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, August 3, 2015

The Best of The Blunt Bean Counter - Resverlogix - A Cautionary Tale

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a November, 2010 blog post on my trials and tribulations as a shareholder in Resverlogix, a small Canadian public bio-tech stock. [Note: I have edited the original post to reduce the length and updated the tale at the conclusion of the post].

I selected this post as a "best of" for two reasons:

1. It is still an interesting story and my experience should still prove as a caution for your investing, even almost 4 years after my post was published.

2. This post has a soft spot for me. Back in November, 2010, I was a struggling blogger with maybe 3 readers. When I posted this blog, it was picked up by Seeking Alpha a large U.S. investment research and discussion site as a featured article and by several Canadian finance bloggers as a "blog to read". This publicity started my blog on the way to where it is today (a blog with 13 readers :)

Resverlogix - A Cautionary Tale

This post 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 investment 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 post 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 time frame.
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 stock market 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 was caused by RVX not receiving any public offers, Big Pharma’s reluctance to make purchases due to numerous drug failures and 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,” investors were hopeful a bidding war for RVX would ensue, 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 Bloom berg 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 two's 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.
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 to $2 when this blog was (initially) posted.
All in all, there was mass confusion and huge paper or actual stock losses for RVX shareholders. I probably will now need RVX-208 to combat the heart attack symptoms this experience caused.

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 (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.") to comments that the HDL levels were out of line and may never achieve clinical success.
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.

Epilouge

In 2013, RVX came back to life as it undertook its ASSURE  Phase 2b clinical trial that evaluated RVX-208 in high-risk cardiovascular patients with low HDL. The company in early June spun-out RVX Therapeutics Inc.(a unit of RVX containing an epigenetics-based BETi drug discovery platform) to Zenith Epigenetics Corp. so that shareholders of RVX now owned one new common share of RVX and one common share of Zenith. As part of the spin-out, Zenith is entitled to a tiered royalty of 6-12% of revenue derived from RVX-208. Investors liked this transaction as if RVX did well Zenith shareholders would benefit to a lesser degree and they also had a separate platform of drugs. I received Zenith shares and still have them, as they are not publicly trade-able and I look at them as a lottery ticket.
Unfortunately, in June 2013, RVX announced the Assure trial did not meet its primary endpoint and the stock which had risen from the dead to as high as $4, again crashed down to around 23 cents.

In September 2014, the company announced that Post hoc analysis of data from the two Phase 2 clinical trials with RVX-208 showed a reduction in Major Adverse Cardiovascular Events (Mace) in patients with cardiovascular disease and a 77% reduction of  MACE in patients with diabetes mellitus. This news gave the stock new life and together with an April, 2015 announcement of a licensing agreement with an Asian company Shenzhen Hepalink Pharmaceutical Co., Ltd., the stock which seems to have nine lives, has awoken again and rose to a high of $3.14 in April. The stock has now settled back to $1.82 as of Friday as investors now wait in anticipation of a PHASE 3 trial that is scheduled to start in the fall of 2015.

This saga is now coming upon ten years for me as I still have some shares kicking around and the spin-off Zenith shares. Who knows, maybe the Phase 3 trial will finally cause a buy-out of RVX or maybe the stock is on its ninth life and the saga will finally come to a conclusion.

Disclaimer: This post is a cautionary investment tale. It is not meant in any manner, as an endorsement of RVX as a stock purchase. 
 
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

6 comments:

  1. At least you've kept a sense of humour about throwing good money after bad :).

    I 'invested' $500 on an internet grocery store back in the 90's. Because unlike the risks you took in pharma, online grocery shopping is/was certain to take off. Except of course the stock dwindled until it was disappeared. Thankfully it only cost me $500 to learn my lesson.

    Picking stocks is like gambling. Pretty much everyone loses, and pretty much everyone will still tell you how big they're winning.

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    1. Hey Glenn

      Not sure I concur. Playing biotech stocks is educated gambling, I agree. The general market, not really in my opinion if you buy good quality stocks/ETFs and hold them.

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    2. yes, I meant individual stocks. Investing in a specific company is gambling. Investing in the entire market through indexes or ETF's is actually investing.

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  2. It seems to me the moral might to keep most of your money in broad-based index funds and save your time and energy for more rewarding (both emotionally and likely financially) pursuits...

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  3. great story... now I know what happened to my money.

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