REVIEW: Biomimetic Therapeutics (BMTI) sliding on lukewarm panel review

Biomimetic Therapeutics received a 'not-completely-negative' panel review

Last week Biomimetic Therapeutics (BMTI), developer of the Augment bone graft, saw a wild roller coaster ride in its share price ahead of the FDA advisory panel.  Biomimetic's Augment product was approved for sale in Canada in Nov 2009.  Augment bone graft is indicated for use in orthopaedic surgery in replacement of an autograft.  The company is currently seeking US FDA approval for Augment.  The wild swing of BMTI began with the release of a concerning FDA document last Tuesday (2 days before the scheduled FDA panel meeting), questioning the design of BMTI's clinical study, which was ineffective in providing meaningful data to support Augment's safety and efficacy as an alternative to autograft in hindfoot and ankle fusion procedures.  Following the release of this document, BMTI plunged almost 35%, as fearful investors immediately equated the negative sentiment to the possibility of  a negative panel review.  However, there have been cases in the past where the panel ignored FDA's document and voted in favor of the product candidate's approval.  Mela Sciences (MELA) was one of them (bouncing back 110% immediately after panel meeting).  On the morning after BMTI's drop due to the FDA's comment, I sent out a tweet (May 11), pointing out that BMTI might bounce back like Mela Sciences (MELA) did if BMTI were to receive a 'not-completely-negative' panel review.  This was exactly what happened 2 days later - the FDA advisory panel voted 10-8 in favour of Augment's benefit over risk.  Based on this and the beaten down share price before the panel, it was widely anticipated that BMTI would surge on Friday, May 13 (a day after BMTI's trading halt due to panel meeting) in pre-market and in early trading. 

Which options to buy? - some number crunching

My trading experience tells me that if one goes against what everyone else is doing, 9 out of 10 times he will be rewarded!  Since most people were scrambling to BUY BMTI on 'positive' news, what I did was SELL.  Purchasing put options, contracts that give one the right but not the obligation to sell the underlying equity at the strike, is a tremendously versatile strategy that takes advantage of a falling stock price (read more on options).  Did I expect the BMTI to fall?  ABSOLUTELY!!!  Investor overreaction almost always causes a rising stock price to overshoot its 'fair market value', a phenomenon that is only resolved by a quick pullback (i.e. fall in share price).  The above strategy could be tremendously profitable, but the most difficult part is to predict the peak of the overshoot.  Only with a correct estimate of the peak can investors purchase the closest out-of-the-money put options at a CHEAP price (before everyone else does) to reap high % gains.  My estimate was as follows:

Average pop following positive news: 10-30% (depending on company, drug, previous run-up… etc.)

BMTI share price pre-FDA document release: $13.40

BMTI share price at the end of Wed (before the halt today): $9.20

% drop: 32% (will likely be re-gained fully)

Estimated % surge tomorrow: 32% + 10-12% (BMTI-specific pop) = 42-44%

Estimated PEAK before share price drop: $9.20 x 1.42 or 1.44 = $13.06-$13.25

Keep in mind that I tend to keep my estimate conservative.  In other words, I try to assume the highest % surge when arriving at the target peak of $13.06 - $13.25.  This will prevent me from taking a loss should the price goes much higher than my estimate.  If the price is much higher than my estimate, then it might never come down to my strike (minus premium) and my put options will expire worthless.  On the other hand, the worse that could have happened with my conservative estimate was to miss a trade (much much more preferable to losing money).

Profiting from a falling stock - how did I do it?

'The morning after' is the best part of trading biotech stocks.  With a major catalyst (e.g. PDUFA, PDA panel, clinical results) taking place the previous day, there is alway a ton of opportunity to be had the next day - especially in the morning!  Watching the stock closely in pre-market trading, I sensed that there was NOT going to be a huge run-up after the opening bell because BMTI had only gained less than 7% (this was far from my anticipation of a 42-44% pop).  The absence of an extreme price jump arose from 1) loss of investors' confidence due to FDA's harsh comment, 2) mediocre panel support, and 3) negative outlook and a potential long wait until Augment approval.  As trading began, BMTI immediately dropped from the high 9's down to the high 8's before settling at around $9.  By that time, I sent out a tweet disclosing my order for May $8 puts at $0.35 (avg fill @ $0.34).  I could have gone for the $9 puts but I felt like the price was too high and the % gain would not have been as great compared to the $8 puts if BMTI continued to bleed.  Since there was not going to be any upcoming catalyst for BMTI, I figured the $8 puts were safe and profitable.  It turned out I was right.  The 'slide' occurred in a catastrophic fashion - more than 18% of BMTI's peak value was lost in 2 trading sessions since Friday's open.  As a result, my $8 puts grew from $0.34 to $0.60, representing a 76.5% profit in TWO trading days.  


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