La Jolla Pharmaceuticals (Nasdaq: LJPC) Swing Move

Last Updated on December 26, 2019 by Sultan Beardsley

Trade Summary

Ticker: LJPC (Last 12/26/19: $4.05)

Entry: $4.0-5.0

Price Target: $7.96-20

Target Time-frame: 0-8 weeks

Trade Thesis
As of 12/25/19, a disconnect remains between LJPC’s intrinsic value and market cap. In trading LJPC we aim to capture this difference as the stock price returns to equilibrium. As I discuss below, there is a reasonable argument to be made that the company is seeking a buyer or could be engaged with one. If this is the case we can tack on a premium to the intrinsic valuation. 

LJPC lost over 60% of its market cap on Monday 11/25/19 after announcing in two press releases the discontinuation of LJPC-401 and the CEO’s transition out. Interestingly, in an 8K filed on Friday 11/27/19, we learned that the COO (and board member) also resigned. Both resignations were dated on 11/23/19. Moreover, the 8K informed us that the CFO would be assuming the role of the “principal executive officer pending further action from the board“. What many failed to notice was the reference to the NDA submission for LJPC-0118 as a treatment for severe Malaria in the CEO transition press release. This has significant implications I elaborate on below.  

The board of directors is chaired by Kevin Tang who founded and directs a life-sciences investment firm ‘Tang Capital Management’. His firm holds an 18% equity stake in LJPC consisting of 4.3 million shares as of 9/30/19. Given these factors, we can assume his interests align with LJPC bulls. Considering this info in light of the NDA submission, LJPC’s commercial asset, the company’s balance sheet, and its low float relative to its market cap a favorable risk-reward profile takes shape. The key thing most people are not accounting for is the priority review voucher LJPC should get after submitting the NDA which is transferrable (i.e. LJPC can sell it).

Intrinisic Value (IV) Calculation (market cap at $74.4M)
Total Assets (as of 9/30/19): $149M
Voucher Value: $124M
2019 Full Year  GIAPREZA sales estimate (the U.S only): $21M
Potential Malaria Market Opportunity: N/A 
Total Liabilities (discounting the tiered royalties): $60M
Shares Outstanding: 27M  

IV = [(149)+(124)+(21)-60]/27=  $7.96 per share ($215M)

So what we have is an opportunity to capture the restoration of $264M ($399-74.1) in the market capitalization of LJPC. The manner in which recent events unfolded feels like a slide of hand trick. Tang effectively distracted the market with headlines in Monday’s press releases while quietly sneaking in the NDA submission. Bears might object that we do not for certain the company will be awarded the voucher. Based on a study of the necessary criteria and the now-former CEOs comments on previous earnings calls we can be confident in the voucher. Furthermore, the discontinuation of LJPC-401 “due to a lack of efficacy” conflicts with previous clinical reports indicating the drug works. It feels as if ousted management was not onboard with the sale of the company and thus were fired and replaced with the CFO whose mindset aligned with the boards. I propose Tang is preparing the company for sale to the highest bidder. News of the voucher is surely percolating through the industry and will pique the interest of big pharma. In the past vouchers have sold as much as $350M and as little as $68M. Even if LJPC is not purchased I feel it is undervalued.

Key Focus
The priority review voucher that should result from the NDA submission of LJPC-0118 and subsequent buyout.

Technicals/Stats

• Watch for the price to break and hold above $2.80
• 9-day EMA is above the 20-day EMA
• The share price is above the 9 and 20 days EMAs ($2.71 and $2.65 respectively)
• RSI on the daily chart= 14 (oversold)
• CCI on the daily chart= -113 (bearish)
• CCI on the 5-minute chart= -22 (neutral-bearish)
• Average 10-day volume= 1.63M

(Assume an entry at $2.78)
Risk Management 
To mitigate downside risk we can buy puts and set stop losses. When using a stop loss I like using one 1-5% below my purchase price. For puts, I like the December 20th, 2019 and/or  January 17th, 2020 options with a $3 strike price.

Reward Potential (Exit Price)
+79% ($5)
+151% ($7)
+260% ($10)
+440% ($15)
+619% ($20)
+799% ($25)

I (Sultan) am long LJPC with a cost basis of $3.03