Syntha Pharmaceuticals (NASDAQ: SNTA)

Key Stats:

Price	3.97	TTM EPS	-1.17
P/E	NA	Mkt Cap (mm)	274.8
TTM P/S	NA	Avg Vol (mm)	1.276
% Short	59.8	Shares Outstanding (mm)	69.05

Price Action:

Writeup:

I typically don't like unprofitable companies, let alone companies that don't have any revenues at all. Thus, when I came across the following words in the most recent 10-Q, I almost put the report down and wrote it off as something that's not of interest: "We have not generated any product revenue and do not expect to generate any product revenue in the foreseeable future, if at all." As someone that believes a stock price's value comes from the discounted future earnings of the company, seeing a line like that is a huge deterrent - but I decided to read on.

Like most small-cap biopharma companies, SNTA burns through cash hoping that their flagship drug in development will make it big-time, in which they'll get bought out by a larger company or use the income stream to expand their product offering and become more stable. Their champion is ganetespib, a Hsp90 inhibitor - meaning that it prevents Hsp90 from doing what its meant to do, which is to facilitate the proper construction and activation of many cancer-promoting proteins. There are many things that make this drug novel: small size so that it can readily pass through membranes larger molecules can't; generality - instead of targeting specific down-the-line targets, ganetespib decreases expression of many of the same targets through targeting Hsp90; low toxicity - though other companies have abandoned similar undertakings due to toxicity and liver damage, ganetespib has proven to be lower toxicity that all the other options, usually resulting in mild diarrhea as its worst side-effect.

SNTA's main trial is the Galaxy-2 Phase III trial for lung cancer treatment as a second line therapy with chemo, which should finish in the 2nd half of 2014 with final results published early 2015. The results from the first trial (Galaxy-1) were recently published and showed that results had worsened over time (moved Hazard Ratio closer to 1.0 - see Appendix). This was due to a disproportionate inclusion of trial patients from Eastern Europe (Russia and Ukraine) late in the trial period, and so the results come on the tail end of the study. These patients contributed to much larger, longer medial survival times, which affected the results negatively. SNTA announced that they're increasing the sample size of Galaxy-2 from 500 to 700, pushing the trial results later into the future, and will not be taking any new patients from the Eastern European countries but will ramp up patient enrollment in the Western countries, where the hazard ratio is much more attractive and the efficacy of the drug is more apparent. If nothing else, this shift in patient demographics should help results going forward.

Another trial started in 2012, ENCHANT-1, is designed to evaluate ganetespib as a first-line treatment for two kinds of HER2+ breast cancer and triple-negative breast cancer (TNBC) (see Appendix). Initial results are expected to be published in December 2013.

In terms of going concern, SNTA burns through roughly $22 million each quarter to fund its operations. That number is expected to go up by roughly $6 million as each new patient in the trial costs around $30,000. SNTA currently has around $54 million to fund operations and has raised another $50 million through a recent share offering (14 million shares @ $3.75/share). This should amount should get them through 2014, where they'll at least have enough to publish interim results from the Galaxy-2 trial and raise more money if there are positive results.

Trade
SNTA is sitting at its 52-week low due to increased trial period of Galaxy-2 and lower efficacy results of Galaxy-1. With initial data from another trial (ENCHANT-1) being presented in December, and management's comments along with industry expert's praise of ganetespib - I believe that the downside is limited. In the case of bad ENCHANT-1 data, I can envision another 5-10% drop - but positive results should push the price up significantly more. Further to that, high short interest and days-to-cover prime the stock for pop-ability. Looking at the technicals, the stock is also oversold and presents a good entry point.

For fundamental/value folks, I would wait until after December results and enter into the stock closer to the initial results of the Galaxy-2 Phase III trial, which should be improved from the Galaxy-1 trial results due to regional sampling. Or - don't get into this name at all. It doesn't create any value due to no revenues and future earnings are too difficult to guess at this point, so from an earnings perspective it should be trading at 0.

If you're in for some quick gains, I would be comfortable entering at this price while price increases due to the stock being oversold and shorts locking profits. I also like the risk/return prospects of the December data for the ENCHANT-1 trials, though I must admit that I have not looked into those results as deeply as I have for the Galaxy trials.

The way I'm going to play it is to write some puts for December 4.0 expiry. The 4.0 puts for December expiry are currently trading at 0.45 - 0.55. I would be comfortable entering into this position in December at $4.00 for a $0.45 premium if I get called, or just pocket the $0.45. The Jan 15 5.0 calls look like a good way to get some exposure to the Galaxy-2 trial results without too much premium. The liquidity is quite low, so I'll be patient and only get in a small size.

Appendix
Hazard ratio (HR) represents the odds that a patient in the experimental treatment arm will experience the event of interest (such as death or disease progression) before a patient in the control arm. A hazard ratio of 1.0 corresponds to no treatment effect, while a hazard ratio of less than 1.0 signifies that the treatment is working better than the control.

HER2+ and TNBC are two major subtypes of breast cancer, accounting for 15% and 20% of new breast cancer cases.

Burberry Dividend Arb

A quick note from the Markit News & Commentary team, concerning Dividends:

October 14th
Intraday Alert
Burberry Group plc GB0031743007 (FTSE 100, STOXX Europe 600) The company has published its planned payment schedule for the upcoming interim dividend, with a provisional ex-dividend date of December 23rd 2013. This means that contrary to last year Burberry shares will trade-ex dividend after the December expiry for derivative contracts. Any market participants rolling-forward last year's timetable are likely to expect shares to trade ex-dividend before the December expiry. The provisional ex-date for next year's final dividend is the 2nd of July 2014. Since non-Markit using market participants usually use last year's timetable as an estimate for future dividend dates, this bit of news provides an arbitrage opportunity. Burberry is current yielding only 1.83%, paying 29p on a price of 1,512.5p - so it might not be extremely profitable, but it should be a riskless trade. The method to tackle this would be in the following manner: Buy the December 2013 Burberry single stock future (pricing in the dividend payment will undervalue the future price and thus it will be cheap) Short equivalent shares of Burberry stock Exit on expiration date

Neat Little Trading Strategy based on COMPRESSION

Wanna see something cool? (All rights go to Jeff Kennedy for the pictures below)

Why don't you do this: find a stock - any stock. Plot as many moving averages as you can (e.g. 5 SMA, 10 SMA, 30 SMA, etc.), and then see if they compress. If they do, then it means something is about to happen. You may then buy a straddle. Or, if you're really keen on predicting where it will go and think you can determine the direction, make a directional bet. If not, then buy a straddle.

Net Non-Performing Assets vs. Total Non-Performing Assets

Over my time in finance, I've come across many ways of valuing companies - especially banks. From sitting through classes to applying a multiple on pre-tax, pre-provision profits at work, there are countless ways to value and monitor bank quality/profitiability.

One curious descrepancy I noticed recently while working with a dataset of bank data was the difference between net non-performing assets (NPA) and total non-performing assets. NPA is defined as "a debt obligation where the borrower has no paid any previously agreed upon interested and principal repayements to the designated lender for an extended period of time" (Investopedia).

Banks usually classify loans past due into three categories: 30-89 days past due and still accruing, 90 days or more past due and still accruing, and nonaccrual. NPA figures come from the loans past due with nonaccrual status.

The difference between total NPA and net NPA is derived from the FDIC Loan Loss Sharing provision. A brief background of this provision can be found off an investment thesis I've written up:

FDIC introduced Loan Loss sharing into purchase and assumption (P&A) transactions in 1991, with the goals of: (1) sell as many assets as possible to the acquiring bank and (2) have the nonperforming assets managed and collected by the acquiring bank in a manner that aligned interests/incentives of FDIC and acquiring bank. Under loss sharing agreements, the FDIC agrees to absorb a significant portion of the loss (usually 80%) on a specified pool of assets while offering even greater loss protection in the event of financial catastrophe – the acquiring bank is liable for the remaining portion of the loss.

The loan loss sharing agreement primarily covers commercial and real estate loans. The way it worked was that the FDIC absorbed credit losses over a period of time (3-5 years) during which the FDIC reimbursed the acquiring bank for 80% of the net charge-offs (charge-offs minus recoveries). During the shared recovery period, the acquiring bank pays the FDIC 80% of any recoveries on loss share assets previously experiencing a loss. The shared recovery period runs concurrently with the loss share period and lasts 1-3 years after the end of the loss share period.

The agreement also includes a “transition amount” – if losses exceeded this projected amount, the FDIC would assume 95% of the losses and the acquiring bank would assume 5%. This provision addresses acquirer’s concerns about catastrophic losses resulting from limited due diligence time and uncertain collateral values stemming from deteriorating markets.

If you are looking through quarterly filings, be sure you know which NPA you are looking at - total or net. Usually a bank will report one or the other - either only total NPA or only net NPA with a footnote explaining why they chose net NPA. These figures do not mean the same thing, thus inconsisencies arise when running screens and calculations - as it is not exactly an apples-to-apples comparison and there are undisclosed assumptions made which are not published.

Furthermore, I've checked with the major data vendors, and their data does not make any distinction between net and total NPA. XBRL formats record the numbers interchangeably - net as total NPA when available.

If you're interested in learning more about net vs total NPA's, implications, and access to both total and NPA figures for banks that only publish net NPA (no instances I've found where they'll publish only total when they can publish net NPA) - please contact me and I'll be glad to share.

MF Global claims, 90+ cents on the dollar?

As you are probably aware, MF Global filed for bankruptcy on Oct. 31, 2011 after sustaining substantial losses and using client money to pay for losses. In total, $1.6 billion dollars of client money was unaccounted for. Banks are now vying for these claims, with Barclays leading the charge.

What might be surprising at a cursory glance is the amount offered per dollar on these claims. Offers are as high as $0.9125 cents on the dollar for US Exchanges and $0.6625 for Foreign Exchanges. You might think that these banks are sure sticking their neck out to make a relatively small and uncertain return, but there's more than meets the eye.

http://www.reuters.com/article/2012/03/16/mfglobal-customerclaims-idUSL2E8EFBFO20120316

Roughly $3.9 billion dollars have been paid back to the US Exchange customers, equalling about $0.72 on the dollar of the claims. Furthermore, there's a plan for a distribution of $600 million in the next two months, another ~$.11 on the dollar.

Thus if you are offering $.90 on the dollar, you are really paying 18 cents (.90-.72) to receive 28 cents (1.00 - .72). Factor in a distribution of 0.11 cents on the dollar in the next two months, and with a couple assumptions the IRR looks pretty sweet. Even if you're not going to get 100 cents on the dollar, that is still a great return.

Another point that many people bring up is that if you're a big bank sitting on a pile of cash that was paid to you from MF Global, you:

1. Know where the missing money is
2. Will be forced to pay it back, so you might as well make some money in the process

After you buy up all the claims at $.72, take a look under your seat and find x millions of dollars from MF Global. You gladly return it knowing that it'll come right back to you.

I think it's a solid trade and the banks prove yet once again how clever they can be.

What Happened to TVIX?

This write-up is based on a Seeking Alpha article I read by Paulo Santos. He hit the nail right on the head with his analysis, and today’s 29% drop can be explained by his investment proposal.

First, we have to ask, what is TVIX?

TVIX is an Exchange-traded note (ETN), a debt security issued by an underwriting bank that tracks a particular benchmark/strategy. In this case, the bank is Credit Suisse and the benchmark is 2x the VIX. TVIX is meant to be a short term holding, as if you read the prospectus, you come across this statement:

“As explained in “Risk Factors” in this pricing supplement, because of the way in which the Closing Indicative Value of the ETNs and the underlying Indices are calculated, the amount payable at maturity or upon redemption or acceleration is likely to be less than the initial principal amount of the ETNs, and you are likely to lose part or all of your initial investment. In almost any potential scenario the Closing Indicative Value (as defined below) of your ETNs is likely to be close to zero after 20 years and we do not intend or expect any investor to hold the ETNs from inception to maturity.”

An ETN usually tracks closely to its Net Asset Value (NAV), the value of the underlying futures that the issuer holds (though the ETN doesn’t own it). The catalyst to the break in TVIX not tracking its NAV was Credit Suisse’s suspension of issuing new units of TVIX. This breaks the no-arbitrage rule, as the supply is gone. The usual supply is from the issuer (Credit Suisse), when it issues the shares at NAV and collects fees, Authorized Participants (AP’s) then make money by selling it at market prices when they’ve created it at NAV cost. They keep selling until the market price tracks closely to NAV again (re-establishing no-arbitrage).

However, when there are no shares to be sold, then the ETN trades like a closed-end fund. A closed-end fund usually trades at a huge premium to NAV due to the difficulty of finding shares to borrow. Paulo noticed/mentioned this when the premium was 18.3% greater than the underlying. Before it reverted back towards NAV levels today, the premium had gotten close to 80%.

The reversion could probably be due to people becoming aware of the mispricing, leaked information about new issuances, hedge funds wanting to take profits, etc. Lots of reasons on why it could revert, it was only a matter of time before it would.

In the future, when you are considering trading in ETFs/ETNs, be sure to read the prospectus and take a look at the underlying.

TVIX Prospectus:

http://velocityshares.com/pdf/VelocityShares.ETN.Final.Pricing.Supplement.VIXlong.pdf

Here's a nice picture mapping TVIX to it's intrinsic value (NAV):

Chartist Friend from Pittsburg's graphs