I recently wrote a piece over at SeekingAlpha looking at whether or not an upcoming FDA Advisory Committee represented a good trading opportunity. In the article, I outlined some analysis that I undertook looking at the results of trading ahead of an Ad Comm. Meeting based on defined entry and exit rules. My goal was simply to establish whether there was potential for trading around these events – I was not advocating the (very simple) strategy that I laid out.
The analysis suggested that there was an edge with this strategy with 70% winning trades over the time frame assessed (2 years). The positions were held for an average of 8 days and showed an expected return of 3.8%.
Given that this was a retrospective analysis I wanted to write a brief update looking at how Ariad Pharmaceuticals (ARIA) and Talon Therapeutics (TLON) might have been traded ahead of their Ad Comm. Meetings this week.
I did trade ARIA in my personal account but was late establishing the position and therefore had a sub-optimal entry price.
The strategy that I investigated in my last article called for entering the trade at the close 15 days prior to the committee meeting. The trade was held until one of the following criteria were met at the close:
- Target gain of 35% reached,
- Initial target loss of 5% reached,
- Trailing stop (max gain – 2% once position is +5%) reached,
- Position still open with three days to go until meeting.
I would like to reiterate that all these targets (and the entry and exit points) are based on closing prices. Intra-day swings may require tolerating potential losses (and ignoring potential gains) greater than the strategy lays out.
Based on these criteria, the strategy would have traded ARIA and TLON as follows:
So the strategy would again produce again with these two stocks – though rather a small one.
If one were to use the strategy as a starting point, rather than a set of hard rules, might a different result have been possible? Reviewing the charts for these two stocks over the time period in question is helpful in addressing this question.
Looking at ARIA, the timing of the entry at 15 days provide a pretty good starting point. The initial stop loss was also placed at a logical level – in fact, based on the chart, one might have even decided to tighten the initial stop slightly based in recent support around $14.00. Exiting before the briefing documents was certainly the right move. ARIA is a much larger company than most of the biotechs that were reviewed for the initial analysis so it is not surprising that its price moved slightly less than many of the original set.
My position in ARIA had a 4% gain in two weeks.
The TLON chart is also useful. The takeaway here, for me, is that the initial -5% stop loss (hit at $0.90) was just too tight. The stock had good support at $0.86 and had hit this level several times in the preceding weeks. If the initial stop had been placed below this support (at, say, $0.84) then the rapid exit would have been avoided and the trader would have been in a position to capture the very significant gains in the stock over the following week.
The recent movement in the prices of ARIA and TLON provide more evidence that the Ad Comm. Meeting can provide a tradable event. They are attractive catalysts in that the timing is transparent (apart from some uncertainty about the precise timing of the briefing document release) and they have a meaningful correlation with the eventual outcome of the FDA decision process.
Arena Pharmaceuticals (ARNA) has announced that the Endocrinologic and Metabolic Drugs Advisory Committee will meet to discuss its drug lorcaserin on May 10, 2012. I will be watching this stock with a view to establishing a position in mid-April.