Most investors who don't like a particular stock just buy another one. Others look to make money by short-selling the stock -- borrowing someone else's shares and selling them with the hope that the share price drops.
Intercept Pharmaceuticals (NASDAQ: ICPT) has emerged as a big target for short-sellers lately. Over half of the biotech's outstanding shares have been sold short. Could Intercept's stock be poised to tumble -- or is the pessimism overdone?
Behind the doom and gloom
The short interest for Intercept's stock really began to pick up in October 2016, but the biotech hadn't reported any negative news. In fact, Intercept received good news on Oct. 14, 2016 with the European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP) adopting a positive opinion recommending approval of Ocaliva in treating primary biliary cholangitis (PBC). However, biotech stocks in general were taking a beating in October, so an increase in short interest wasn't too unusual.
Also, Intercept's third-quarter results were scheduled to be announced in early November. Some investors were likely expecting disappointing sales from the U.S. launch of Ocaliva. And sure enough, Intercept did miss sales estimates for Ocaliva. However, it wasn't a huge miss. Third-quarter sales of the drug came in at $4.7 million, only a little below estimates of $4.8 million.
Short-sellers continued to pile on in the subsequent weeks, likely spurred by another revelation in Intercept's third-quarter conference call. Mark Vignola, director of investor relations for the company, mentioned that the enrollment rate for a late-stage study evaluating obeticholic acid (OCA) in treating non-alcoholic steatohepatitis (NASH) needed to increase. Intercept CEO Mark Pruzanski also stated that the company had hoped to have seen higher enrollment at that point.
Moving the goalposts
As it turned out, those enrollment challenges in the late-stage NASH study were worse than many might have thought. When Intercept announced on Feb. 10 before the market opened that the company would provide an update on the study, many investors were worried. The short-sellers, though, were probably smiling.
Those smiles were short-lived. Intercept's update highlighted some changes to the NASH study. Enrollment rates had been moving more slowly than expected, but the biotech had taken some key steps to address the issue.
Most important, Intercept changed the study's protocol from having two co-primary endpoints to only requiring one of the endpoints to be met. Instead of requiring fibrosis improvement with no worsening of NASH and NASH resolution with no worsening of fibrosis, the study will now only require one of the improvements to be achieved.
Intercept also reduced the number of patients to be enrolled in the study from 1,400 to 750. The company stated that enrollment will be completed by mid-2017, a minor change from the earlier goal of completing enrollment in the first half of the year.
Time for a squeeze?
There are still unanswered questions about exactly why the enrollment for the NASH study went more slowly than anticipated. However, most investors don't seem to care too much about it. Intercept's stock price is up big since the update on Feb. 10.
Are conditions ripe for a squeeze? A short squeeze can occur when short-sellers try to cover their positions, quickly driving share prices higher as a result. I suspect that some short-sellers are already second-guessing their pessimistic outlook for Intercept.
Those changes to the NASH study could give Intercept a greater chance of winning approval for OCA. It should be easier to meet one primary endpoint than to meet two endpoints.
Thanks to lowering the number of patients to be enrolled, Intercept also remains in a neck-and-neck race with French biotech Genfit (NASDAQOTH: GNFTF) to reach the market first with a NASH treatment. Genfit's late-stage study of elafibranor already included just one primary endpoint -- NASH resolution without worsening of fibrosis. Both Intercept and Genfit appear to be on course to launch their respective NASH drugs in 2019 if all goes well.
Glass half full
Short-sellers look at a glass of water as half empty. With Intercept, they see a biotech with disappointing early results for its only approved product. They focus on the negative side effects of OCA, such as severe itching. They probably suspect that Intercept is doomed to be beaten by Genfit or Gilead Sciences (NASDAQ: GILD) -- one of several larger companies developing NASH drugs.
But if you look at a glass of water as half full rather than half empty, your perspective is much different. In your view, Intercept remains a leader in NASH development, with its lead candidate already on the market for treating another chronic liver disease. You applaud the latest update from the company, thinking that it makes regulatory approval more likely.
You perhaps see Intercept as a possible acquisition candidate for a bigger biotech like Gilead. Even if a buyout doesn't happen, you view the size of the NASH market and think there's plenty of room for Intercept, Genfit, Gilead, and others to all succeed.
Is the glass of water half-full or half-empty when it comes to Intercept? At this point, the short-sellers' perspective appears to be coming up short.
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