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I have been interested in the technical analysis discussions, but want to put forward a fundamental viewpoint and some conclusions related to the stochastic price movement of late. Fundamentally, IRC is a play on Remune. If Remune is approved by FDA, then IRC has strong potential to be a $100 stock (e.g. with 10% of US aides patients at $500/shot). If Remune is not approved by FDA, then IRC is south of $5. Statistically, Phase III clinical trials have a little less than 50% chance of demonstrating efficacy. We can take that as the probability of FDA approval since Remune has demonstrated safety. Previous IRC studies have not had the statistical power to make a call on efficacy, and opinion seems to be evenly split on whether Remune is an onion or a pearl (although doctors involved in the trials would use Remune themselves). By this logic, a capital investment in IRC is essentially a 50/50 bet on winning or losing everything. To take that type of risk most venture capitalists require a 10x payoff on the upside. By this fundamental logic IRC is fairly valued at $10 (i.e. 10x10=100). Normal statistical volatility would be +/-15%, which takes us between $9-11/share 67% of the time and between $8-12/share 95% of the time. If you buy this logic, then all of the fussing about partnerships, timing, technical analysis, etc. is not material to the stock price. What is material is the outcome on Remune and the stocastic randomness around fair value. For example, if no partnership on the RA technology is forthcoming, then the worst outcome is that another $20 million in financing is required to cover the Remune Phase III trial through to completion which dilutes shareholder value by 10%. That dilution would make fair value $9 rather than $10, even with no adjustment for the underlying value of the RA technology itself. This choice should be based on the expected value of the RA technology to shareholders (which may be worth $5-8/share by itself) and not on shareholder expectations of a corporate collaboration. The clear conclusion of this is to be a buyer below $10/share, and a short term seller above $11/share. However, selling exposes you to the risk that an event revealing the outcome of Remune occurs while you are short - expected value of that event is negative for a short seller. As best I can tell, the best probability distribution for when the efficacy of Remune is revealed is a bimodal distribution between now and next March with peaks in May 1998 and March 1999. In any one month, you are exposed to a 8% probability that the event occurs, but the risk will be higher in May. Given the upside potential, traders will need at least 8%/month volatility to risk being short, but that premium will increase with the potential of revealing the Remune outcome. It seems to me that both volatility and price should increase as a result between now and May. Any comments? |
