Although many biotechs have made substantial upward moves in 2012, many have fallen as much as 80% or more. Sometimes this is due to clinical trials or FDA decisions that end in disappointing results which can be difficult to predict ahead of time. Oftentimes though it is the result of a biotech being poorly capitalized and overpriced as was seen with Horizna Pharma (HZNP) resulting at a secondary offering at a severe discount to current prices. Sometimes these companies can make for good trading ideas to either short ahead of an anticipated capital raise (and decline in share price) or to buy long as the street may be over-punishing based on balance sheet an otherwise great company that may be in better financial shape than its equity number suggests.
In sort of an opposite take on my previous article which was attempting to screen for cheap well-capitalized biotechs between $5 and $10 and over $10 million in equity, I performed a screen for US-based biotechs trading over $7.00 that have negative shareholder equity. The price being over $7.00 helps to find possible names either worth shorting with some downside potential (or is possibly undervalued to go long), and the negative shareholder equity helps find companies in likely poor financial shape (or are falsely assumed to be in bad financial shape). However, the screen is merely the first step before further research.
The result of the screen is these 4 biotech stocks (although as I immediately threw out 2 additional ones that came up as they had no volume):
(1) Amarin Corporation (AMRN)
Amarin Corporation focuses on developing the treatment for cardiovascular disease in the field of lipid science. Its lead product candidate includes AMR101, a prescription-only omega-3 fatty acid comprising icosapent ethyl, or ethyl-EPA for the treatment of patients with very high triglyceride levels and high triglyceride levels or hypertriglyceridemia. It recently traded around $12.00 per share. Although AMRN has a lot of debt (over $200 million), it likewise has a ton of cash that will last them several quarters at least. According to the most recently 10Q, the majority of their long term debt isn't even due until 2032 with interest payments only, paid semi-annually, until at least 2017 (the earliest data any principal repayment portion even has a realistic possibility of being required). In short, AMRN is better capitalized than it appears. I would not short it based on balance sheet alone. Not to mention it has a potentially positive upcoming catalyst. As such, the nearly 20 million shares short with a short ratio over 5 may be making a financially grave mistake and are risking getting squeezed.
(2) Incyte Corporation (INCY)
Incyte Corporation focuses on the discovery, development, and commercialization of proprietary small molecule drugs for oncology and inflammation. The company offers JAKAFI, an oral janus associated kinase inhibitor for the treatment of patients with intermediate or high-risk myelofibrosis (MF), including primary MF, post-polycythemia vera MF, and post-essential thrombocythemia MF. INCY recently traded just under $18.00 and has negative $220 million in shareholder equity including $226.7 million in negative tangible equity as of September 30. Like AMRN, INCY has a ton of cash. However, INCY's total liabilities is around double the size of its cash. According to its 10Q, little bit of it comes due in 2013, a little more in 2014, then the rest in 2015. INCY is worth watching to see how their cash balance goes especially into 2014. It's too early now, but in 2015 INCY faces its own "fiscal cliff" with over $300 million in debt payments due though if their cash burn rate increases they may need to due a capital raise sooner, maybe even next year. Too soon to short but definitely one to put on radar to possibly go short in the future. I would not go long INCY.
(3) Merrimack Pharmaceuticals (MACK)
Merrimack Pharmaceuticals focuses on discovering, developing, and preparing to commercialize medicines paired with companion diagnostics for the treatment of cancer in the United States. The company uses its proprietary Network Biology discovery platform to integrate the fields of engineering, biology, and computing to discover and develop therapeutics and diagnostics. MACK recently traded around $7.00. Although MACK technically has positive equity (even though it showed up on the negative equity screen), it appears to be in terrible financial shape. They are steadily burning $20 million in cash per quarter and have at most 3 quarters of cash worth as of September 30. Expect a capital raise to come within the next 1-2 quarters. MACK may be a good short.
(4) PDL BioPharma (PDLI)
PDL BioPharma, Inc. engages in intellectual property asset management and royalty bearing assets investment activities. The company is involved in the humanization of monoclonal antibodies and the discovery of a new generation of targeted treatments for cancer and immunologic diseases. PDLI recently traded just under $8.00. It has a negative $115 million in stockholder equity. But PDLI is raking in cash from its royalty agreements with Genentech, Roche, and Novartis reporting a net income of $48.6 million last quarter alone. PDLI pays a .15/share dividend each quarter giving it a handsome dividend yield and suggesting high confidence in the future by management. With a historical PE under 6 and growing, PDLI looks like a strong candidate to go long if anything and not short. They are in nearly zero risk of a secondary offering any time soon. At the rate they're doing, they will have positive shareholder equity within a year even while paying quarterly dividends! Not only does PDLI look like a good buy long, I will likely do so, pending further research, within the next 72 hours. PDLI has nearly 22 million shares short and a short ratio of 5.0. They are expected to announce guidance later this month which could be a catalyst for a squeeze. I love short squeeze opportunitites with stocks that have large short ratios.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PDLI over the next 72 hours.