Here are two popular biotech names that have recently seen bearish trading that may add to their significant short interest.
1.) Amarin (NASDAQ: AMRN) - this stock is one of the most heavily-followed biotech names out there, and I'm bullish on my holdings of the stock. The market has not been kind to Amarin in the last month of trading, which dropped shares about 17% - from just under $15/share to $12/share and change. AMRN has struggled to stage a decent recovery rally, and sentiment remains more bearish than usual.
Recent pessimism is based on uncertainty over the NCE status of Amarin's flagship product Vascepa. Analysts are also skeptical on the stock since it still hasn't announced a partnership with a larger pharmaceutical company.
Amarin's short interest as % of float was last measured at 15% (in mid-September), which was higher based on an increase of 650,000 shares short. It's been almost a month since then, and I expect to see some signs of short covering from profit-taking.
Even if we don't see Vascepa designated as a New Chemical Entity by the FDA, AMRN doesn't like to drop below $12/share these days. Keep this in mind as bears descend on the company's uncertain direction.
2.) Sarepta (NASDAQ: SRPT) - Sarepta caught everyone's attention last week with a 200% rally on October 3rd, in reaction to a data release for its phase IIb trials for its flagship drug eteplirsen in the treatment of Duchenne Muscular Dystrophy. The clinical trial met its primary endpoint, and demonstrated to the market that the drug actually worked. For a tough disease with no cure and a lack of treatment options, like Duchenne Muscular Dystrophy, it's very exciting to see something like etiplirsen.
Although a 200% rally is anything but bearish, SRPT has been in steady decline ever since the closing bell on October 3rd. The 200% rally ended up giving back half its gain. Indeed, SRPT is now only 110% higher than it was prior the announcement.
Short interest on SRPT was last measured at 3.2 million, which is about 15% of float (the exact same as Amarin, strangely enough). While we can presume that a good number of shorts had to cover right after the phase IIb data release, the continuing decline in SRPT may be encouraging for any bears that are still stuck in their trade and able to hang on for a little longer.
There is also profit-taking from SRPT shareholders who bought before the data release. This source of downwards price momentum will be exhausted eventually, so watch for prices to bottom.
Conclusion - I think both of these stocks are solid plays on the long side. Wait for the bearish trading to calm down, and move in when the sentiment is ready to shift again.
I did end up buying AMRN on Friday, when shares were just around $12.50/share. Although I believe that the downtrend will eventually reverse, I sold in-the-money ($12 strike price) October Call Options in anticipation that it would take a while.
Disclosure: I am long AMRN.
Additional disclosure: I also sold AMRN Call Options, as described in the article