Yesterday, Enhydris correctly called the biotech Telik Inc. (TELK) a 'perfect short candidate' once the stock crossed the $3.00 mark. Sure enough, TELK began to immediately show weakness at $3.03, and fell over 25% in a single day (including after hours trading). Our prediction was based on the underlying fundamentals and technicals of the stock, which clearly signaled that TELK represented an excellent shorting opportunity. Indeed, the biotech sector in general is rife with shorting opportunities due to explosive upside moves that are not supported by the company's fundamentals. Even so, shorting a biotech based on a quick run-up alone can be a fool's game. In this article, I explore the recent explosive run-up of Sangamo Biosciences, and discuss why shorting SGMO is a bad idea at this time.
Sangamo BioSciences, Inc. (SGMO) is a clinical stage biotech company developing gene expression and modification technologies. Specifically, Sangamo is focusing on engineering zinc finger DNA-binding proteins (ZFPs) to turn genes on or off. The company's most advanced drug candidate is SB-728-T, a ZFN-modified autologous T-cell product, which is currently in Phase II and Phase I/II clinical trials for the treatment of human immunodeficiency virus (HIV) and acquired immunodeficiency syndrome (AIDS). Sangamo also has five additional drug candidates using the ZFP platform currently in the pre-clinical stage, indicated for the treatment of diseases such as Hemophilia and Huntington's disease. Moreover, Sangamo has strategic partnerships signed with a number of large biotech companies including Shire, Dow Agrosciences, and Sigma-Aldrich. To date, these partnerships have brought in over $90 million in revenue to the company, and are expected to produce seven new Investigation New Drug (IND's) applications over the next three years.
SGMO led the entire Nasdaq in gains yesterday with a 17% increase in PPS, and is now up over 26% since CEO Edward Lanphier gave a business and scientific update at the recent J.P. Morgan Healthcare Conference. At the conference, Mr. Lanphier stated that Sangamo would be releasing preliminary clinical data for SB-728-T, a ZFP nuclease indicated as a 'functional cure' HIV/AIDS, at the upcoming Conference on Retroviruses and Opportunistic Infections (CROI) meeting in March. He also stated that the data was unprecedented in terms of increasing CD4+ count in patients infected with HIV, but didn't go in much detail. Although the exact day and time of Sangamo's presentation is presently unknown, the Conference runs from March 3rd-6th.
Fundamental and Technical Analysis
Sangamo started the 2012 fiscal year with $84 million in cash and cash equivalents, and an average monthly burn rate of less than a million. As such, the company ended 2012 with approximately $76 million, and is guiding is have $40-45 million in cash on hand by the end of 2015. This guidance is based on the assumption of no new financings or strategic partnerships, so it should be viewed as a baseline. Unlike most other microcap biotechs, Sangamo should thus not have to resort to dilutive financing deals in the near term. With the high number of positive catalysts and strong balance sheet going forward, institutions have been gobbling up shares of late. Specifically, institutions increased their holdings of SGMO by 24.8% last quarter, and now hold 42% of the float.
From a technical perspective, the recent upswing in SGMO PPS appears to be due to short covering. As of last December, shorts held a massive 11% of the float, and now appear to be exiting en masse ahead of the March clinical trial data release. While the stock is technically overbought with a relative strength index of 84%, and is trading 54% higher than its 200-day moving average, I would not advise taking a short position in SGMO, despite the technical indicators. Even with the tremendous recent run-up, SGMO is still only trading at about 4.5 times cash on hand, and has a number of positive clinical catalysts coming in the near term. If anything, I believe SGMO is a strong buy on any weakness.
At first glance, Sangamo Biosciences would appear to be another excellent short candidate in the biotech sphere due to its recent upswing over the past few trading sessions. Yet, the fundamentals clearly suggest otherwise. Specifically, Sangamo has a very strong balance sheet for a microcap biotech, has a number of positive catalysts on the horizon, and a short squeeze appears to be in the works. I believe the upcoming CROI presentation for their HIV construct will only add fuel to SGMO's rapidly rising PPS. As a result, I wouldn't seriously consider shorting until the stock broke $10. Currently, I believe SGMO is a strong buy on any dips ahead of the CROI conference.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.