Shorts on the rise in U.S. Pharmaceuticals

Proposals by The Federal Trade Commission to abolish “pay-for delay” deals between brand-drug manufacturers and makers of generic medicines is sending jitters through the pharmaceuticals sector. Our screen of the US Pharmaceutical stocks in the NASDAQ revealed that 18 had seen new annual highs in short interest over the past week including; Avanir Pharmaceuticals (NASDAQ:AVNR), Savient Pharmaceuticals, Inc (NASDAQ:SVNT), K-V Pharmaceutical Company (NYSE:KV.A), Vical Inc (NASDAQ:VICL), ISIS Pharmaceuticals, Inc (NASDAQ:ISIS), Seattle Genetics, Inc (NASDAQ:SGEN), Astellas Pharma Inc (TYO:4503), BioSante Pharmaceuticals, Inc (NASDAQ:BPAX) and PDL BioPharma Inc (NASDAQ:PDLI).

Top 3 most shorted

A 20% decrease in the share price of Avanir Pharmaceuticals (NASDAQ:AVNR) over the past two weeks prompted short sellers to further increase their positions to 22% of the total shares outstanding on loan. Since January, short interest has quadrupled and almost all of the shares available to be borrowed are currently out of loan. In contrast, large funds who lend have also been continuously increasing their holdings to 15% of total shares.

Savient Pharmaceuticals, Inc (NASDAQ:SVNT) is the second most shorted pharmaceutical stock in the NASDAQ. Short interest has surged from 6% in December to reach an unprecedented level of 21% of total shares. In this time, the share price has halved and is currently trading at annual lows but institutional owners continue to hold 25% of total shares. While this stock does have a convertible bond in issue, which can inflate the demand to borrow, there appears to be significant directional short selling taking place.

K-V Pharmaceutical Company (NYSE:KV.A) is again under federal investigation in relation to its Makena drug treatment. The company is the third most shorted stock in the screen and has seen short interest quadruple since the start of the year, reaching new annual highs last week at 20% of total shares outstanding on loan. Despite almost all the lendable supply being out on loan, institutional owners have doubled their holdings since the start of the year to 18% of total shares. This stock has several convertible bonds in issue however, this does not detract from significant directional short selling.

Short interest on the rise

Vical Inc (NASDAQ:VICL) is a relatively small-cap stock with a market capitalization of USD 273 million. Following a period of short covering, short sellers have returned with the percentage of shares outstanding on loan having increased from 2% to 5% since March as the shares have rallied. Large funds who lend have also showed some bearish sentiment towards this stock, reducing holdings by 10% since the start of the year.

Short sellers in ISIS Pharmaceuticals, Inc (NASDAQ:ISIS) consistently covered their short positions after short interest peaked at 12% last August. However, short interest has increased from an annual low of 4% to 6% over the past two months, as the share price has tracked sideways. In contrast, large funds who lend have increased their holdings slightly to 15% of total shares. This stock also has a convertible bond yet the recent increase in stock on loan seems to be directional short selling.

Battling bull and bears of the mid-caps

Seattle Genetics, Inc (NASDAQ:SGEN) and Japanese Astellas Pharma Inc (TYO:4503) are to team up on a second antibody cancer drug. Although Astellas Pharma is a thinly traded stock in securities lending, short interest in Seattle Genetics has reached a new annual high of 17% of the total shares outstanding on loan. Short sellers have been consistently increasing their short positions since October, despite a rallying share price which has reached new annual highs. Institutional owners have also increased their holdings by 30% over this period.

BioSante Pharmaceuticals, Inc (NASDAQ:BPAX) and PDL BioPharma Inc (NASDAQ:PDLI) have both seen a rally in their share prices, but short interest has also rallied reaching new highs of 15% and 17% of total shares outstanding on loan, respectively. However, these stocks are most likely subject to high convertible bond arbitrage trading.

Bottom line

The average short interest across the US Pharma is 4.3% of total shares, which is broadly in line with that of the Russell 3000. However, the recent surge which saw 7% of US Pharma stocks see a fresh annual high in short interest leads us to believe that this is a sector to monitor.