Top Stocks To Invest In 2014, Top Stocks To Buy For 2014: 10 Most Shorted Stocks in Biotech

Short-sellers are piling into biotech stocks like Savient Pharmaceuticals(SVNT) and Avanir Pharmaceuticals(AVNR) emboldened by a sour economy and the challenge of selling new drugs in an uncertain environment of health care reform and high drug prices.

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Betting against new drug launches has become a popular and profitable short-selling strategy -- more so than shorting pending Food and Drug Administration approval decisions or clinical trial results.

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The five largest short positions in biotech today all revolve around stocks undertaking new drug launches. And among these five "drug launch" stocks, the shorts have a near-perfect record of beating out their rival investors on the long side of the trade. Several factors have made launching new drugs increasingly difficult: A weak economy has forced many people to defer medical care. For those patients who do seek out medical care, paying for high-priced medicines has become more challenging. And insurers are putting more obstacles in front of patients who do seek reimbursement for new drugs. The following pages detail the 10 biotech and drug stocks with the largest short positions at the end of the third quarter, according to Bloomberg data. You may not agree with the short thesis, especially if you own these stocks, but it's always important to know what the bears are thinking.

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Avanir Pharmaceuticals(AVNR)

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Short interest: 27%52-week high: $5.80Current price: $2.86Year-to-date performance relative to the Nasdaq Biotechnology Index: Down 30%Shorts have been laughing uncontrollably over the slow, slow, slow launch of Avanir's Nuedexta for pseudobulbar affect (PBA). Just like the five stages of grief, analysts and Avanir investors have come to accept that Nuedexta isn't the blockbuster drug they thought it was. Revenue forecasts have been whacked to such an extent that Avanir has a decent shot of meeting, if not beating, expectations for the third quarter. The longer-term problem for Avanir is that its sales reps have to visit doctors multiple times before doctors are convinced to give Nuedexta a try in the few PBA patients they have. Marketing Nuedexta costs so much money that Avanir may never reach profitability.

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Seattle Genetics(SGEN)

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Short interest: 26%52-week high: $19.42Current price: $19.04Year-to-date performance relative to the Nasdaq Biotechnology Index: Up 27%The market opportunity for the newly launched Adcetris in relapsed and refractory Hodgkin's lymphoma is much smaller than Seattle Genetics' executives and bullish analysts forecast. Recent sell-side surveys of lymphoma doctors claim to have found enough eligible patients to predict a successful Adcetris launch. These reports have helped Seattle Genetics' stock price recover from the August lows following the market collapse. Hedge-fund shorts have done doctor surveys of their own which reveal the opposite -- too few Hodgkin's patients -- and they're betting that Seattle Genetics' stock price will fall again. Even if Seattle Genetics puts up early strong Adcetris sales numbers in the third and fourth quarters, it will be more likely due to inventory stocking and a backlog of advanced Hodgkin's patients who were waiting for treatment. Once that initial bolus of patients is treated, Adcetris sales will fall off a cliff. And moving Adcetris into earlier-stage Hodgkin's will be very difficult because the standard drug therapy used today is already highly effective, with response rates hovering near 90%. Shorts also point to Seattle Genetics' decision to prevent distributors from reporting monthly Adcetris sales figures to IMS Health as a red flag suggesting the company is nervous about the drug's commercial trajectory.

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Cadence Pharmaceuticals(CADX)

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Short interest: 22%52-week high: $10.00Current price: $6.55Year-to-date performance relative to the Nasdaq Biotechnology Index: Down 13%Cadence is another short-the-drug launch story. Picking up a pattern, yet? Cadence has done well convincing hospitals to carry its injectable acetaminophen Ofirmev on formulary. Convincing budget-minded hospitals to actually use (and pay for) the premium-priced pain reliever drug -- not so much. If Cadence can't start generating revenue from Ofirmev soon, management will have to raise more money, which will further erode the company's message that Ofirmev is on track.

K-V Pharmaceuticals(KV-A)

Short interest: 21%52-week high: $13.55Current price: $1.35Year-to-date performance relative to the Nasdaq Biotechnology Index: Down 47%

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K-V Pharmaceuticals earned a spot on the most-shorted list through sheer stupidity and greed. The company angered patients, physicians, insurers and lawmakers by pricing the premature-birth prevention drug Makena at $1,500 per shot even though the active ingredient in the drug was already widely available for just $10 per shot. When K-V tried to shut down access to cheaper, generic versions of the drug, non-profit groups like the March of Dimes balked and lawmakers called for investigations.K-V ultimately gave in to the pressure by dropping Makena's price to "just" $690 per shot but the damage was done. Makena sales have disappointed and the company's balance sheet is weighed down with debt, emboldening shorts who view K-V's equity as essentially worthless.

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Oncothyreon(ONTY)

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Short interest: 20%52-week high: $11.59Current price: $5.98Year-to-date performance relative to the Nasdaq Biotechnology Index: Up 83%The short story is simple: 1) Cancer immunotherapy doesn't work (Dendreon's Provenge included); 2) Oncothyreon's Stimuvax lung cancer won't work either; 3) the "positive" phase 2 study of Stimuvax's enrolled too few patients and was skewed in the drug's favor; 4) Oncothyreon used to be known as Biomira -- any drug company that changes its name is an automatic short; 5) Biomira/Oncothyreon was founded and headquartered in Canada before moving to the U.S.

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Vivus(VVUS)

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Short interest: 20%52-week high: $11.48Current price: $8.07Year-to-date performance relative to the Nasdaq Biotechnology Index: Down 14%An obesity drug? That's so 2010. Vivus might convince FDA to approve Qnexa some day but only after the company completes a 10,000-patient cardiovascular safety study. Check back in five years or so.

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MannKind(MNKD)

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Short interest: 19%52-week high: $10.05Current price: $3.79Year-to-date performance relative to the Nasdaq Biotechnology Index: Down 53%In Al Mann we distrust. Sure, the billionaire health care entrepreneur used to have the golden touch, but today Mann is old, tired and spending billions on a quixotic quest to develop an inhaled insulin device diabetics neither need nor want. A commercial flop in the making, if it's ever approved.

Top Stocks To Invest In 2014, Top Stocks To Buy For 2014

Tuesday, December 11, 2012

10 Most Shorted Stocks in Biotech

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