Wednesday, February 8, 2012

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from BioHealth Investor

The upcoming week will be a big one for Hollis Eden Pharmaceuticals (HEPH), a company I've written about previously. The company was founded in 1992 and they've not advanced a single drug to a Phase 3 clinical trial.

Their lead compound, called Neumune, prevents loss of white blood cells (neutropenia), loss of platelets (thrombocytopenia), and loss of red blood cells (anemia). This drug has been demonstrated safe in several Phase 1 clinical trials. The biggest indication for Neumune is protection against acute radiation syndrome (ARS).

Project Bioshield, a response to potential terrorist attacks, was signed into law in July 2004. One of the purviews of Project Bioshield is to develop and stockpile drugs to protect Americans from biological, chemical, and nuclear attacks. The anthrax scares in Washington DC are a chilling reminder of why this may be important: I'll leave comments about feasibility aside.

Sensing opportunity, Hollis Eden has been seeking to provide the Government (specifically the Department of Health and Human Services, HHS) with Neumune to protect against a radiation attack. At first glance, this was a smart strategy. Implementation, however, has not been so easy.

HEPH has been trading wildly (according to Yahoo Finance beta = 5.42) over the past few years, due in large part to their attempts to secure a contract for Project Bioshield. In my opinion Hollis Eden has an extremely weak pipeline, and this procurement is their last hope. Trouble is, much like Lucy pulling the football away before Charlie Brown can ever kick it, HHS keeps moving the deadline back. Initially a target date of September 30th 2006 was set, which was pushed back to November 30th, which was pushed back to January 31st next Wednesday.

So, while I would never recommend HEPH as an investment, I think it will be a fun stock next week for day traders (take a look at Friday afternoon's minute-by-minute chart) and those looking to speculate next week. If HHS! awards a contract to Hollis Eden the stock will take a nice spike. If they don't deliver on a contract, or delay it a third time, I think the stock will take a substantial dive.

There are a couple of ways to play this. A good volatility play is a straddle with March $5 options: open interest on February options is very low, and March options, while still illiquid have a higher open interest.

Now, Project Bioshield has hit some hiccups. A debacle in which a $1B contract was cancelled sent Vaxgen's stock (VXGN.PK) to the Pink Sheets. There have also been calls, by Senators Collins and Lieberman, for a congressional investigation into Project Bioshield.

But here's another twist. A week after announcing the November delay in the HHS procurement, Hollis Eden announced it was selling $26M worth of shares at $6.50, a substantial discount then. The company had $48M in cash at the end of Q3, and were burning on average $6M per quarter: there certainly was danger of running out before the January 31st tentative date set by HHS. Waiting until after a contract award would have meant a higher share price, and a bigger infusion of cash.

One can speculate endlessly about what the secondary offering of stock means about management's confidence in obtaining the contract. To be clear, according to a November press release, Hollis Eden is "not aware of any other company that remains in the competitive range for this contract award".

Whether or not HEPH gets a contract next week is pure speculation. The stock is trading near $6, so shorting it can be risky shorts I recommended on Avanir Pharmaceuticals (AVNR) and Encysive Pharmaceuticals (ENCY) were both in this range, and both paid off very well! This is a situation where I like to buy puts, and I have purchased some. To be clear, this is highly speculative, but I like the odds of betting on government inaction. Should be a fun week!

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