Our Unicycive Short Sale

Unicycive's therapeutics pipeline consists of two assets: Oxylanthanum Carbonate (OLC), a lanthanum-based phosphate binding agent, and UNI-494, a nicotinamide ester derivative and selective ATP-sensitive mitochondrial potassium channel activator. The former is their primary asset, having already passed through Phases 1, 2, and 3 of regulatory approval. Novana entered into a short position against Unicycive two days before Saturday, June 28th, OLC's Prescription Drug User Fee Act (PDUFA) action date and the latest anticipated date that the Food and Drug Administration would respond to the Company's OLC New Drug Application.

Unicycive had released a public update two-and-a-half weeks prior, on Tuesday, June 10th, concerning its New Drug Application for OLC to treat "hyperphosphatemia in patients with chronic kidney disease on dialysis." In it, the Company disclosed the following: "The FDA communicated to the Company that it had identified deficiencies in cGMP compliance at a third-party manufacturing vendor (one of its CDMO's third-party subcontractors and not its Drug Substance vendor) following an FDA inspection." Novana calculated the simple arithmetic mean of Unicycine's share prices in the trailing six months prior to and including Tuesday, June 10th, obtaining an average value of $6.26 per share. The June 10th update had been a major negative price catalyst, causing prices to tumble from $11.00 per share down to $4.70 per share — a 66.36% net loss over the course of just two trading days. Yet, by June 30th, Unicycive's share prices had bounced back, trading at $6.33 per share: a slight upgrade when compared against its six month-averaged share price prior to the June 10th update.

Building Our Thesis

Novana had a strong conviction that the market had failed to price in the FDA deficiency disclosure put forth in Unicycive's June 10th update, leading to falsely inflated share values. The announcement should have materially updated the market's expectations regarding Unicycive's regulatory prospects. Crucially, the FDA indicated that the cGMP¹ compliance deficiencies precluded label discussions, effectively signaling that approval in the current cycle was highly unlikely. By any rational interpretation, this type of disclosure should have increased the market's expectation of a delay or CRL², both of which would typically depress a biotech stock evaluation ahead of a PDUFA action date. Yet, the price action following the disclosure told a different story. Shares did drop sharply in response to the initial announcement, falling more than 66% in just two days. However, the rebound to $6.33 by June 30th brought the stock back above its six-month volume weights average of $6.26. From a fundamental standpoint, this recovery was unjustified. The market appeared to treat the announcement as a transient headline rather than a shift in the drug's regulatory outlook. We viewed this as an irrational bounce that ignored newly introduced downside risk.

Novana's thesis was built upon the conviction that the FDA's feedback materially changed the implied probabilities associated with OLC's potential regulatory outcomes. We categorized these outcomes into a few discrete scenarios: a full approval, an approval with post-marketing commitments, a CRL due to manufacturing issues, a CRL requiring more clinical data, and an outright rejection. Our internal research, which included historical FDA outcome modeling, revealed that NDA applications with pre-PDUFA cGMP issues rarely secure approval in their first cycle. We estimated that the most probable outcome was a CRL due to manufacturing issues, a fixable but value-destructive delay. Based on FDA precedent and backtesting, we assigned outcome probabilities and modeled the directional price impact of each:

In theory, the market should have efficiently reflected the expected weighted average across these outcome deltas so as to fairly price Unicycive. But, we found that the market had effectively reverted the pricing to a neutral, optimistic base case, essentially ignoring what should have been an obvious increase in the probability of a downside price movement. To summarize: Unicycle's market valuation seemed to price business as usual; Novana's trade sought to exploit this inefficiency and deploy a market-neutral trade in order to isolate idiosyncratic risk in a bet that Unicycive's stock price would violently revert towards the regulatory reality after the Food and Drug Administration's response to its NDA.

At the time of trading, our Bloomberg Terminal data feed reported Unicycive's beta to be ~1.33 and the SPDR S&P 500 ETF Trust's to be ~1.01. We hedged beta by taking positions short UNCY and long SPY in a 1.01:1.33 ratio, respectively.