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A Method to Profit From FDA Approvals

publication date: Oct 30, 2010
The Run-Up method involves locating and buying shares of these companies well before their decision date, riding the share price up, and selling BEFORE the FDA announces their decision. But what about after an FDA decision? Specifically a positive one. There is a proven method to consistently profit from FDA approvals, lets take a look.
This method is what we call the "Run-Down" method. We have yet to see a small cap biotech company maintain the highs it hits after an FDA Approval. For example lets take a look at SOMX, which had its drug 'Silenor' approved by the FDA in March of this year. After climbing to a high of $10.60, it began to slowly drop in share price. In fact, it clsoed at $2.79 on Friday, well below its run-up highs. Take a look at the chart below:

SOMX is not an abnormality. This is very typical. In fact we saw a similar effect demonstrated this week when EXAS announced excellent results for its data validation study for cancer screening. When short term traders all decide to take profits, there are more sellers than buyers and the price drops. Bio pharmaceutical companies have a long rode ahead of them after their drugs are approved. They must manufacture the drug, put together a sales team, market the drug, wait for sales, then report them. This process can take up to 6 months, the entire time investors do not know if the drug is going to be a 'success' or a failure. For most traders 6 months is an eternity, and most are not willing to stick around, as there are plenty of other opportunities.
So, how can we take advantage of this situation? AVNR has just received FDA approval, and share prices are expected to more than double, as it was trading in the low $5 range in after-market on Friday. We expect AVNR to open in the $5 range before beginning to sell off.
Timing is critical when trying to profit from the assumed 'run-down' of an FDA approval. Watch for the approval 'pop' then you can either short AVNR outright, or buy 'Puts' (options), banking on a lower price over the following months.
We will be watching $5 Puts that expire in December. As the price of AVNR falls, the values of these puts increase.
Currently I hold $4 and $5 Nov Calls for AVNR. I plan to unload these on the spike and swap them out for Dec $5 Puts.
For more information on trading options, click the link below: