The FDA issued a warning letter to healthcare professionals and patients regarding Intercept Pharmaceutical’s (ICPT) liver disease drug Ocaliva after 19 patients died and others suffered liver failure resulting from taking the drug. Ocaliva is Intercept’s only commercially viable drug in production and was responsible for $52 million of reported revenues in the 1st and 2nd quarters of 2017, versus just $6 million in reported revenues in the 1st and 2nd quarters of 2016. Ocaliva was also in the final testing phase for treating NASH disease which affects between 3%-12% of Americans according to the U.S. Institute of Health and had the potential to become a $1 billion drug by 2021.
ICPT was up 32% through over half of 2017, hitting a year-to-date high of $135.03 on 7/20, but with yesterday’s 25% decline and today’s 15% decline in early trading, its stock price is down to $62.90, decreased 42% on the year. Short interest in ICPT is $382 million with active short selling yesterday and today, with over 500 thousand new short shares hitting the tape. Stock borrow fees are starting to climb off of general collateral levels (the cheapest borrow rate for the easiest to borrow stocks) and we are seeing new stock borrows at around the 2% fee level as borrow supply starts to tighten.
Shots were up $117 million in daily mark-to-market profits yesterday and are up another $56 million today. Shorts are now up $173 million in mark-to-market profits for the year. ICPT is now the second most profitable short in the Biotech sector in 2017.
With several analysts, such as Morgan Stanley, Citibank and Wells Fargo, already cutting their price targets for ICPT we should see continued weakness in ICPT’s stock price and more short selling as new fundamental and momentum sellers enter the trade. Unfortunately, short selling will be limited as ICPT’s overall amount of lendable shares is relatively small compared to its float because a large percentage of its long shareholders are insiders (Genextra SPA & Orbimed Advisors) whose shares are not in lending programs or retail investors whose shares are not in rehypothicatable margin accounts.
There are approximately 1.5 million shares of ICPT left to short, barring an increase of share ownership in lending programs, stock borrow rates will begin to increase significantly as more of the remaining available shares get taken down. Another half million of short sales will probably increase stock borrow financing cost to the 5% fee level and one million of additional short sale executions will push rates above the 10% fee level. If long shareholders who are in lending programs become disenchanted with ICPT’s future revenue stream and start selling their positions we will begin to see stock loan recalls hitting the street which will only exacerbate the stock borrow supply shortage and drive stock borrow rates even higher at a much quicker pace.
If ICPT short selling continues in the near future, short sellers looking to act on analysts’ downgrades or their own fundamental research, may be limited by both the ability to locate substantial blocks of stock from their prime brokers and high financing costs which will negatively affect their net of financing Alpha. ICPT may continue to be an attractive short, but the ability to act on the short thesis may be limited.
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Managing Director Predictive Analytics, S3 Partners, LLC
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