When the Markets Are Wrong

A CCXI Case Study

ChemoCentryx (CCXI) is a Phase 3 biotech that applied for FDA approval for Avacopan in July 2020. FDA gave an initial PDUFA date of July 7, 2021. Here is CCXI's chart from Oct 2019 to Oct 4, 2021.

The price was trending up to almost $70 even before anticipated FDA approval on July 7, 2021. Then they were hit with an FDA notice outlining' several areas of concern' 2 months before PDUFA.

Here are the notable catalysts on the above chart:

  • Nov 2019 – Successful Phase 3 (Big jump in SP)

  • Sept 2020 – FDA sets PDUFA date of July 7, 2021 (No meaningful change in SP)

  • May 2021 – Split AdCom vote (9-9) where “several areas of concern” were noted (Big drop in SP)

The last bullet point is our primary focus in this write-up.

A split AdCom vote is not a positive development. FDA uses these advisory committees to help them sort through data, or understand complex trial designs. The FDA leans heavily on their recommendations. Therefore, it makes sense the SP took a substantial hit.

So how does one derisk this potential opportunity?

Answer: You gather as many facts as possible.

There was an interesting tidbit on the Seeking Alpha News section of the CCXI ticker.

On May 4, 2021 AdCom provided an extensive 90-page document outlining the deficiencies. Here it is.

So why is this document so interesting?

Because it gave CCXI insight into what the AdCom saw and how they were interpreting the data.

When a sponsor, CCXI in this case, files a BLA/NDA they do not submit all of the information from the Phase 3 trial. That amount of data would overwhelm and frustrate the FDA. They give the FDA the most relevant parts to support approval.

This document allowed CCXI unique insight into AdCom's decision making process, and their interim conclusions. It also allowed CCXI to provide additional info, which they did.

[Some may be wondering if I read the document in detail? No - I didn't need to. Because a casual glance showed that the AdCom was very specific with their concerns. It is somewhat analogous to a teacher showing you which answers are incorrect, but giving you a second chance to provide the right answer.]

On July 6, 2021 they filled an amendment to their application and a new PDUFA date of Oct 7, 2021 was set.

But this still leaves us with a HUGE unknown of how the FDA will decide on the modified application.

The only way we can derisk this further is to understand how the FDA has ruled in the past with similar types of delays.

I happened to discover this little gem on a CCXI Stocktwits post. It shows the number of delays (and subsequent approvals) over the past 6 years.

Source

It is easy to see that despite a delay, many drugs are still approved. Based on this chart over 85% are still approved after the delay. (It is unknown if this is an exhaustive list.)

In addition Japan had just approved Avacopan on Sept 27, 2021.

In summary, here are the major considerations leading up to the Oct 7, 21 PDUFA date.

1) AdCom vote is split 50/50. [This is basically a coin toss for approval and not worth much.]

2) But we also know from the PDUFA delay chart above that most drugs are approved without a dreaded CRL. These delays are most likely the FDA’s attempt at giving companies a 2nd chance at submitting the correct data.

3) In addition, Japan had just approved the drug and their evaluation criterial is just as strict, if not stricter, than the FDA.

I concluded there was an 80-85% chance of approval.

Couple this with the SP being down over 70% from previous pre-approval highs, it makes for a very compelling risk/reward setup.

So how did FN play this?

Read on...

The price was depressed from previous levels due to the possible negative outcome of the FDA review. Here is the SP chart again.

Here was my thinking:

The share price was clearly headed to $70. But then some news seems to have leaked out (possibly that there were issues with the application). This leak appears to have occurred in late February 2021 when the SP started to slowly drop. Official news (of the AdCom vote) was released on May 7, 2021 and caused a drastic drop resulting in a SP around $11.

I started looking into this company the end of Sept 2021 (2 weeks before Oct 7 PDUFA) when the SP was around $19. Even at this level, FDA approval would send this stock skyrocketing since it was approaching $70 before FDA approval.

I decided to leverage my position by buying OTM $50 Nov calls. I figured this was safe since an approval should push the SP well above $70 giving me a return of over 2,000%. If CCXI received a CRL, I was only out the money I put in.

On Oct 7, CCXI issued an early AM press release that the FDA had approved their drug. The SP did this in response.

The next morning the SP doubled to $40. My options were up over 300% at the end of the day.

Here is the conundrum. Drug approval has been completely derisked yet the SP is well below the level of Feb 2021. How can this be? It makes no sense, but such is the irrational stock market.

This example demonstrates why I don't believe in efficient market hypothesis. Either the market was right last Feb, or it is right now, but clearly it cannot be both. But then again, maybe the SP should be in-between the two.

The lesson here is that if the FDA requests more info from an applicant, the markets will hate it, but that may an opening for a significant investment opportunity.

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