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Rigel Pharma: Importance of Knowing Your Stock

Last Thursday night, Rigel Pharma (RIGL) released disappointing results on its TASKi3 Phase 2b study on Rheumatoid Arthritis (RA). The results showed that the placebo worked basically as well as the R788 pill. Now here is where you need to understand the stock and what was being tested or otherwise you'll be forced into a trading decision by the market and not knowledge.

First, this test was only to determine whether the R788 drug worked on RA patients that failed to respond to at least one biologic treatment. Therefore, this result was much less material to the company then the TASKi2 results on July 9th that showed the drug was as effective or more so then existing medicines that typically require shots.

"Our objective with R788 in RA is to position the product after methotrexate and before biological therapies are used. We have shown excellent results in that patient population in our earlier TASKi1 and TASKi2 studies, and we believe that patient population represents the large market opportunity for this product," said James M. Gower, chairman and chief executive officer of Rigel. "In this TASKi3 patient population, biologic failures, we have seen divergent results as sometimes happens in studies with subjective components. However, we are pleased to see excellent results in the objective measures and in the Synovitis and Osteitis MRI scores," he added.

Second, the results actually showed that the R788 worked basically as expected, but that the placebo worked much better then it ever has in similar tests. RIGL doesn't plan to abandon the hopes that this drug will eventually work for these suffering patients. It will be interesting to see why the placebo saw dramatic improvement in results after 6 weeks when the R788 was dramatically outperforming.

Although the ACR scores for the R788 group were within the expected range in this patient population, the reported placebo response rates were considerably higher than seen in any other previous study of RA biologic failure patients and rose unaccountably between week 6 (at which point the reported response rates between R788 and placebo were significantly different) and month 3 (when such reported response rates were no longer significantly different).

Based on these 2 facts, the stock shouldn't have dropped from $14.50 on Tuesday prior to the release to $7.50 in AHs on Thursday after the release. Oh and where is the SEC to investigate the $3 drop during trading on Tuesday and Wednesday prior to the release. Somebody clearly got wind of the negative results. This is where knowing the stock could have paid big dividends. Anybody buying AHs in the panic could've seen huge gains by mid day on Friday. An easy 20%+ gain as the stock approached $11 and closed at $10.40. Knowing a stock gives you confidence to step in and buy a stock on unwarranted weakness. Likewise it gives a investor confidence to hold as well knowing the stock will bounce.

RIGL should still be in line to sign a significant partner deal as the TASKi2 results were the primary focus of any partnership. It's difficult to see how an inconclusive result on a non-material test group would impact the long term financials of RIGL. From listening to the conference call though it was clear that most analysts involved were focused on these results and not the valuation impact. Once the emotion subsides in the weeks that follow, more people will begin to realize what any objective person already knows. The inconclusive test results don't matter to RIGL. The market is being reactionary as RIGL already has proof that the drug works on the targeted population.

Prior to the results, several analysts had thrown $30+ targets on the stock. I hardly see how these test results are going to impact that even though one analyst already reduced his target to $18. Huh? What was the rational for that? A 40% reduction because of an immaterial test seems very overdone.

Its also important to point out that these patients failed to respond to other biologic treatments so they are by definition a difficult group to treat. Sure RIGL and analysts were hoping for a homerun by showing that this drug treats this difficult class of patients. Regardless, it doesn't change whether RIGL has a blockbuster drug in their possession. The results were also so inconclusive that hope still exists that this drug will eventually be used. After all per the conference call, 85% of patients in the study chose to continue using the drug and the MRI scores showed improvements. So maybe it really is just an issue with the subjective nature of the test.

Knowing all this lets an investor step up and buy.

Disclosure: Long RIGL in client and personal accounts.


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