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Medical Research Collaborative, LLC
(1/) Someone mentioned a poor risk/reward in holding AMRN here, on which we agree. But thought we would elaborate as to why. Expected value (EV) is paramount in evaluating the profitability of a position.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(2/) EV is found by first assessing accurately your odds in a given situation. For example, if you are dealt AA heads up in Texas hold’em against KK, you have an ~80% chance of winning the hand. You certainly may lose, but over 100 times you probably will win close to 80%.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(3/) However, over any 10 permutations you may see 5/5, 2/8, 0/10, 10/0, 8/2 wins/losses. In fact these *must* all happen given enough occurrences (10,000+). But you can be “reasonably” confident in 100 occurrences (for this stat) approx 80 will be wins.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(4/) So how do we judge whether or not a healthcare analyst’s calls are profitable? The answer is: it takes a while. But if after some 20 or 30 calls they are not trending positive (>7%), or very positive (>20%) their calls are probably negative ROI or less than ideal investments
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(5/) Of course this is complicated further by timeframe, and events outside of one’s control, such as bear markets (especially extensive ones) or irrationality in markets for any extended period of time.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(6/) But when speaking plainly of odds, investing in healthcare companies is not an exact science, unlike the poker analogy above. It requires subtlety. Regarding AMRN, we have two conflicting sets of odds:
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(7/) The sellside analysts’ such as Michael Yee’s, and ours. Yee gives a CRL 25% odds and a very broad result of <$10. And an approval a result of $21-$22. That would mean a 25% chance of a 50% loss and a 75% chance of a 25% gain.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(8/) Thus, we can calculate the EV of his call this way: [(0.75 * 0.25) - (0.25 * 0.50)] = EV. The EV according to Yee is thus +6.25%. That means every time you go long AMRN in this exact set of circumstance and at a price of $17, you will net a 6.25% gain.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(9/) That is of course less than 10%, and has high variance. It’s high because a full 25% of the time it will fail. Low variance would be less than 5%, or preferably less than 2%.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(10/) A 6.25% profit margin is poor in speculative so called “smid cap biotech” investing. And so we are surprised (not really) to see him still recommend AMRN as a buy. Especially with the problematic overhang of patent litigation not yet resolved.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(11/) Our viewpoint, based on our expertise and the data we have gathered, puts a CRL at ~70% chance, but with a result of ~$3-$5 pps. We think $5 immediately, and then down into $3s as investors continue to flee the asset as ANDA bench trial date approaches.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(12/) We do agree with Yee on the $21-$22 upside, due to patent overhang, however. Thus, our EV is highly negative: [(0.30 * 0.25) - (0.70 * 0.80)] = -48.2%. Thus in our view, every time you short AMRN in this exact set of circumstances, you will net +48.2% profit.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(13/) Of course, as with anything based on odds, chance will cause variance. And one could be right on the odds of a particular set of circumstances but wrong regarding that individual occurrence. Yet 75% odds of something occurring and then not, likely means you were just wrong
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(14/) Because in my experience, unlike with random chance events such as winning or losing with AA vs KK, if you are right or wrong in healthcare investing, you are right of wrong for more concrete causes mixed with utter chance—rather than total chance (as in poker).
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(15/) In other words, where there is more data, there is more certainty. It’s not possible to know what will be in the briefing docs or how the panel will vote, but it’s clear the data have significant problems, and clear FDA tends not to approve based on one confounded dataset.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(16/) Furthermore, it’s not possible to know if DRL/Hikma will settle, but when considering the potential size of the win (REDUCE-IT indication), as well as the sheer rubbish that is Vascepa’s IP (and you would need expertise in patent law to know), it makes that outcome unlikely
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(17/) We have an >85% odds placed on patent litigation loss, which will send AMRN’s stock under $1. That is actually the primary driver behind our 250 pg report, and the EV on that short from $17 is approx +74%. Now consider what a compounded short would yield. What do I mean?
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(18/) A compounded short can yield greater than 100%. In this case, principal + profit closed out, and then re-shorted. So, from $17 to $3 is ~82% gain. Close out and re-short with 182%, and return 70% on patent litigation loss, or 309%, which includes principal, so *209% ROI*.
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(19/) So what really is the EV here? Is Yee’s 6.25% compelling to you? What about the double exposure to risk? (FDA analysis/decision and ANDA filer litigation). Two ways to lose massive ROI, and must scale *both* hurdles to win?
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Medical Research Collaborative, LLC Sep 21
Replying to @MedResCol
(20/) The only compelling position here is a short one. The bull-case is weak and offers an unattractive EV with too much risk on the way to realizing it.
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