Editors' Note: This article discusses micro-cap stocks. Please be aware of the risks associated with these stocks.
Yesterday I wrote an article calling Sarepta (NASDAQ:SRPT) a short due to problems inherent in their lead drug candidate and the design of its Phase II clinical trials. As a result, I got considerable blowback from Sarepta bulls, many of whom said "I have no idea what I am talking about". And that's the nice version...
While I refrain from taking to twitter for pointless exchanges or responding to comments ripped right from the pages of company investing materials, I do think it's fair to question my ability to call a biopharma short or not.
I could cite my professional career reviewing journal articles, working in the field, and lecturing on biotech, but that doesn't get to the heart of the matter.
What kind of track record do I have calling biopharma shorts? Fortunately, it's easy to look this up on Seeking Alpha, and I was even interested to see how I've done over the past year.
So here are the results…
Enhydris 2012-2013 Biopharma Short Picks and Performance
Of the 8 biopharma companies I've explicitly called short candidates in the last year, 7 have been clear winners and 1 (NASDAQ:KERX) would have been a bad mistake if the short wasn't covered within the first month. By my calculations, that's better than an 85% success rate. Not bad.
Arena Pharmaceuticals (NASDAQ:ARNA)
Down > 45% since I warned investors on May 23rd that Belviq sales would vastly underperform the expectations of bulls. Volume has been average in the interim.
Down > 14% since informing investors the stock was grossly overvalued a week ago. Volume has been low to average, and the decline has been accelerating recently. I also called it a short that worked out for a 50% gain in less than a month earlier in the year.
Dara Biosciences (NASDAQ:DARA)
Down > 45% since I warned investors not to buy into the hype surrounding KRN5500 last April. Volume has all but dried up in the interim.
Up 57% since I called it a short candidate last February. My belief was that the stock went up too fast, too soon on the positive Phase III results for Zenerex. Volume has been moderate to heavy the last few months. KERX showed some weakness in February but the short thesis never really worked out. That said, there was plenty of time to cover once the stock failed to retrace on fundamental or technical indicators.
Nanosphere Inc. (NASDAQ:NSPH)
Down 52% since I warned investors that the stock ran up too fast based on improving sales of Verigene cartridges. At the time, I suggested investors should take profits, and traders may want to short the stock. My suggestion was met with various twitter attacks and threats on my safety. History proved me correct, however.
Closed down more than 7% yesterday on heavy volume. Calls plummeted and a number of out-of-the-money Puts showed heavy volume to the upside.
Telik Inc (OTCQB:TELK)
Down 47% since I said the Orphan Drug Status for Telintra was overblown last January. The stock has almost no volume despite a bargain basement PPS. Since the article appeared, there were times when this short would have fetched over 70% returns.
Vanda Pharmaceuticals (NASDAQ:VNDA)
Down > 29% since warning investors 2 weeks ago that tasimelteon would not likely be approved by the FDA, and the company does not have the cash to support a launch even if it does get approved. Volume has been medium to average in the meantime, and the decrease in PPS has been accelerating of late.
My take on biopharmas and shorting
The truth is that I am actually bullish on a fair number of biopharmas, and have written dozens of bull articles as proof. So it's not fair to say I am a bear or a shill for short hedge funds. After all, most of these companies would have quickly rebounded if the issues I brought up weren't based on facts. If I was trying to write hit pieces for a quick gain, the stock would more than likely rebound after a short dip. By contrast, most of these stocks showed increasing weakness over time. Interestingly, my one failure, KERX, was based on technical indicators, and that turned out to be a false signal. I learned there not to fight the tape so to speak, and I now avoid using momentum as a sole indicator of a pending correction.
And yes, I know. Some of you will hold my feet to the fire on my Herbalife (NYSE:HLF) call. But in all fairness, Herbalife is not a biopharma in the strictest sense, and I shouldn't have stepped outside my circle of competency. Lesson learned.
And some people mistakenly think I said to short Omeros Corporation (NASDAQ:OMER) earlier. I never said to short the stock, only that shorts were taking a big position in the stock. That's a big difference. Specifically, I called Omeros a potential value-trap based on its fundamentals, and that's why shorts were piling into the stock. I did say that the stock should be avoided "for the time being" because of the fundamentals. A look back at the tape shows that OMER traded sideways for nearly 4 months after I made that call, and material events changed thereafter. Exercising caution is not the same as a short recommendation.
I also recently told Amarin (NASDAQ:AMRN) bulls to be careful heading in the company's Advisory Committee Meeting, which was misconstrued as a short attack. The rest of that story is fairly well known at this point, but this example does show that biotech bulls are all too often ready to shoot the messenger, instead of listening to alternative viewpoints.
Bottom line: I don't often call biopharmas short candidates compared to the overall number of companies I cover. But when I do, I have a good reason that is usually based on the underlying science or fundamentals of the company. Sarepta falls into the latter category. With shorts piling into Sarepta of late, it would be wise to lock in profits if you have them. My belief is that the stock will be yet another example of unfounded overexuberance in what is quickly becoming a biotech bubble.
If you don't share my sentiment, however, then buy more shares at these discounted prices. After all, one of us will win, and one of us will lose. That's life.
Disclosure: I am short SRPT, INO. 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.