Medarex Stock Options Activity Resembles Dendreon’s Trading

Stock Tickers: MEDX, DNDN

When traders made bets and saw a move of more than 200% at one point onFriday in Dendreon (DNDN), this is the sort of news that can getbiotechs with upcoming events (and even some of the old dead biotechzombies) going.  Don’t be shocked when you look back to Friday or evenover the next two weeks as traders are parsing through trades to findwhat could be the next mover like Dendreon (DNDN).  Before readingfurther, understand that trying to look for a 200% gainer is not thenorm and trying to predict a gain or loss of anything remotely close tothis in a biotech company is one that even industry and corporateinsiders have charred their fingers on many times.

But what can be done is looking out on the horizon as far as optionstrading and open interest is telling you, and this will at least give ashot to see where some of the smart money and aggressive traders areplacing some bets and where they see a big potential move down theroad.  Medarex Inc. (MEDX-NASDAQ)is one of those names as one of the upcoming biotech review stocks towatch.  This is already a battleground stock as traders have placedbets in favor and against this name, just like they did in Dendreon,and the short interest has risen.  The company’s financials have beenleft off for a space-saving since this is already a long note, but theyhave ample operating capital and partnerships that should keep themgoing for years.  The short interest grew from 13 million shares inFebruary to 16.7 million in March, and its market cap is almost $1.6Billion.  At a $12.72 close MONDAY, shares are in the middle of a $8.51to $16.23 52-week trading range; shares have been significantly higherand lower over the last 10 years and more.

The one thing that may be different in Medarex (MEDX) is that if anyits candidates turn out to be duds, they have a substantial pipelineand a broad group of diverse partnerships that may generate revenues onan ongoing basis.  As you will see later, the partners are impressiveand they are in Phase II and Phase III in more than one candidate.  Itsprimary focus is in monoclonal antibodies to make potential drugdevelopment much faster and less expensive.  Cancers are the primarytargets here, but if you read on you will see they have many othertargets as well.  The company has two kep approaches:  (1)collaborative partnerships with partners to jointly generate, developand commercialize human antibody products (more than a dozencollaboration partners as of 2006); (2) out-licensing partnerships tolicense its human antibody generation technology to partners inexchange for license fees, milestone payments, and royalties (claimstwo dozen partnerships here).  MEDX lists Abbott (ABT), Amgen (AMGN),Centocor-J&J (JNJ), Eli Lilly (LLY), MedImmune (MEDI), Novartis(NVS), Novo Nordisk (NVO), Pfizer (PFE), and Schering Plough (SGP) aspartners as of 2006.  Here is the list:

MDX-010 Phase III for Melanoma and other cancers with Bristol-MyersSquibb (co-promotion/profit share); was granted “Fast Track”designation in 2004.
CNTO 148 & CNTO 1275 for inflammation both in Phase III with J&J’s Centocor (milestones/royalties).
HuMax-CD4, CD20, and EGFR in Phase III’s for cancers and lymphomas with Genmab/Serono (equity interest).
MDX-066 and MDX-1388 in Phase II for C. difficile Disease with MBL (co-development).
MDX-060 in Phase II for Hogdkins and other lymphomas (wholly owned).
AMGN Antibody #1 in Phase II for undisclosed treatment with Amgen (milestones/royalties).
MDX-018 in Phase I/II for undisclosed treatment with Genmab (co-development).
CNTO 95 in Phase I/II for Cancer with J&J’s Centocor (milestones/royalties).

The company also has numerous PHASE I studies going on (partner name,then treatment indication): Celldex for cancer, wholly-owned study forUlcerative Colitis, PharmAthene for Anthrax, MedImmune for Lupus, OnoPharma for cancer, Novartis for Autoimmune diesease, more undisclosedstudies with Amgen and with Eli Lilly, Bristol-Myers for cancer,Imclone for cancer, and more partnerships or wholly-owned candidates.

Medarex has upcoming presentations May 2-4 at the Morgan Stanley GlobalHealthcare Unplugged Conference and May 22-27 at the CitigroupHealthcare Conference.  It has also recently begun a Phase I clinicaltrial for the potential treatment of Psoriasis and just last week notedsome positive activity in its primate study to potentially treatAnthrax.  Anthrax is a potential win for the company, but its pipelinein Phase II & Phase III studies is what you want to focus on.  Anumber of these could become blockbuster drugs, and Medarex operates asa royalty company that would collect fees if these go to market.

2007 is the potential pivotal year, because it has two BLA’s to befiled this year and next and has numerous updates coming in Phase I andPhase II trials (plus all of the preclinical candidates).  This isn’twithout problems: it is in need of some steadiness in leadership and inits SEC filing history.  We should have more detailed information onits phase II & III studies for melanoma later this year.  The popup in the stock from the Anthrax preliminary results was probablymagnified because traders saw Dendreon go up 200%, but this stressesthe forward “wild cards” that can be catalysts.  The problem is thatthe data, filings, and news may come “later this year” or any of it canbe delayed.  Traders are betting on “later this year” if you look atthe options open interest.

The May CALLS had over 50,000 contracts in the open interest and thesame PUTS were only about 28,000 spread out.  It is quiet for thesummer and in NOV07 PUTS/CALLS, but if you go out to JAN2008 you willsee that the bets are on.  And they are on big time.  Look at theJAN2008 open interest levels:

An at the money straddle ($12.50 strikes) out to JAN08 would run youroughly $5.65 right now, so you don’t have to claim where you think thestock will trade in 8 months to be able to recognize severe volatilityis being priced into the stock.  The “positive Anthrax news” was notpriced ahead of time in last Friday, but that isn’t even one of theimmediate candidates that could be the homerun or flop that traders arebetting on.

We can’t predict that the price action will be anywhere close toDendreon’s move.  It would be reckless.  But what is fair to say isthat if you look at the open interest in the JAN08 PUTS & CALLSthen you will be able to tell that there are many bets that Medarexcould see some of the same sort of anticipated action.  DNDN was“only”pricing in a 50% to 60% move based on last week’s option trading rightup to the stock halt, but that was merely a snapshot and you can’t usethe math as gospel.  That’s what we are seeing here in Medarex with aless certain date. Talk about time value.

We’ll be following up on this one as we get closer and closer and as wesee more news and research this year.  We operate on a two-way streetso any outside data or information that is factual or able to beconfirmed will be welcomed.  This was one we initially saw 10 days agoin a preliminary option screen, and constantly look at many of these tosee if there is value that can be added.

Jon C. Ogg & the 24/7 Wall St. , LLC Team
April 2, 2007

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