Gritstone Bio is Trading as Though They’ve Had a Major Breakthrough in Cancer Research

There’s a lot of weird things going on with Gritstone Bio lately. Since December 22nd there’s been a ton of after-hours buying in large blocks. I thought it was over on February 1st, but the after-hours bandit showed back up again on the 8th and 9th scooping up another 1,375,156 shares.

“So what?”

Well, I covered this after-hours buying extensively in my last article. But to summarize, there are only 95.34 million shares of Gritstone outstanding. Roughly 50 million of these shares are owned by large institutions.

Since December 22nd precisely 25,872,234 shares have traded hands after-hours.

That represents 27% of the company. That’s a large amount. I have never seen such a large percentage of a company traded after-hours. It also didn’t move the stock price that much. $GRTS has been mostly tracking the movements in $XBI (small and mid-cap biotech index).

“Someone” has been buying large blocks at the end-of-day price ranging from $1.82 to $2.86. I don’t think this is the bad type of dilution for various reasons, which I outlined in the last article.

Let’s talk about the options market

Small companies don’t usually have stock options. There simply isn’t enough interest to warrant them. Or the rules of the exchange prohibit them to protect investors from sleazy pump-and-dump CEOs.

Gritstone does have stock options. And the action from the options market corroborates the theory that the large after-hour blocks is “someone” loading up in anticipation of a major market moving event.

I rarely trade equity as I find the return on investment to not be worth the time it takes me to build a thesis. Sure, equity is fine for passive investments like index funds and the like, but if you want to make a killing with a small investment then you need leverage.

Options are not for everyone.

You can lose 25% in minutes. You could lose 100% with a single bad earnings call, or a failed drug trial. Equity holders lose as well, but for them it’s like 5 to 50%. When you see a stock drop 7% after hours from a bad earnings call, the next expiry call options are likely dropping 99%.

It’s dangerous. But it’s also more rewarding when your thesis plays out.

Another problem with options is the spread. If you’re buying Gritstone equity the spread might look like this: BID: $2.25 – ASK $2.26

Maybe sometimes it widens to a few pennies but that’s it. Even pre-market and after-hours when there’s no liquidity the spread might only be 20 cents.

Options are much worse. The spread on a long-dated deep out-of-the-money call option could look like BID: $0.20 – ASK: $0.50.

That means if you buy at the ask and then change your mind a few days later it would cost you 60% to close your position. You should only be buying options if you’re sure of your thesis and understand the risks involved. (Or if you’re hedging a position, but that’s a different beast.)

“Who is selling the options that I’m buying?”

Good question. It can be other investors or traders, or it could be institutions looking to get some extra income for holding their equity by selling covered calls. But if a stock is obscure and it doesn’t trade a lot of options then it’s probably the market maker. Yes. The spooky market makers we hear about all the time but never meet.

Market makers are firms (like Citadel) that commit to providing liquidity in the market by always being ready to buy (bid) or sell (offer/ask) securities at publicly quoted prices. They profit from the spread between the bid and ask prices and are a primary source of liquidity in the options market. By quoting prices for a vast array of option strikes and expiration dates, market makers ensure that there is almost always a seller and a bidder for these instruments.

They aren’t Harry Potter goblins sitting at tiny desks for each company. It’s run by computers and algorithms.

Time for options

Let’s say it’s Sunday and there is a hypothetical company with options expiring next Friday. The stock price is currently $2.25. You can buy call options at $2, $2.50, $5, and $7.50.

What should these options cost? Well, it depends on what is going on with the company. If they’re not reporting earnings, the stock price doesn’t move that much, the CEO is on vacation, their next major catalyst is months away, the stock is on nobody’s radar, and nobody is buying it or selling it, then the options will be cheap. Very cheap. $2.50s might be as low as 5 cents. There would be no market for the $5s and $7.50s.

Now let’s look at Gritstone.

The February $2.50s traded as high as $0.35 on Friday. The $5 options traded for 10 cents. That’s insane. These expire next Friday. What’s even more insane is that there was a standing bid all day at 5 cents for the $5 calls. Yes, market makers are supposed to provide liquidity but that doesn’t mean they’re going to buy up every piece of garbage. You can’t sell them calls that expire tomorrow that are so far out of the money that it would take divine intervention for them to pay out.

On Friday, one Twitter follower tried to close some of their covered calls at 8 cents and it wouldn’t fill. That means that not only is there a trader out there that thinks Gritstone has a chance of hitting $5 next Friday, but the market maker also thinks there is a chance because otherwise they would have filled the calls at 8 cents and would have sold as many calls at 5 cents to whoever the bidder was.

And it gets even wilder.

Somehow, as time is going forward, the option prices (particularly) for next Friday have been creeping up. This should not be possible, especially since the stock price has been going down. If the share price is $2.25 then all the strikes above that are out of the money. Which means the value in the option is all time value. Time value goes down the closer you get to expiry unless there’s a catalyst around the corner. (Time value for all options eventually hits zero.)

Options for Gritstone in February are trading as if the company is expected to announce earnings next week, with significant stock price movement anticipated. While they aren’t announcing earnings next week, there is a special date. Valentine’s Day. February 14th. This is when all the 13F forms must be filed.  It’s 45 days after the end of the quarter.

Whoever bought and sold the 5M share block on December 22nd must file by next Wednesday. That might be the catalyst that’s affecting the Gritstone options, but it might be something bigger.

Gritstone is scheduled to report initial phase 2 cancer data by the end of Q1. This data was initially scheduled to be released by the end of last year but was then delayed. Why? The CEO said it was to get more data.

Delaying the release of initial data for the phase 2 trial of the by three months to gather more data could provide several advantages that enhance the depth, reliability, and potential impact of the study's findings.

1.  Longer Follow-up on Patient Outcomes: Additional months allow for a longer follow-up period with patients, which can provide more comprehensive data on the durability of the response to the therapy. This includes longer-term survival rates, progression-free survival, and potential late-emerging side effects or benefits.

2.  More Comprehensive Immune Response Data: The extended period could offer a fuller picture of the immune response generated by the vaccine, including the development of T-cell responses over time and how these correlate with clinical outcomes. Understanding the dynamics of the immune response is crucial for evaluating the efficacy and mechanism of action of immunotherapies.

3.  Additional Biomarker Analysis: With more time, researchers can conduct deeper analyses of biomarkers in patients' tumors and blood samples. This could help in identifying which patients are most likely to benefit from the therapy based on their molecular or genetic profiles.

4.  Increased Statistical Power: More data points can increase the statistical power of the study, making it easier to detect significant differences between treated and control groups or among different patient subgroups. This is particularly important in phase 2 trials, which often aim to identify preliminary signals of efficacy.

5.  Evaluation of Secondary Endpoints: Additional time may allow for a more detailed assessment of secondary endpoints, such as quality of life measures, specific side effects, and other clinical outcomes that may take longer to manifest or evaluate.

6.  Data on Retreatment or Additional Cycles: If the trial design includes the possibility of retreatment or additional cycles of therapy for patients who benefit from or tolerate the initial treatment well, a few more months could provide initial insights into the feasibility and effects of such approaches.

7.  Refinement of Dosage and Administration Regimens: Extended observation can offer more insights into the optimal dosage and administration schedule, including how patients respond to and tolerate different dosages or combinations with other treatments.

This delay could possibly at the request of a big pharma company eyeing a partnership. Such a delay can serve multiple strategic purposes.

For a pharmaceutical company considering a partnership, conducting a thorough due diligence is crucial. This involves requesting more detailed data for a comprehensive analysis, which necessitates additional time for compilation and review. This period also allows both parties to negotiate a partnership agreement with a fuller understanding of the therapy's potential, ensuring that the terms are favorable.

Secondly, strategic planning plays a significant role. A potential partner might wish to synchronize the data announcement with their strategic initiatives, which include structuring the partnership, planning future trials, and incorporating the therapy into their broader product portfolio. This careful planning is crucial for seamlessly integrating the therapy and maximizing its potential.

Thirdly, regulatory strategy considerations may prompt a delay. A partner could advise waiting to release data to better prepare for regulatory discussions with bodies like the FDA or EMA. More comprehensive data can aid these discussions, potentially influencing the design of Phase 3 trials or speeding up the regulatory approval process.

The CEO of Gritstone said that if the data is good, then it could lead to 3-5 phase 3 trials. They would need a partner for this the partner would know best on how to get the FDA to sign off on the trials.

Getting back to the Gritstone options market, let’s look at the April strikes.

Around 1:30pm on Friday I liked how the stock was looking, and I liked the way the options were behaving. Prices were up pretty much across the board except for the April $5 calls, which seemed to be the only decently priced option available at $0.55. I bought a few. Someone else must have had the same thought because minutes later they bought 100.

And then something strange happened. The ask immediately jumped to 70 cents. It was like all the buying spooked the market maker’s algorithm. Right away the guy who bought a ton of the April 5s jumped on the April $7.50s and paid 50 cents for those. Like he was trying to buy everything he could no matter what the price.

For those options to pay out the stock would have to go to $8 by April 19th. That’s an increase of more than 350%.

What’s happening here?

Well, Gritstone options are being priced in a ridiculous manner. No sane trader without a powerful thesis or insider information would buy them. They’re just too expensive. They seem to be been priced to make you shake your head in disgust and find something else to bet on. While the market maker is committed to providing liquidity, it looks like they don’t want to sell any Gritstone options at all. And when people do buy them, they’re immediately priced higher, again in what I think is an effort to get traders to buzz off.

The Answer to the Big Question

The delay in the data to get more information, the mega after-hours purchases, and the ludicrously priced options all point to Gritstone having made a major breakthrough in cancer research.

I think Gritstone has solved the problem of how to turn a cold tumor into a hot tumor.

A personalized cancer vaccine targeting cold tumors would be extremely valuable for several reasons.

1.  Targeting Cold Tumors: Cold tumors are those that do not provoke a strong immune response due to the lack of immune cells infiltrating the tumor. These tumors are often resistant to many forms of immunotherapy, including the checkpoint inhibitors that have been successful in treating some other types of cancer.

2.  Personalization: The vaccine is tailored to the specific antigens of an individual's tumor, which could significantly increase its effectiveness. This approach addresses the issue of tumor heterogeneity, where different patients' tumors (or even different areas within the same tumor) might express different antigens. Personalized vaccines will ensure that the immune system is directed against the most relevant targets, increasing the likelihood of a successful outcome.

3.  Comprehensive Cancer Treatment: Integrating personalized cancer vaccines into the broader cancer treatment regimen could enhance the effectiveness of existing treatments, such as chemotherapy, radiation, and other forms of immunotherapy. By boosting the immune system's ability to recognize and fight cancer cells, personalized vaccines could potentially lead to better overall outcomes, including increased survival rates and quality of life for patients.

4.  Potential to Overcome Drug Resistance: Cancer treatment often faces the challenge of drug resistance, where cancer cells evolve to resist the effects of chemotherapy and other therapies. A personalized vaccine targeting cold tumors could provide a dynamic approach that adapts to the evolving nature of cancer, potentially overcoming or reducing the impact of resistance.

5.  Economic and Social Value: Beyond the direct benefits to patients, the development of effective personalized vaccines for cold tumors could have significant economic implications. Reducing the burden of hard-to-treat cancers could lead to lower healthcare costs associated with long-term treatment and care, as well as increased productivity and quality of life for patients. Moreover, the success of such a vaccine could spur further innovation and investment in personalized and precision medicine, with wide-ranging benefits for the treatment of various diseases.

Sayonara, Share Price

If they have solved the problem of turning a cold tumor hot, then Gritstone’s share price is about to make a meteoric jump. Their current market cap is only $214 million. A company that has solved such a problem would be worth billions even with just phase 2 data. Because with phase 2 data comes the partnership which brings in cash and media attention. Once the share price is back over $5 then more institutions can invest. Especially since it’s been de-risked.

If their phase 2 data is good, and all signs point towards it being good, then Gritstone could jump 10x in single day. It could go up 100x in a few years. If the phase 3 trials are good, then the company will be worth 10s of billions. And that’s before the mania hits.

And don’t forget there are fewer shares available for the public now. There was already 50M locked up, and then another 26 million were purchased after-hours. The float is vanishing after-hours and in the options market. Something like 2% of the company could be acquired just with the current call options.

The Gritstone options have the implied volatility of a meme stock going into an earnings report. This does not line up with the publicly available information. The IV across the board ranges from 240-400%. You would almost never buy an option like that. There’s no money in it because stocks don’t usually move that much even when the catalyst is positive.

$VKTX has been on a tear lately and the IV on their options is barely 160%. Stocks that are moving a lot tend to have higher implied volatility because they’re either going to run more or drop back down.

Something big is going on with Gritstone. It’s not the BARDA contract. Even if they announce next week their 10,000-person study is fully enrolled (press X to doubt) then it doesn’t warrant this strange behavior in the after-hours, or with the options market. It must be their cancer data.

Or maybe Gritstone is going bankrupt and Morgan Stanley is doing small investors a favor by purchasing 5.78% of the company 🙄 🙄 🙄

We’ll see what happens next week. I’m expecting some price action surrounding the 13F filings. We might even see some filings from someone who went over the 5% limit in the last few weeks. They only have 10 days to file.

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