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 Short interest has risen in a number of biotech names perceived as
vulnerable to a selloff after a rally that has sent the Nasdaq
Biotechnology Index <.NBI> up 42 percent over the last year even
after this week's declines.
Overall, a screen of about 1,650 mid-cap U.S. companies shows
biotech stocks, on average, have a short interest ratio of about
11.6 percent, compared with the average mid-cap name's 6.4 percent
in short interest, according to Starmine, a Thomson Reuters company.
This suggests a greater number of bets on these stocks falling than
the rest of the market.
That is occurring as other fund managers boost their bets on the
high-flying names. Fund managers now have an average of 4.1 percent
of their portfolios in biotechnology companies, nearly double the
level of three years ago, according to Lipper data.
“We think that investor sentiment is a bit overdone,” said John
Fraunces, a co-portfolio manager of the Turner Medical Sciences
Long/Short fund, whose fund is in the top 1 percent among long-short
funds tracked by Morningstar over the last three years.
“The problem is that investors are giving people the benefit of the
doubt and instantly giving a company billions in market value when
there still need to be more studies to determine whether or not a
drug is therapeutically effective," said Fraunces, who is looking
for more opportunities to "short" stocks, or bet that the price will
fall.
Some of the names attracting short bets are recent entrants to the
stock market. There have been 88 initial public offerings of
biotechnology companies over the last 12 months, which have gained,
on average, 59.6 percent - the most of any sector, according to data
from Renaissance Capital. Early-stage biotech companies rarely post
any revenue, and tend to be money-losers.
Many recent IPOs have only a small percentage of their outstanding
shares trading, with some still restricted due to lock-up
provisions. But the shares out in the public market are being
frequently lent for short bets.
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One is cancer-therapy company Kite Pharma Inc, whose shares are up
322 percent since the company went public on June 19. About 2.7
million shares - or about 70 percent of what is available for short
bets - has been lent out for shorting, according to Markit, which
tracks short interest lending programs.
Andrew Morey, portfolio manager of the Aston Small Growth Fund, said
the shares of companies that have come to market in the last year
have largely looked overstretched.
Around 1-1/2 years ago, he bought shares of a gene therapy company,
whose name he would not divulge, shortly after its initial public
offering, but quickly and sold it after shares rapidly doubled.
“That’s when we started to say that some of these gains don’t look
appropriate,” he said.
Some shares that were initial winners have seen their fortunes
dimmed and yet short-sellers remain prominent. Castlight Health,
which went public in March 2014, saw its shares rocket in its first
day and has since lost nearly 80 percent of its value.
But short bets remain. More than 88 percent of the shares available
for short bets are being borrowed for that purpose, according to
Markit data.
(Editing by Matthew Lewis)
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