Enanta Pharmaceuticals, Inc (NASDAQ:ENTA), is a Massachusetts-based biomedical research and development firm that focuses on developing small-molecule drugs to treat infectious diseases. With the upcoming unlocking of insider shares, the price of ENTA shares may be at least temporarily depressed, presenting a short opportunity for aggressive investors.
The firm went public on March 21 by offering 4.0 million shares with Credit Suisse (NYSE:CS) and J.P. Morgan (NYSE:JPM) as lead underwriters. As discussed in the company's prospectus, a substantial number of shares of the company held by the directors and executives, collaborator firms, and venture capital firms will be unlocked for sale this week. Venture capital firms remain under significant pressure to return capital to their investors in the aftermath of their low returns brought on by the Great Recession, and the firms that are major shareholders of ENTA are no exception. TVM Capital and OBP III Holdings, the two largest shareholders, own 4,404.671 shares, and both can sell some of their shares after the unlocking takes place this week. Five other venture and private equity firms own a total of 5,255,813 shares. The officers and directors also own hundreds of thousands of shares. (see page 122 of the company's S-1A filed 3/14 2013). The sale of shares into the market from these many firms, officers and directors could lead to an increase in supply resulting in a temporary negative downward pressure on the ENTA stock price.
Share prices also often move down significantly before insider share unlockings, as investors anticipate the possible sales that could occur on the unlocking date from the institutional investors, directors and company executives who may be selling for diversification and tax planning reasons. See our recent articles on Silver Springs (NYSE:SSNI), Model N (NYSE:MODN) and Marin Software (NYSE:MRIN) that have shares unlocking in September that have given our readers successful shorting opportunities already.
Unlocking concerns aside, Enanta's success in the foreseeable future is heavily dependent upon its ability to successfully develop treatments or vaccines for MRSA and Hepatitis C. The pharmaceutical industry is extremely risky both for firms and investors even under the best of circumstances: pharmaceutical firms must gamble huge amounts of funding on treatment developments that may or may not ever result in a successful product - though successes could lead to massive payoffs. In the case of efforts to treat high-profile diseases like MRSA and Hepatitis C, the risks and rewards are even greater, and competition is much stronger, though there is still no guarantee that any firm will be successful in producing a treatment.
It is worth noting that Enanta has produced a treatment that has moved beyond Phase 2 of clinical trials (the phase that establishes the efficacy of the drug): ABT-450, a protease inhibitor designed to treat Hepatitis C. The drug presents the potential for a significant windfall for the company.
Enanta scored another recent success with a $9.2 million increase in funding from the National Institute of Allergy and Infectious Disease to develop a new class of antibiotics known as Bicyclolides. The funding will go towards preclinical and early clinical testing. Enanta also entered into a collaboration and license agreement with Novartis (NYSE:NVS) on February 2012 which gives the firm increased credibility.
Disclosure: I am short ENTA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article was partly based of the company's S-1 filed with the SEC and was written for informational purposes. Investors should read the S-1 and consult with their financial advisor before making any investments.