Saturday, March 28, 2015

A Couple of Short Squeezes in Drugs ?

I don't know how fond you are of profiteering off the misfortune and agony of other investors (as in being long short squeezes) but I've run across two that look interesting and may tweak your interest if you're the sadistic, opportunist type. Drug development by the small companies is a dangerous playground where short sellers like to play. Generally I venture there only when the technicals are very good and the insiders, who hopefully know as much or more than the shorts, show a lot of confidence. I don't go looking for a short squeeze.

But I'm long two names that also are becoming a worry for a very large shorted float - Newlink Genetics (NLNK) and Intercept Pharmaceuticals (ICPT).  Intercept has some Phase II and III drugs for liver and related illness with proprietary bile acid compounds. Newlink has a line of cancer drugs, but of particular interest lately is their ebola vaccine, which is being fast tracked into use. It is the new synthetic approach where the vaccine is 'built' not grown with live virus and is much safer and can be made in large quantities needed by such things as an ebola outbreak.

I won't bore you with more medical knowledge than that, mainly because that's about all I know anyway. Both stocks carry a huge shorted float of around 28% with days to cover 11 for NLNK and 4.5 for ICPT, creating a tight squeeze for shorts to get out if the stocks keep climbing, especially for the smaller Newlink. The NLNK shorts are in retreat having backed down from a 32% level just two months ago. Both stocks have extremely high insider ownership at 29% for NLNK and 41% for ICPT, making the insider army even greater than the short army. Both of these groups of people are very smart and well informed, and when they rumble, the gains can be extreme.

Stocks tend to repeat chart patterns, and a striking resemblance caught my attention between Newlink's condition now and Intercept's condition about a year ago. Let me show you: click on image to enlarge

Both stocks have a ramp up in short interest over this time frame, although ICPT was only around 10% of the float. The treatment of the market (also a very smart group) in both cases is remarkably similar, in a similar business. There is growing accumulation in both, a similar burst of very high volume, sharp up moves about 6 months previous, then a similar settling into a quiet climb atop the 140/200 day moving average support, which is about the best divider I've found between intact climbs and those breaking up. The quiet climb amid accumulation is also a similar positive.

What happened to ICPT after this pattern about a year ago? In one of the most brutal annihilations of shorts ever, ICPT reported a good trial result on their main liver drug, the only treatment for a disorder that about 12% of US adults suffer from, and the stock vaulted some 580% over the next two days. Bits and pieces of shorts were laying everywhere.

Will the same thing happen to Newlink? Who knows. But there is an interesting similarity. Just sayin'.


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