Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Why Shorts Are Betting Against Enanta Pharmaceuticals

Short interest is often a key metric that investors can use to gain some insight into how the Street feels about a particular stock. And when short interest picks up dramatically, it's generally a good idea to know why.

Shares of little-known Enanta Pharmaceuticals  (NASDAQ: ENTA  )  have been on a tear over the past year, as the company's lead protease inhibitor, ABT-450, heads into a regulatory review as part of a triple-therapy combo indicated for chronic genotype 1 hepatitis C infections. Specifically, shares have now headed higher by a noteworthy 43% year to date.

By the same token, short interest has risen in lock step with share price lately, with shorts now holding close to 15% of the float. With this in mind, let's take a look at why shorts have started to jump into the stock. 

ENTA Chart

ENTA data by YCharts

Enanta and AbbVie are on track to gain approval for their all-oral hepatitis drug
Last April, AbbVie  (NYSE: ABBV  )  submitted a New Drug Application, or NDA, for its triple-therapy regimen for genotype 1 hepatitis C infections, with Enanta's ABT-450 being a key component of the cocktail. Based on data from six late-stage studies, the therapy showed sustained virologic responses topping 90% in many cases after 12 weeks of treatment, with few patients dropping out due to adverse events. Put simply, the therapy looks comparable to Gilead Sciences (NASDAQ: GILD  )  Sovaldi in terms of its effectiveness and safety profile for genotype 1 patients. The therapy is also now under regulatory review in Europe. 

Based on these regulatory milestones, Enanta has reportedly earned $40 million in milestone payments from AbbVie this quarter. What's key to understand is that Enanta stands to earn another $155 million if the therapy gains approval in selected world markets, as well as double-digit royalties on net sales.

So we are looking at a small-cap biopharma with a current market cap of $725 million that could earn well over $200 million over the next year or so. Taken together, this begs the question, what are shorts seeing that makes them think the stock is poised for a downturn?

The hepatitis C market might be tapped out
Enanta's projections place a value of between $10 to $20 billion on hepatitis C therapies within the next 10 years. With an estimated 180 million people afflicted with the disease, this estimate certainly doesn't sound outlandish. But there are issues that could dramatically lower the commercial value of newer therapies going forward.

First and foremost, hepatitis C infections have naturally been on the decline in the U.S. for the last decade. What's key to know is that hepatitis C therapies garner a significant premium in the U.S. compared to other markets, which has led, at least partly, to the contentious pricing debate for these drugs. As this market slowly evaporates through natural mechanisms and the introduction of functional cures like Sovaldi, one of the most lucrative markets could literally dry up.  

Secondly, unfortunately the vast majority of hepatitis C infections occur in countries and often among populations with little access to health care. Although these large numbers of individuals suffering from the disease may sound impressive, shorts likely see these demographic issues as roadblocks to monetizing newer therapies. Put simply, Sovaldi is exploiting its first-mover advantage in a big way by pushing hard in the most profitable markets.

Foolish wrap-up
While I think the shorts certainly have a point about the long-term outlook of the hepatitis C market, the large milestone payments owed to Enanta are reason enough to think the stock still has remaining upside. Indeed, this is the main reason why I added Enanta to my portfolio.  

Barring an unexpected and undisclosed surprise in the clinical data, I expect AbbVie and Enanta's therapy to gain approval in the U.S. later this year, especially since insurance companies are clamoring for new therapies to potentially force Gilead to lower Sovaldi's price tag. After that, I wouldn't be surprised if Enanta becomes a takeover candidate by either AbbVie or its other major partner Novartis. At the end of the day, Enanta still looks cheap in light of its lucrative deal with AbbVie, and even more so following the eye-popping deal Merck made for Idenix's hepatitis C pipeline.

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need to Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2993001, ~/Articles/ArticleHandler.aspx, 8/29/2015 10:44:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

George Budwell

George Budwell has been writing about healthcare and biotechnology companies at the Motley Fool since 2013. His primary interests are novel small molecule drugs, next generation vaccines, and cell therapies.

Today's Market

updated 13 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:04 PM
ABBV $63.98 Down -0.53 -0.82%
AbbVie Inc. CAPS Rating: ****
ENTA $41.18 Down -0.85 -2.02%
Enanta Pharmaceuti… CAPS Rating: ***
GILD $107.78 Down -0.21 -0.19%
Gilead Sciences CAPS Rating: *****