Shares of Keryx Biopharmaceuticals (NASDAQ: KERX) rocketed upwards yesterday due to phase III results that were released on a conference call before the bell.
The data, which took a few extra weeks to hit the public, showed that Keryx's phosphate-binding drug Zerenex was "not inferior" regarding phosphate reduction in patients with late-stage kidney disease when compared to the performance of the two main compounds that are used for this indication today (Renagel and PhosLo).
In the concluded phase III trials, we can see that Zerenex was able to meet all of its primary and secondary endpoints. This surpassed many investors' expectations, and ultimately gives Zerenex big market potential due to the number of patients on dialysis and its favorable safety profile.
On the shockingly good news, KERX ended 77% higher by the closing bell on January 28th 2013. The bullish action took the stock as high as $6.86/share, which was all made on extremely heavy volume. About one out of every three shares of KERX traded hands yesterday, and there was enough short volume to suggest that the majority of the bears might've retreated completely from KERX.
Another thing to add is that I actually attempted to short the stock as it was approaching the day's highs for day trade, but my brokerage firm did not have enough shares available. I found this particular problem quite peculiar, and frustrating since I missed a >10% scalping trade entirely as a result.
Not only is KERX difficult to short due to scarcity of the shares themselves, but I believe that it's an unfavorable bet if you intend to hold the position overnight. Although KERX is already expensive for what it is, there are many shorts who are now trapped behind a huge Zerenex-induced rally, although I think that a huge chunk of them (possibly the majority) might've closed out their position due to the sheer power of KERX's rally today.
I don't see any way that those who are holding the remaining shares short KERX will be able to exit from the trade "gracefully," although we could certainly see fresh interest from the bear side against KERX due to the market capitalization (which has now reached ~435m). This is implied due to healthy buying in KERX put options, and from price action in the later part of the day that suggested a major profit-taking motive.
Investors who have already made it big on KERX have quite a few options available to them right now. Covered calls might be attractive for those looking to secure some of their gains with a premium. Another is to wait for FDA approval for Zerenex, which would probably occur in 2014. Perhaps the most straightforward, least stressful, and safe option is to simply take gains (or losses) that you already have.
It seems very likely Zerenex will now be approved by the FDA, and will most likely become the best-selling phosphate-binding compound when it reaches its prime. The problem is that the demand for KERX may dry up a bit, leading to some weakness in the stock following all the recent good news. I also think that KERX can only move up so much on short-covering after this point, since volume was so incredibly high today (meaning that many of the shorts did indeed cover for steep losses on their positions).
I think that KERX can be a good run-up type of trade after we see an NDA submission from Keryx worth revisiting when the time comes, but for now I wouldn't expect anything that can match the excitement of yesterday's trading session in the stock. Upside potential is still possible as stragglers move into KERX, following the rally's momentum, but the position gets less favorable with each uptick. I also worry about a correction, which could lop off a big chunk of KERX shareholders' winnings in just a few minutes given the stock's volatility these days.
While greed is good, it might be time to take the money and run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.