• Research

AUG 5, 2016

S3 BLACKLIGHT: Galenica’s Bid for Relypsa Creates a Classic Short Squeeze

Call me Ishmael. We have a sighting of a legitimate short squeeze – where a spike in stock price is followed by actual short covering over an extended period of time.

Relypsa Inc.’s (RLYP US) stock price rose 59% on July 21st to $31.95 when Galenica AG (GALN VX) agreed to purchase the pharmaceutical manufacturer and distributor for $32/share. RLYP short interest on the 21st was $465 million, a historical high for the stock and its stock borrow cost at the time of the offer was 14.5% fee.

By the next week, shorts began covering their positions after taking a one day loss of almost 60% and not wanting to incur additional double digit stock borrow expenses. By July 29th, short interest dropped to $223 million, down 52%, and has remained at these levels with short interest today at $213 million. With over half the outstanding stock borrow returned in just over a week the cost to borrow Relypsa shares also plummeted. Existing stock borrows are being charged a 4.5% fee while borrows for new shorts are going around the 2.5% fee level. Existing shorts are paying a higher borrow cost than new shorts because it takes a few days for a prime broker to get rate changes for their entire book.

Further evidence that a short squeeze was taking place was that the S3 Crowding Indicator, a measurement of real time shorting activity relative to market cap and float, showed easing on nine of the thirteen days following the price spike. In addition, the S3 Velocity Indicator, a measure of real time relative change in shorting activity, had begun trending downward prior to the 21st as there was some short covering earlier in the week but all three trend lines, the 7 day, 30 day and 90 day, have been accelerating downward since the 26th.

With both the Crowding and Velocity Indicators showing strong easing momentum we expect Relypsa short covering to continue. At $213 million, short interest is still over twice as high as 2015’s average short interest of $103 million and seven times as high as 2014’s average short interest of $30 million.

FINIS

For more information on the above analysis, please contact:

Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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