Here's Why INSYS Therapeutics, Inc. Jumped a Whopping 40.3% in August

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What happened

Shares of INSYS Therapeutics (NASDAQ: INSY) jumped a whopping 40.3% in August, according to data from S&P Global Market Intelligence. The biotech's massive valuation change came from news about a settlement with the U.S. Department of Justice (DOJ), which seems completely reasonable, followed by a not-so-reasonable increase as shorts covered their positions at the end of the month.

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So what

A DOJ investigation about sales and marketing of INSYS' opioid drug, Subsys, has been hanging over the company since 2013, so the announcement that INSYS would only need to pay $150 million over the next five years reduced the risk of a larger fine. And considering the company had already set aside $150 million last year to cover the major expense, the settlement wasn't a cumbersome financial hit.

The end-of-the-month rally was a little more dubious. INSYS received fast-track designation from the Food and Drug Administration for its epinephrine nasal spray. The designation is arguably worth something, since having it can speed up the drug development process. But it's hard to see how it's worth the 34% one-day increase the biotech experienced.

The massive jump probably resulted from short sellers who bought to cover their short positions, as evidenced by the share-price slump the following day.

Now what

It's hard to see how the events in August justify the increase in INSYS' share price, but considering how low the biotech's valuation got earlier this year, the increase over last month may simply be a reset to the correct valuation.

Longer term, investors should be watching INSYS' drug pipeline that could help the company recover from declining sales of Subsys. Just don't expect the turnaround to happen over one month.

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Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.