Spectrum's Huge Short Interest: A Dangerous Or Intriguing Play?

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Shares of Spectrum Pharmaceuticals (NASDAQ:SPPI) were on the move late last week, with a Friday spike of nearly four percent solidifying gains of well over a dollar for the week as a whole. Volume was also rolling in at a much more significant rate than earlier in the month and investors were beginning to smell news.

The news, in fact, hit the wires on Monday morning when Spectrum announced that the most recent clinical data presented for ZEVALIN in the treatment of Aggressive Relapsed / Refractory Lymphoma was "outstanding." The data was presented at the 17th Congress of the European Hematology Association (EHA) and sparked a continued price run to over thirteen dollars, a level not seen in months.

Spectrum had already been a big-time winner over the past year. The company has continued to post increases in revenue for FUSILEV sales, even as many in the community doubted that FUSILEV would hold strong through a re-birth of generic competition. What has benefited Spectrum, however-- and therefore led to continued revenue growth for FUSILEV -- has been the unexpected and continued manufacturing delays for levoleucovorin, the generic competition.

Given that many investors were predicting an earlier resolution to those manufacturing delays, the SPPI short interest has been growing phenomenally, just as the share price has inched higher on news from the FUSILEV and pipeline front.

Spectrum's short interest should not be taken lightly, as the percentage has reached just under fifty percent of the float. That is a huge number, to say the least, and a good indication that the shorts were highly confident that a significant correction would materialize sooner, rather than later. The correction has not materialized just yet, however, due to the continued momentum enjoyed by FUSILEV sales. That said, regardless of what goes on in regards to press releases, the SPPI stock is positioned right now to either squeeze big or crash -- and whatever it does, it will most likely happen pretty soon.

Since most logical reasoning behind this huge short number most likely revolved around the expectations of generic competition, the shorts must believe that levoleucovorin will soon become a factor again.

The longs will point to the fact that FUSILEV has built a solid foundation of believers who will not switch medications, even with generics is back on the market. They'll also point to the fact that the impressive pipeline results presented at ASCO this year, and the ZEVALIN data announced this week build a solid foundation for the future and that the Spectrum share price is fairly valued, even while taking into consideration the potential for FUSILEV sales to drop.

Regardless of who turns out to be right, the short term trading could prove to be very volatile. If the market as a whole decides to take a dive, then it should be assumed as a no-brainer that the shorts would take advantage of such an opportunity to drive the price down.

Since the likelihood of an all-out market collapse has deteriorated somewhat, it may be a little bit more difficult for the shorts to drive the price down, but certainly not impossible; that makes SPPI quite the intriguing story to watch over the coming weeks. If a short squeeze does materialize, it could turn into the mother of all short squeezes. It's not every day that you see this much short interest and the right catalyst could quickly propel shares towards the twenty dollar level -- or higher -- if the shorts are forced to cover. As exciting as those prospects sound for longs, the heavy short interest could quickly put a damper on those high hopes and send shares below ten.

One angle not yet investigated is the potential buyout talk that could eventually surround Spectrum. Large pharma is currently looking at new pipelines to reinvigorate pipelines depleted by expiring patents. Spectrum's latest trial results show that the company could be considered a solid pick up.

The timing is right be acquired. Many companies are negotiating from positions of strength and turning away their larger suitors in hopes of gaining a more fairly-valued offer, as demonstrated by some recent deals. GlaxoSmith (NYSE:GSK) made headlines recently with an offer to acquire Human Genome Sciences (HGSI). That bid has since gone hostile when Human Genome demanded a better bid. When you also consider that Illumina Inc. (NASDAQ:ILMN) rejected two offers from Roche Holding AG (OTCQX:RHHBY) just a couple of months ago -- one for $44.50/share and the other for $51/share -- and that Amylin Pharmaceuticals (ALMN) turned away Bristol-Myers Squibb Company (NYSE:BMY) last month on a $3.5 billion, $22/share offer, it's easy to see why smaller companies such as Spectrum are ready to play hard ball before being picked up on the cheap. Pfizer (NYSE:PFE) has also taken measures that foretell some moves in the M&A market.

Invested or not, the Spectrum story is one to watch right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.