial testing results, in most cases you can take out your initial investment and play for free, removing your capital risk over the long term. However, many bio-techs fail early on, so there is no long term and you lose your entire investment.

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  5. RVX is currently trading at about $1.30. It seems to be in a 'death spiral' as far as financing is concerned. RVX is an amazing story.

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  6. I see RVX is trading at $1.21. Up 3 cents. There may be hope? Surprised it is still listed in 2016

    A great saga of investing. Thanks for posting.

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