...(or anyone else who is not ricky):
BMR, it's obvious that shorts are shorting the heck out of SGEN now and a few of us have been chatting offline about this. You predicted something like this, though you expected it to happen soon after FDA approval of SGN-35.
The multi-part question:
Given that FDA approval seems likely and the company is firing on all other apparent cylinders (and a takeover bid or even a takeover battle could erupt at any moment), why would shorts pile on now? What do they have to gain from taking a chance at this particular point in time?
Or are they driving it down now so they can get out of their shorts (so to speak) ahead of all of that expected good news?
Or is this a piece of some other complicated play that is going on here?
Also, what exactly have you seen at other biotechs regarding shorts or others pushing down the stock after FDA approval? What was the game then?
Would really appreciate as much detail as possible, based on your prior experience. And many thanks.
Sorry for a really delayed response to your guestion. We traded our California cold for Charleston/Savannah's warm weather for a few weeks and the last thing I wanted to see was a computer screen, so I read your guestion just today.
Shorts: God love um
This is the most intellectual string of posts I've read on the shorting topic. Most MB discussions include reference to unnatural sex acts and death threats.
I don't know that I can add anything of use to what has already been said but here is what I've observed.
Most FDA approvals which involve companies with their first and only drug coming to market are greeted with a rash of buying on approval that push price far above anything near sustaninable followed by massive shorting. It's a formula that works for shorts.
Most everyone followed DNDN last year as it rose from $25 to $55 in May only to retace all of the gain by July.
Here's a chart - hopefully it captures the approval spike if not look at Feb 2010 - July 2010.
Take a look at SOMX's massive move up in 2010 on approval and subsequent sell off.
There are many examples.
As companies transforms themself from a developement company to a drug company there is a period where expenses go through the roof and revenue is nonexistent. Many are extrememly cash strapped.
Thus far the market has priced SGEN on potential. After approval it will price on fundamentals so I'm basing my own target price on sales projections only.
Is SGEN different? Maybe. I don't think it's overpriced here. They have plenty of cash. They have pent-up demand and a product that will sell itself from day one. And they have a strong pipeline while admittedly long term.
So why short now? I think it's more about the FDA than SGEN. This new FDA is a lot like the old FDA of 30 years ago. I don't think they will be friendly toward the tiny single arm and the panel may be split. That's not to say they won't win approval. They will.
I'm watching out for an approval spike that reaches an unrealstic value. For now I'm pleased to be here.
Wonderful that you managed to stay off the computer. One of these days I will emulate you maybe go Cochin( Kochi, the Indian name) , and just visit the ancient Kabbalah centers in India. The population N size of 55 is ideal enough and if they get a successful size ( sort of reduction in tumor size in SGN-35). I see this as a 85K minimum per regimen. That is a huge accretion to earnings. I do hope this guys have a variable (Sliding Scale type ) pricing for the third world nations.
Thanks, BMR. I can barely imagine being away from a computer screen for a few hours, much less a few weeks. Don't know who you do that, but I admire the discipline.
From a hold/sell perspective, the historical background you provided likely will come in very handy, assuming FDA approval. But this part of your note caught my special attention:
>>I don't think they will be friendly toward the tiny single arm and the panel may be split. That's not to say they won't win approval. They will.<<
That first part about being unfriendly to the admittedly small trial size: Do you really think that will be the case, given that SGEN said - or seems to have said - that the FDA approved or at least signed off on the trial design from the get-go?
I'd be surprised if management at a big pharma would be concerned enough over a $1.5-$2B company to team up with people to short the price down. Not when their market caps may be $100B. It wouldn't be worth jail time.
What I could see is this, there was just dilution of around 10%, plus there may be some concern that the ALCL BLA doesn't get accepted, since it is a small trial and just P2. Plus, after a big runup after the data was released, the stock drifted down and tested the the 200 day MA and now may be poised to go back the other direction.
Biogen: Two questions, as I try to think this through.
1. If Big Investment House, on behalf of Big Pharma, is working to suppress the pps through aggressive shorting ahead of a buyout offer from Big Pharma, couldn't that be seen as a criminal conspiracy in restraint of trade? Or, at the very least, a violation of SEC regulations?
2. If Big Investment House, on behalf of Big Pharma, is working to suppress the pps through aggressive shorting ahead of a buyout offer from Big Pharma, wouldn't the cost of eventually covering this huge short holding add considerably to the cost of the eventual buyout? That is, if BIH/BP has to cover out of pocket at $20 or $30...they'd still have to buy the stock at those prices from somebody to do that, so what would be the point?
I noticed that the most recent data on SGEN's short position (as of 3/15) shows that the short interest dropped slightly for the first time this year - down from 15,920K shares to 15,789K. Not much of a drop, but the first time this year it did not increase.
I am not a short player and know next to nothing regarding short investment strategy. That being said, I have certainly wondered, as you and others have, why there is a short position of signifcance here at all. Although one could of course theorize that the short players are somehow not fully aware of the SGEN situation and are therefor making an uninformed short investment, I do not believe in the "stupidity" arguement. Something more is in play.
Could that something be a two way hedge play? Given that it is likely that the next significant PPS move for SGEN will be event driven i.e. approval or disapproval by the FDA on its BLA for SGN-35, with the resultant price move in either direction being rather dramatic and substantially realized within a very few days, could an investor go both long and short on an equal basis with the intent to bail out of the "wrong" position as early as possible post-FDA decision (perhaps with preset buy/sell orders) and then ride the "right" decision to its conclusion? At worst one would break even, at best make a profit with a zero initial net investment.
As I said at the beginning, when it comes to short investing I don't know what I'm talking about here. In any event, I'm long with SGEN. In fact added 10% over the last couple of weeks.
you really don't know much about stock trading.
100% hedge is usually a zero sum game.
esp. if you do it long/short.
the best hedging is usually done buy options.
but option costs usually means that that is a zero sum game if not eats sig. into your profit.
i did analyse the whole SGEN short game in detail.
there is likely no insider play or big surprise.
shorts still think that they have enough time to get out
by way of small dirty tricks (cramer, bogus downgrades etc),
or a fake "sell on the news" type of raid.
however they are taking a huge risk here.
i would much rather that they are squeezed.
if they manage to escape before that,
that is still fine with me.
we will go up once they leave the building.
I don't know about a blood bath, I do believe we are setting up for a great short squeeze. All we need is one big hedge fund to step up and start buying to send the stock skyrocketing - then as it goes up, the hedge fund sells off with a nice profit.
Maybe the hedge fund is even shorting a bit to get shorts to continue to fall for the trap. Who knows.
I do know that retail investors can only hope to survive by doing good due diligence and picking stocks that deserve to be bought.
actually, a similar story is shaping up with INCY.
i like INCY but think that SGEN is the better bit right now.
however if INCY dips more, i do plan to buy.
INCY's FDA bid is also almost a sure shot (SPA, fast track).
But remember INCY's drug is not disease modifying.
And they have competition lined up.
They also do not have a platform technology.
Going back to the shorting story, I wonder whether it is done by same group of people. What is the strategy? They sure won't be able to pull one big dirty trick after other. If they have an FDA plot, they will surely end in jail. It would be too obvious.
Azel, I absolutely do not subscribe to an FDA plot theory.
Honor's explanation - they're betting on a more routine denial by the FDA - may be the most likely. If so, the shorts haven't done their research on the blockbuster SGN-35 trial results, which, itself, seems rather unlikely (and that gets us back to the starting line).
I suppose, as Honor also suggests, it's possible that they are anticipating the widely expected FDA approval and then a possible sell-on-the-news phenomenon, especially given the relatively small market for SGN-35. They could be right, in the short run. But, in the long run, SGEN has much more working for it than just SGN-35.
And there's always the wild-card - a sudden acquisition battle for SGEN. (In fact, one could even theorize that this deep walk-down is being orchestrated just ahead of a bid, though there's obviously no evidence of that at the moment.)
My guess they are betting the FDA shoots it down. The odds based on recent submissions are quite high. Or they are betting approval is already priced in, as many feel approval is a no brainer. The second theory may be whats keeping us above 14.
By looking at publicly available data, I cannot see how FDA can possibly shoot this down. It is not an anti-obesity drug at the end of the day. If FDA pulls a surprise, they would put themselves into a difficult position. Lets not forget: we are talking about potential cure for people in death row.
And I doubt the good news already in the price argument. This means they will need to wait "sell the news" which will not be a short wait. The price will tend to go up come close the verdict. Plus the "sell the news" pull backs are never to deep. Not a smart bet.
Under normal conditions (ie no dirty tricks), the only rationale could be the view that SGEN is overvalued. I have run several scenarios on valuation and even the most conservative ones tell me the opposite. Even if you believe the overvalued argument, would you take the risk of good news (like acquisition, another licensing deal or new trial data)?
That leaves us the dirty trick way.
They will need a very big one for this.
And that would put them on the spot.
Are they brave enough?
I am very seriously struggling with the same question.
The drug works wonders, with very okay side effect profile.
And there was an SPA.
One should be paranoid to expect major trouble from FDA.
But shorts are bidding hundreds of millions on the opposite.
It looks suicidal.
Could they dare a very big dirty trick? (I am not talking about fake analyst downgrades here).
If they were bidding on commercial potential, they would wait post-approval for shorting.
And they must be 100% sure about threat of acquisition.
I would happily take the acquisition risk if I had a contrarian view.
But I would have never bid on the FDA verdict in this case.
I would love to hear your views. Feel free to email me.
Azel, we have quite a few smart, veteran biotech investors on this board. My guess is that BMR and others soon will join this conversation and nudge us toward some answers (or at least worthy theories).