August 12, 2007

Analyzing Vanda: Part 2

In my eyes, Vanda (VNDA) takes on several different identities as a stock. Here, I'll outline those, and which I feel give investors the best chance to make money. In my research, I see Vanda's stock as being anywhere from a short candidate to a buyout target. Today, I'll analyze it as a short play, a short squeeze, a buyout, and an option play.

1. Short Play
As of last month, approximately 15% of VNDA shares were held short. The shorts have held strong on VNDA for the last eight months. The stock hit a high of $32 in January after it announced positive top line data for Iloperidone. However, since that high, the stock has floundered, trading as low as $15.06 as recently as last week. Investors have been down on Vanda despite all the positive news out of its pipeline. The stock started is downward momentum with a secondary offering in January. Then the momentum gained traction as insiders were selling. And last week, the stock dove toward $15 as the company announced that it is having trouble finding a partner.
Shorts have a hold of this stock, but I don't think now would be the time to initiate a new short position, despite the downward momentum, but I look for the selling pressure to hold until the company can turn the tide with some positive news.

2. Short squeeze
I think this play could have some fruit. BioHealth Investor ran an article about short squeezing biotechs, and Vanda sets up pretty well for it. There is significant short interest in the stock and any positive data or news will send shorts running for cover. The company does anticipate some events in the fourth quarter that could have a short squeeze effect. Vanda expects to complete its phase II trial for excessive sleepiness (VSF-173), it expects to initiate phase II trials for depression (VEC-162), and it plans on starting dosing for its next phase III trial for chronic insomnia (VEC-162). The company is also going to file a NDA for iloperidone by the end of the year. All of these events could send the stock higher, but what I want to see is a partnership, which would send the stock up, up, up.
Looking at option activity, there is significantly higher open interest in September's $17.50 calls. This could signify that investors are expecting some announcement by then that could send the stock higher.

3. Buyout target
I would never buy a stock solely because I thought that it would get bought out, but I'm not afraid to entertain the option. Vanda has some promising drugs that are nearing the end of development and the company has already hired JP Morgan to help it find a partnership. Why wouldn't a larger firm just buy the company's entire portfolio, instead of just iloperidone? Some are thinking Wyeth became a candidate after the FDA refused to approve its schizophrenia drug Friday.
Then again, maybe the company is already overpriced to be a buyout target. And the current market conditions have stemmed the M&A activity recently.

4. Option Play
Options might be the best way to make some money with Vanda. Like I've said before, I like options for small biotechs. Some risk can be reduced by using options. For the most part, from what I'm seeing, there is pretty good reason to be bullish on VNDA in the fourth quarter. However, as with all small biotechs, there is risk and being long can expose you to that risk more than holding call options. I'd be interested in calls with expirations as far out as January 2009.

To conclude, I like what I'm seeing from Vanda. The stock is well off its highs and I think there is less downside now than there was before and there are catalysts set up for the end of the year that could send the stock higher. I have started my process of finding a fair value for Vanda, and I will report that in a later post, but as of now I am moderately bullish on VNDA.

Disclosure: I currently own shares of VNDA, however I did not at the time of writing this article


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Great reviews on biotech stocks.