Short sellers have been piling into healthcare stocks this year, especially among companies with comparatively small market caps. While the global economic headwinds such as the Greek and Puerto Rican financial meltdowns have potentially been major factors behind this short selling bonanza, the unprecedented and sustained rise of pharma stocks over the last three years is probably another key reason why investors are starting to bet against this group. Put simply, those going short are assuming this rally can't last forever, or perhaps even that much longer.
The really eye-catching part is that short sellers have taken out absolutely massive positions in companies like Adaptimmune Therapeutics , MannKind Corp. , and Northwest Biotherapeutics :
With such mind-boggling high short interests, you have to wonder if shorts firmly believe these three companies are on the verge of collapsing, or worse yet, filing bankruptcy. Let's dig deeper.
Adaptimmune has been getting crushed since its IPOAdaptimmune is a British cancer immunotherapy company that was founded in 2014 and went public in May of this year. The company's area of expertise isgenetically engineering T-cell receptors, or TCRs, that target both solid tumors and hematological malignancies, such as synovial sarcoma, multiple myeloma, melanoma, ovarian cancer, esophageal cancer, and non-small cell lung cancer.
Although the tiny biopharma is partnered with GlaxoSmithKlinefor its lead product candidate thattargets the NY-ESO antigen, its stock has fallen by over 15% since its IPO:
The short thesis is basically that TCRs won't prove to be as safe and effective as their related CAR-T cousins being developed by a host of rivals such as Bellicum Pharmaceuticals, Juno Therapeutics, andNovartis, among many others. After all, the next-generation of CAR-Ts incorporating molecular switches that can up and down regulate their activity could be a game-changer in the fight against many cancers.
So, while TCRs theoretically can be used against a wider variety of therapeutic targets, it's not entirely clear that Adaptimmune has solved the significant safety and efficacy problems that have plagued this technology to date. To be fair, the jury is still out on next-gen CAR-Ts as well, but there are some compelling reasons to think they have a better shot at making a major leap forward in the clinic soon.
MannKind's inhaled insulin product is off to a slow launchMannKind is a favorite name among short sellers because the company's inhaled insulin product, Afrezza, is struggling commercially, and it has a boatload of debt due to the numerous regulatory setbacks that occurred during Afrezza's development. Unfortunately, these issues don't appear to be going away anytime soon.
Afrezza's second-quarter sales greatly underwhelmed investors' expectations at $2.2 million, bringing its grand sales total to $3.3 million for the entire first half of the year. Although Afrezza's marketing partner Sanofi is reportedly now putting greater resources behind the drug's commercial launch, sales will essentially have to grow exponentially for it to live up to its blockbuster potential.
The bigger problem, though, is that Afrezza's slow commercial launch has forced the drugmaker to sell shares to retire a portion of its Senior notes and kick the can down the road, via a note exchange, on another chunk of this debt. Eventually, Afrezza's going to have to start carrying its weight or MannKind could be in deep trouble.
Northwest Biotherapeutics is in a precarious financial positionThe clinical-stage biotech Northwest Biotherapeutics is making impressive strides with its experimental brain cancer vaccine DCVAX-L based on its dendritic cell immunotherapy platform. That being said, the company has a seriously worrisome cash problem. Per its second-quarter figures, for instance, Northwest is down to a mere $19.2 million in cash and cash equivalents, yet it's burning over $8 million a month. The drugmaker even racked up a net loss of a noteworthy $66.8 million in the second-quarter alone.
Northwest is therefore going to have to either find a partner willing to fork over a hefty upfront cash payment for its lead clinical candidate, or resort to more dilutive financing to keep its doors open. Unfortunately, big pharma hasn't expressed much interest in dendritic cell-based immunotherapies lately, leaving the company with few alternative financing options to meet its long-term obligations.
Are any of these three stocks a good contrarian buy?Buying shares in the face of an avalanche of short selling may seem foolhardy, but sometimes it pays off via the so-called "short squeeze," where shorts get caught by an unexpected material event. In the case of these three biotechs, you would have to imagine that such an event would be a buyout by a bigger pharma. Nonetheless, I don't see a compelling reason why any of these companies would be attractive to a buyer right now. Adaptimmune is way behind most of its peers in the engineered T-cell space. And MannKind and Northwest have problematic balance sheets. In short, it's probably not wise to bet against Wall Street on these three small-cap biotechs.
The article 3 Biotech Stocks Wall Street Hates originally appeared on Fool.com.
George Budwell has no position in any stocks mentioned. The Motley Fool recommends Juno Therapeutics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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