Kevin Mak

$ABVX Update Disclosure: Long shares of ABVX. We've had a lot to say about this over the past month. It's one of our largest positions and has given people a ton of opportunities and turmoil through the volatility. I'll start with my narrative of what I think happened, and then talk about how we managed our position through it. I realize this may sound retrospectively biased, but there's a handful of people that talked to me during the whole saga that can confirm these were my thoughts and beliefs in real-time. --- We all know the topline data on June 1st came out very positive, ahead of expectations, with some cancer notes that were deemed "no safety signal." The stock initially gapped up to the $155–$170 range and traded there for a few minutes, about ~400k shares traded. In my opinion, the sellers of the stock at these levels were largely indiscriminate sellers taking profits from the pop in the stock price. They were not sharp investors that saw the cancer data and knew the stock was destined to plummet 50%. 400k shares is not many, but more surprisingly (or arguably not surprisingly at all), there were very few buyers at $150+. Consistent with the article I wrote back in January, in my opinion, there is very little dry powder left to chase ABVX (or biotech in general). Funds that like the name are already at or above their risk limits, and investors who have no position generally aren't terribly interested in buying higher at this time, with this information set. The stock fell below $150 and on very little volume, quickly returned to the $133 pre-data level. Mass confusion set in as everyone was saying "why aren't we trading higher, the data is ahead of most estimates." That's when people started looking at the cancer data panel and saying "is this the problem?" In my opinion, the data was never the problem. But the price narrative turned it into one. It made people doubt themselves, leading them to not buy, or even sell. Some people who were overlevered had to sell. Just over 1M shares of trading moved the stock from $150 to $90 in about 10 minutes. That's a little over 1% of shares outstanding and a 40% move in the stock. I think a large portion of this phase of selling was a gamma squeeze of options market makers. There was a fair number of people who held put options to hedge their long positions. The market makers, when the stock was at $130 or $150, were short very few shares to hedge their short put exposure. As the stock ratcheted down from $150 to $130 to $100 to $90, the market makers had to short ABVX shares to delta-hedge, and the absence of buyers (due to the price driving the narrative) meant there was a liquidity vacuum. Prices snowballed downward until finally there was a bid from extreme-dip buyers in the $70–$90 range. I personally know people who were largely unaware of the name saying "hey, maybe I should pick up some shares here at $80, what do you think?" When we talk about price discovery, we think about the market knowing more than you do. So when the stock is falling, it is genuinely plausible that someone knows something and you should pause, delay, re-assess. But it doesn't always mean someone knows something. Sometimes it's mechanical, forced flows that happen to give off the wrong signal. In this case, that is what appears to have happened. A very short quote that I said during those days that sums it up: "There have been over 100,000 words written to defend the ABVX data, and essentially no words drawing serious concern. But the price appears to tell you everything you need to know." "Appears" is doing a lot of work in that sentence, and the price, in hindsight, now seems to have been exceptionally wrong. If you look at the totality of the Phase 3 Maintenance Part 1 and Part 2 data, the analytical consensus is that the cancer scare is largely benign and the drug efficacy is significantly better than previously expected. All things equal, we believe the data supports a materially higher valuation than where the stock was pre-data. ---- With that narrative in place, and given our investing style, which is to underwrite stocks aggressively and buy weakness and sell strength, I wish I could give you a heroic story about how we navigated this situation perfectly. The truth is pretty far from that. A key part of our strategy is to underwrite aggressively and update our positioning to reflect new information. During the post-data halt, we revised our estimate of fair value significantly higher. The data was great, and the cancer scare inconsequential. We added a substantial number of shares post-halt to reflect our updated view. As discussed above, the stock fell over 50% in a matter of an hour, causing a large loss. Realized or unrealized is irrelevant, a loss is a loss. Having just added at those levels, we would have loved to buy more as the stock fell further, but portfolio-level risk discipline prevented us from doing so. That's not me blaming risk controls. They exist for a reason and that reason is a very good one. We've largely held through the volatility. At current levels, we are worse off for having added than we would have been doing nothing. But the data validated our thesis and the analytical consensus has moved in our direction. We remain confident that the drug's approval and eventual commercialization, whether standalone or via acquisition, will be significantly valuable. Disclosure: Creek Drive and its affiliated funds may hold positions in securities discussed. Views expressed are current opinions for informational educational only, subject to change and are not investment advice or a recommendation to buy or sell any security. Investing involves the risk of loss and past performance is not indicative of future performance. See the disclosures link above for more important information.