Hayward, I am not happy about it but doesn’t change my opinion on why I am long the stock. I tried to provide you with a shorter answer but every point creates a different discussion so I apologize for the lengthy reply. It won’t happen again. Ok, here is my thinking:
Holding a note provides you with zero downside and all the upside. If the stock goes back down to $2 or lower if interim is not halted, as a note holder, you don’t care since you are clipping coupons and collecting your 3.5% without any change to your principal. If R-IT is halted and the stock opens up at $10+, they would be able to convert their notes at the same conversion price as they are getting today and eliminate any downside volatility. It truly is a win-win for the note holders.
Since the note holders are now being converted into shareholders, their win-win situation is eliminated. Their principal is now exposed to the volatility of the stock (good and bad). If you run a fund, you are all about risk management and your risk exposure has changed significantly. I agree with JL, that some of the shares were hedged in 14/15 but there are a lot more shares being assigned than are short. Therefore, I would expect selling pressure over the next couple of weeks.
In addition, HDG gave you the list of all the note holders and there are some very big funds listed. I heard that the recent secondary was mostly taken down by 13 accounts which tells me that at least half of these 13 accounts are also listed as note holders. This means that some of these funds are now looking at a lot more shares in their book vs what they were comfortable with going into the interim. You might see some forced selling, especially if the stock drops below the secondary price. I understand why AMRN is doing this (especially having a new CFO and cleaning up the balance sheet) but I don’t like the timing.
I have a very sizeable position and will not be selling since I have no idea when interim news could come out. If the stock should get hit hard, I will be adding to my position aggressively because the risk/reward is very interesting to me, especially after they added the 2nd interim look. I don’t think you will find a better trade in the market right now, unless you are PYRR and are 100% sure that Vascepa will fail (I still don’t get his risk/reward on his trade…best case scenario making 80% and worst case scenario loosing 400%+…but PYRR is a big boy and should know what he is doing. Even if he is right, the trade set-up is horrible. You won't survive long or make a lot of money in the market with these type of set-ups. But that's what makes a market. Like the saying goes “live and learn”…I am getting old and I am still learning).
Here is my game plan:
Full position (whatever you are comfortable with) going into 1st interim look. If R-IT is halted, I will put half of my net worth into it, no matter where it opens up.
90% position going into 2nd interim look. If R-IT is halted, same as above.
30% position into final look. If R-IT is successful, same as above.
I know your question. Why am I scaling down my positions as the probability of success increases? It is a little counter intuitive but it has to do with risk/reward and because 1) I believe Vascepa should show significant improvement vs statin alone (I would be disappointed if it is not confirmed by 2nd interim look) and 2) the risk/reward changes dramatically going into the final data since it becomes 100% binary. I think everyone here is good at highlighting the reward scenarios so I will focus on the risk side for each look:
1st interim – risk is that stock could initially pull back 30-50% but I do believe that it will recover most of it going into the 2nd interim look (if not more). Therefore, I am planning to buy more if it trades down significantly and start trimming my position prior to 2nd interim look.
2nd interim – risks is that the stock could pull back 50%+ and stay low for a while. However, my true risk exposure is probably less than 10% since I do expect some type of run up (“greed gets everyone”) into the final data. I would reduce my risk by buying more shares, especially if it pulls back below $1.50. I would trim my position according to my avg price ahead of final data.
Final data – probability of success is the highest but risk increases dramatically as well so the set-up is least interesting to me. I believe downside risk is 80%+ if R-IT fails. I know many disagree and argue about potential for encouraging sub-analysis and other indications, etc etc. but I don’t agree.
As a last note, the secondary or the convert of the note is giving us absolutely zero insight into anything regarding “company knows R-IT will be halted” or “we are going to get bought out” or “new partnership will be announced soon” or “we need more outstanding shares so there is no liquidity problem down the road” (btw, it ruined my day coming from JL. I would agree if there were 30M shares outstanding but 200M shares are plenty (well, now 270M+). REGN has 100M shares and they are doing just fine with liquidity. There comes a point where too many shares outstanding actually hurts you since you can’t show the leverage in your model…but that is an entirely different discussion).
Again, sorry for the long reply. Since it is your money you are putting at risk, I hope you have your own game plan and risk/reward scenarios.
GL
