On Tuesday I bought 1600 shares of ORXE, a Net Net pharma stock for $.30/share or $485.00 including the ChoiceTrade $5.00 commission, for the Small Investor Portfolio. I sold today at .40/share for a profit $150.00 or nearly 31% including commissions. This is not my usual trading style. But as much as this was a NCAV pharma investment, it was also a special situation investment. Having watched the volatility of the stock over the past few days, I thought it best to take the profit quickly. I have placed another limit order for .31/share.

What is Ore Pharmaceuticals?

Over the years Ore, originally Gene Logic, has morphed into a company whose future relies on four licensed  drug compounds. ORXE is re-positioning these compounds for other disorders than the original companies envisioned. Their lead drug ORE1001 is a potential treatment for Inflammatory Bowel Disease (IBD), a condition that afflicts 4 million persons worldwide. ORXE “ initiated a Phase Ib/IIa clinical trial in patients with ulcerative colitis – one of the two main disorders comprising IBD – in the fourth quarter of 2009.”

What are the risks of investing in ORXE? As always these are not all the risks of purchasing stock in ORXE. But these are risks that I think are significant.

1. Ore Pharmaceuticals is not profitable. The only exceptions I make to this Ben Graham rule, are if a company has operating profits, but has one time charge-offs like IFON or if it is a Pharma stock. The reason for the exception on the Pharma stock side is that the potential upside on these stocks is so much higher than a regular company that it makes sense to take on  a little extra risk on the down side. I do not expect Ore to become profitable soon.

2. ORXE was delisted from the NASDAQ on March 25th. The price of the stock dropped from approximately .70/share to .28/share. The price has fluctuated between $.28/share and $.40/share ever since. Radical moves are part of the daily cycle. The stock is not for the faint of heart. The stock price could continue down.

3. The company’s business plan has failed, so far. As they said in their 3-31-10 10K, “Our intention at the time of the reorganization was to explore and, if feasible, implement a strategy by which we would finance development of our portfolio through establishing alternative investment and program development vehicles, with Ore receiving program management fees from, and equity interests in, these vehicles.  To date we have not formed any of these vehicles and we are uncertain that we will be successful in implementing this strategy and business model in the future, in which case we may determine to take other actions designed to preserve, increase and realize the value of these assets.”

4. Non of their drug candidates has completed even Phase II trials, meaning that more capital will need to be raised. If the capital can’t be raised then they will not be able to bring the drug candidates to a profitable stage. They only have enough money to get through Q1 2011, including the ongoing Ib/IIa trials for ORE1001.

5. The company is subject to litigation by former landlords. The lawsuits stem from leases for a former subsidiary that ORE sold in 2006. The potential loss is $4 million, if required to pay leases through term.

6. The conversion to a holding company has restricted the value of the NOL’s for an acquiring company, since the terms of this conversion restrict how much ownership can change over the next three years.

So despite the fact that I have already made money from ORXE the why of investing in this company seems higher than usual.

1. NCAV stock. The net current asset value of the company is currently approximately $.58 share so the margin of safety of 33% means it is a buy under $.38/share. I used limit orders to protect myself from the huge price swings.

2. Net operating loss carryforwards- The company has $329 million in NOL’s. Whether or not the value of these will be extracted or what the actual value of these is in the current environment is beyond my estimation. In any case, I did not use them in my asset valuation, although they certainly have some value. Particularly for an acquiring firm.

3. Volatility- I have listed that as reason to purchase not a risk for a specific reason. In this case it was clear the volatility hinged around the de-listing and I felt that it was something that could be exploited in a short term way. This is why I considered ORXE a special situation. The company had not changed, but any investment funds that held the company stock that required its equities to be only in exchange  listed companies, were forced to sell. It was a catlyst to realize profit by artificially lowering the stock price, in the short term. This was not a speculative venture. I was happy to hold the stock and let it appreciate slowly, but I thought that it was more likely that I could make 25% – 30% in  a very short term, if I used limited orders wisely and let the volatility trigger my orders on the buy side and then the next day on the sell side.

4. The four leading compounds have already been tested in humans- Although they have not been tested for the treatments Ore is investigating, the fact that the compounds were previously well tolerated in humans, reduces the risk of the compound failing in further clinical trials.

5. Additional research for free- Ore’s lead drug candidate ORE1001 is also being investigated for radiation enteritis.” In October 2009, we entered into a research material transfer agreement with the Armed Forces Radiobiology Research Institute (AFRRI) where ORE1001 will, without cost to us, be evaluated for potential utility in countering the adverse effects of radiation.”

There are, of course, other more speculative reasons to purchase shares of ORXE such as a buy out,  partnership with larger Pharma company etc. But, since this is an investment blog, not speculative blog, I will leave those stories for someone else.

Strategy; But and sell if profit hit 30% in a short period, say less than a month. I plan on repurchasing the stock if possible if the volatility persists to hold for a longer period or if in the case of another 30% swing to sell in the short term.

Disclosure: Although I do not own ORXE in my Chroma Small Investor Portfolio, I intend to buy it in the 80-20 portfolio as a special situation. As with this posting, I may post my purchase of the stock after the fact, or not at all. I work in the film business and am not an investment advisor, make sure you do your own research before making any investment, even if this looks like a good idea to you, no, particularly if this looks like a good idea to you.

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