Halozyme Therapeutics, Inc. (NASDAQ:HALO)

50% drops in biopharma share prices are not unusual after an FDA rejection. In the case of Halozyme, however, rejection of Baxter's application for HyQ was expected after the FDA requested additional info in April prior to reviewing the BLA. Most investors thought the rejection was priced in after the stock dropped from recent highs over 13 to as low as 7.25.

What shocked the market after hours on Wednesday was the announcement that the FDA was placing a clinical hold on ongoing trials of recombinant human hyaluronidase in the HyQ collaboration as well as the subcutaneous Cinryze collaboration with Viropharma. The critical sentence in the Halozyme PR, quoted ad nauseam in the financial media, is as follows: "The primary issues raised in the letter focused on non-neutralizing antibodies generated against recombinant human hyaluronidase and the possible effects of these antibodies on reproduction, development and fertility."

I guarantee that as I write this pitch, a lot of people with stronger analytic backgrounds than myself are working on a better understanding of that sentence. If the street has overreacted then there's a lot of money to be made going long on Halozyme right now. On the other hand, programs have been killed over these kinds of concerns and if that's the case Halozyme should have an enterprise value of zero.

I decided to green thumb Halozyme now because I want to tag the stock and record my state of mind so I'll be able to refer back to it quickly if I do decide to buy in. There's a few things that suggest that the fears of complete platform destruction may be overblown.

1. Hylenex, the Halozyme component of HyQ is recombinant human hyaluronidase. While the company has reported data indicating generation of antibodies to the product, they have not described any findings related to fertility in animals or humans. Intuitively, it seems unlikely that humans would produce antibodies to a recombinant native human protein that would result in significant adverse consequences. Unlikely, but of course still possible.
2. Hylenex itself has been approved by the FDA since 2005 although actual usage has been limited. The Hylenex label states "Long-term animal studies have not been performed to assess whether hyaluronidase impaired fertility; however, it has been reported that testicular degeneration may occur with the production of organ specific antibodies against this enzyme following repeated injections. Human studies on the effect of intravaginal hyaluronidase in sterility due to oligospermia indicated that hyaluronidase may have aided conception. Thus, it appears that hyaluronidase may not adversely affect fertility in females." It appears that the FDA has been aware of potential adverse effects of Hylenex on fertility for at least seven years and not considered this a serious problem.
3. Halozyme reports that the CDER division of the FDA has confirmed that there is no need for actions against Hylenex or clinical programs in the Hylenex IND. Hmmm.
4. PropThink is reporting that Roche, another Halozyme collaborator, is not concerned about the FDA action and will continue their trials of Hylenex with Herceptin. Of course, Roche is a European study and is conducting studies in Europe with plans to file for European approval. This liberates them somewhat from the dictates of the FDA, at least until they decide to seek US approval. PropThink may also be full of it. I don't know much about PropThink.
5. At least one board member has continued to make sizable purchases on the open market even after Baxter communicated likely FDA rejection of HyQ.

Traders not adverse to risk might consider taking a long position in Halozyme now. I believe much more will be revealed about the FDA action in coming days once analysts and journalists have consulted with their scientific colleagues. I believe ultimately the FDA's concern will prove to be related to reactivity of anti-hyaluronidase antibodies against human sperm potentially leading to infertility, but I also believe that ultimately this concern will most likely prove to be unfounded. Am I risk-adverse enough to avoid this stock? I believe after getting creamed on every single one of my risky bets in 2011 that I am.