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Biotech Roundup: Hypothecation Warning, Amgen's Vectibix, Dendreon Watch


The week's Street beat at your fingertips...


NYSE Warns About Hypothecation

I've written before about the effects of hypothecation on voting rights and preferential taxation for dividends. The NYSE chimed in with a similar warning this week. It was gratifying to read its "Informed Investor" disclosure because it provides some independent verification for things some have given me grief about in past writings.

"Hypothecation" is a fancy term you can probably find in the agreement you signed with your brokerage firm. It means your brokerage has the right to loan your shares to short sellers so it can bet against the stocks you own. If you have a margin account, you almost certainly had to agree to allow your broker to loan the shares and to forego the potential revenue it gets for those loans. That revenue helps keep your margin rates and brokerage commissions low, however, so most everyone believes it is a fair trade.

Contrary to the NYSE document, though, non-margin accounts are not exempt from hypothecation agreements. I've not seen a 401(k) or ROTH account with a default hypothecation clause, but I have seen standard cash accounts where the brokerage reserves the right to hypothecate your shares unless you inform it otherwise – in writing.

I especially thought the second paragraph from the bottom of the first page of the document was interesting. I've had long arguments with more than one academic – and several industry "corporate governance experts" – on the impact of short selling on voting. Each told me that short selling had no effect on proxy voting, which is plainly wrong.

What the NYSE doesn't mention is that the problem is actually more serious. Because of the implicit share creation involved in short selling, massive short selling ahead of a proxy vote can theoretically skew a vote significantly. It is conceivable a determined activist could essentially "buy" a proxy election simply by compounded shorting and loaning of a stock (ignoring, for a moment, that such a strategy might be financially unwise).

The moral of the story is to look at your brokerage agreement and understand the policies surrounding hypothecation of your shares. Kudos to the NYSE for taking the time to point this out for people.

Amgen's Vectibix

On its conference call last night, Amgen (AMGN) characterized the overall response rate (ORR) in its PAACE trial of Vectibix as "broadly similar" between the arms. That's not a good sign. Usually, "broadly similar" is biotech-executive speak for "the control arm is doing better."

Some are hoping progression free survival (PFS) will show a benefit. That might be the case, but recognize that PFS and ORR are somewhat related. It might be that proponents of Vectibix will have to wait until overall survival data are known.

One thing's for sure, the potential to see the PFS data at the American Society of Clinical Oncology (ASCO) means that its conference could be livelier this year for the sector than in the recent past.

Dendreon Watch

It looks like the end of March for the FDA advisory panel for Dendreon's (DNDN) Provenge. Recall this advisory panel is one I believe might have an impact on the entire sector. The betting against a positive result is increasing, with short interest gaining a whopping 28.7% in the last measurement period. The options market is also hot with aggressive call sellers doubling down on its short equity positions.

There is little question that Provenge works. As I've noted here previously, the question is whether the clinical trial data Dendreon has compiled meet the technical and biostatistical requirements for FDA approval. The advisory panel will be faced with a choice between approving a drug that clearly increases patient survival and has little in the way of side effects or slavishly sticking to process.

That might seem like a no-brainer decision to you and I, but please remember this is not the real world. Common sense does not always apply when it comes to government bureaucracy.

In any case, a positive opinion would reverberate through the sector as a signal this FDA and this FDA Commissioner are willing to be reasonable in its application of FDA regulations. Since the pros all seem to be expecting a negative opinion, I'm not sure the sector will be harmed if the panel chooses process over patients and turns down Dendreon's application.
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