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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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August 8, 2006

Back in Court With Ariad and Lilly

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Posted by Derek

How time zips along - it's time already for the next trial addressing the scope and validity of Ariad Pharmaceutical's massive patent on NF-kB pathways. It's a bench trial this time (no jury), which I think could make a big difference. I wrote about this back in the spring - scroll down to April 11 and work your way up. You'll see me short 1000 shares of Ariad stock right before the first trial's jury verdict, which to my surprise went Ariad's way.

Another recent review of the situation can be found at CNN. It's a pretty good summary, although the first version they posted was somewhat bungled. I persist in my view that Ariad's patent is too broad and never should have been issued in its current form, and that the idea that Lilly should have to pay damages to them sets an awful precedent.

So how's Ariad stock been doing? Well, that short position has been working out just fine, as the chart since their trial win will make clear. The stock dropped fairly hard today, on no particular news that anyone seems to know about, other than the unsurprising fact that the company is still burning money at a good clip. I have no updates from the trial at all, unfortunately, so I don't know how it's been going, nor when it's expected to end. (Anyone with more information is more than welcome to comment!)

If time is weighing on you while you wait for a verdict, take a look at the Ariad message board on Yahoo, and meditate on just what function these things are supposed to serve. Almost no one there seems to have a clue about the stock, other than they really like it or really hate it. The inhabitants spend their time shouting either words of encouragement or random curses at each other; hardly any information is ever exchanged. The history of the messages posted there since Ariad's court victory make for a study in mass delusion, as people continue to assure themselves and whoever might be listening that the stock really has bottomed out and that there's nowhere to go but up, etc., all the time losing money almost every trading day. It's a wasteland even by the rigorous standards of Yahoo stock message boards.

Comments (8) + TrackBacks (0) | Category:


1. wcw on August 8, 2006 10:13 PM writes...

I have no information from the trial. Agreeing with your analysis but cautious about juries, I shorted after the decision came down, and have since covered, figuring the easy money has been made. While my inclination is to assume a bench trial means a rational decision, I'm not comfortable holding a short unless there's a fat enough price runup. Besides, I'm busy finding margin and chasing inventory in my favorite current target, CRF -- a closed end fund with closet-index holdings, effectively no turnover and trading at ~80% premium to NAV. Why risk anything in ARIA so long as I can get short a few more lots of that every couple weeks?

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2. Anonymous on August 8, 2006 11:06 PM writes...

I'm sure you noticed the great picture at the top of the CNN story with a well protected lab tech staring intently into a beaker with a nice purple solution in it. Obviously she is trying to find the cure for cancer right there.

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3. Still Scared of Dinosaurs on August 9, 2006 6:02 AM writes...

I know someone who worked at Ariad but left quickly. 'nuf sed.
I have spent some time trolling small biotech message boards and found some popular lines of argument:
1) How much lower can it go? (Answer is always "To $0")
2) If x% of patients use our drug that's $y in sales.
3) $1 in sales = $1 in profits.
4) The other guys are beating us because they are bribing FDA.
5) "Bashers" are paid stooges of shorts trying to cheat "newbies" out of their shares. (Derek-how many stooges on your payroll?)
6) We're going to get bought out any day now, with a bidding war.
There's more but my kids are waking up.

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4. Derek Lowe on August 9, 2006 6:42 AM writes...

SSD, those are some of the old standards, all right. People who spend a lot of time on those boards have a Manichean view of the market - it's the brave, optimistic investors and their plucky little company versus the evil shorts and paid bashers. Sort of reduces stock-picking to the level of professional wrestling, in my view, but you'll never convince any of them that they're living in a fantasy world.

As for stooges on my payroll, my wife would be very surprised to find out that we have enough overhead for 'em. I wonder if a stooge is tax-deductible?

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5. Still Scared of Dinosaurs on August 9, 2006 9:54 AM writes...

Pretty much everything is tax-deductible if you make sure your accountant is one of the stooges. ;)
BUUUUUTTT..., one of the reasons I support FDA more strongly in chat rooms than meeting rooms is that I've seen so characterizations of it as a bastion of omnipotently omnisciently anti-capitalist incompetence. Nice work if you can get it, I suppose, but I have so much firsthand experience, on the industry side, of bumbling ignorant capitalist excellence. My goal is to help my team be less bumbling and learn faster than the other guys, but the majority of development delays are not primarily the fault of FDA.
It's tough to advocate this position with knowledgeable folks who don't think I'm trying to cheat them out of their shares. It's impossible on stock message boards, but in the right circumstances is will occasionally be fun.

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6. Palo on August 9, 2006 10:21 AM writes...

Derek, the fact that you sold Ariad stock on the belief that it was going to lose the trial, and that your wrong prediction still helped your finances I think says everything you need to say about looking for rational forecasting of the stock market, forget message boards.

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7. Still Scared of Dinosaurs on August 9, 2006 11:47 AM writes...

Palo, I disagree. I think of a stock position like a poker hand. If I think I'm behind, I ask how many outs I have and what the payoffs are likely to be if I hit them. If I think I'm ahead I guess how many outs the other guy has and how much it will cost if he hits them. And also how many outs I have that put me back on top of his outs.
In this case a belief that Ariad would lose the case may create a strong position by itself, but if you think the management is great, the technology revolutionary, the clinical data in hand pristine, and the burn rate unthreatenning, don't short. If they all suggest further weakness, then short and hold until the overall story changes. That's rational, probability-based action using all of the information you get your hands on.
And just like poker you can always get burned by what you don't know and can't know, but that doesn't make the activity irrational, just risky. In both cases the rational action is the one that has a favorable expectation.

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8. Derek Lowe on August 9, 2006 12:48 PM writes...

That's why I held onto the short position even after the jury verdict - I didn't think it would stand up, and I thought that it was worth staying in while the story developed.

But Palo has a point about irrationality. I've been ferociously burned on short positions which were (eventually) completely correct, as in the company collapsing and/or disappearing from the stock market listings entirely. But in the short run, crazed investors can take stocks like these and push them beyond any level you can imagine.

As they say, the market can remain irrational longer than you can remain solvent. But I see the distinction that SSD is making: shorting stocks isn't necessarily irrational, but the irrationality of the market makes it risky.

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