Last week Endocyte was discounted 70% and is now trading in uncharted territory. It sold down to this level due to bad results in the Phase II study for the EC145 treatment. The study showed that patients with platinum-resistant ovarian cancer who took ECYT treatment did not live longer than other patients. However, as their CEO explained, this Phase II trial was not designed to test survival. The company plans to continue with Phase III and aims for FDA approval. More comforting is the fact that during the week that followed, several directors of the company purchased stock in the open market. The value of stock purchased was significant, in fact north of $750,000. The stock price has stablized in a (surprisingly) narrow range of 3.10 and 3.20. After such a a big drop, usually some volatility is expected, either a bounce or more severe selling. But we haven't gotten much in terms of volatility. During the consolidation period volume has remained very high between 1.5 and 2 million shares changing hands daily. I believe going long at $3.13 and holding for a few months represents a very good risk VS reward tradeoff.

As you can see there have been no significant rallies or bounces, despite news coming out that the trial results were misunderstood and the insider buying frenzy being reported. The price first dropped to 4.00 and then slowly declined to low 3.00's. Keeping in mind that (1) this stock is heavily owned by institutions, (2)  we are in the last weeks of trading in 2011, (3) volume is huge and (4) the price remains in a tight range, I believe that one of the institutions which holds a big position in ECYT is in the process of resetting their cost basis. The way this works is the entity currently holding ECYT stock sells it all in 2011, effectively locking their loss and lowering their P&L for the 2011 year. While another affiliated — special purpose entity — is buying the shares being sold. On a consolidated basis they would still own the same amount of shares at the end of 2011, but entity #1 will lower its income tax for the year because of the loss that was booked. In other words marking their long-term investment to market. During this process the trading algorithm that is reponsible to make it happen kicks in at around 9:35am every day. Take a look at this chart:

On every single morning before 9:35am the stock wants to bounce from its currently undervalued level. However an algorithm kicks in after that and begins selling to retain the stock in a narrow range. The price is locked by this big player because they have only a week to finish transferring shares, and a volatile environment would make the task more difficult. In a perfect world this exchange would have happend at a fixed price so that net losses from the process are nil. But that's impossible. Notice that during premarket and aftermarket trading sessions, the price pushes higher, a few hundred shares trading in the 3.30's, showing us that the stock is in demand. By Wednesday Dec. 28 (next week) the institution will be done controlling the price and supply and demand will again allow ECYT to move freely. Based on the fact that the company cash on hand is a little below $4/share and that the results were not as bad, I believe that market participants will correct the price significantly higher. Also keeping in mind the company has more drugs in its pipeline… currently it's priced as if it's going bankrupt. Now would be a good time to weasel in and get out at much higher prices in a month or two, perhaps as high as $5 or $6. A more conservative short-term trade would be to set a stop at $2.90 and to begin taking profit at $4.00 (or any significant daily bounce above $3.80). Market inefficiencies do happen and there are ways to take advantage of them, you just have to be patient and always control for risk.

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