Puma Shares Soar When Wall Street Misplays Expectation Game

The reason Puma Biotechnology ( PBYI) is up a jaw-dropping 287% Wednesday is because the stock was relatively under-owned (not heavily shorted) by healthcare investors. That means a lot of investors are playing catch up following last night's news that Puma's experimental drug neratinib delayed the return of cancer in a large trial of women with early-stage breast cancer.

Puma is why so many investors love to speculate on biotech stocks. A contrarian trade against a heavily expected outcome can return a fortune. It happened with Puma Wednesday, just like it did with Intercept Pharmaceuticals ( ICPT) last January. 

Here's why so few healthcare investors expected Puma's neratinib "adjuvant" breast cancer study to succeed:

The study compares one year of neratinib following 1 year of Roche's ( RHHBY) Herceptin versus 1 year of Herceptin plus a placebo. Essentially, the idea here is to determine if adjuvant breast cancer therapy with two HER2 inhibitors prolongs survival longer than a single HER2 inhibitor. Earlier this year, a similar adjuvant breast cancer study of Herceptin and GlaxoSmithKline's ( GSK) Tykerb failed to improve overall survival compared to Herceptin alone. Moreover, in another study, two years adjuvant therapy with Herceptin failed to deliver any added benefit to patients receiving just a single year of Herceptin adjutant therapy. The negative results from the Glaxo study and the lack of two-year benefit from Herceotin significantly lowered the probability of success for Puma's neratinib study in the eyes of many investors. For this reason, Puma was relatively under-owned.

Wrong call. 

One guy who made the right call -- and a huge pile of money Wednesday -- was Adage Capital's Phil Gross. Adage is the largest shareholder in Puma, largely because Gross believed fervently that neratinib would succeed in the adjuvant breast cancer study. He was right! 

Puma CEO Alan Auerbach is a big winner, too. With the huge surge in the value of his Puma shares, Auerbach is now a billionaire. 

Next up for Puma, besides seeking neratinib's approval in breast cancer, will probably be finding a buyer for the company. Auerbach sold his last cancer company, Cougar Biotechnology, to Johnson & Johnson ( JNJ), so he'll likely try to do same thing with Puma. Alternatively, Auerbach might sign a marketing partner for neratinib, along the lines of what Pharmacyclics ( PCYC) did with Johnson & Johnson. 

If you're a big Puma bull now, you believe Auerbach can strike M&A gold once again. Roche's Herceptin generates about $4 billion in sales as an adjuvant breast cancer therapy. Neratinib, if approved, would be used as a second year of adjuvant therapy following Herceptin, so could it also deliver $4 billion in sales? Probably not given some women --with no evidence of cancer recurrence -- won't want a second year of therapy. Neratinib also causes a lot of serious diarrhea, which might turn healthier patients off. But even with those drawbacks, neratinib could still bring home $2-3 billion in adjuvant sales. The drug is also being developed for other forms of breast cancer and additional indications. 

Auerbach's ability to sell Puma will depend on Big Pharma's willingness to pay up for the company. At today's price, Puma is already worth almost $7 billion. 

One more interesting wrinkle to this crazy Puma story: What the hell happened with Pfizer ( PFE)? 

Minutes before Puma made the neratinib breast cancer data announcement, the company issued a separate press release disclosing re-negotiated terms with Pfizer for the licensing of neratinib. [Pfizer licensed neratinib to Puma years ago.]

Under the new agreement, Puma agreed to pay for about $30 million in additional neratinib clinical trial expenses that would have been Pfizer's responsibility. In exchange, Pfizer agreed to accept a royalty on sales of neratinib in the "low to mid teens" instead of 10-20%. 

The big question: Did Pfizer know about the neratinib breast cancer data before agreeing to accept a lower royalty rate? Puma didn't say and no one on the company's conference call Tuesday night asked the question. I asked Puma if they disclosed the neratinib data to Pfizer in advance but have not received a response.

If Pfizer had access to the neratinib data, perhaps the study results aren't as good as we've been led to believe. But if Pfizer didn't know because Puma get the neratinib results hidden, Pfizer looks foolish today.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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