Why Shorts Are Taking Aim at This Marijuana Stock

Short interest in Insys Therapeutics has spiked lately. Here's what you need to know.

Jun 20, 2014 at 6:00PM

Short-sellers are generally not your run-of-the mill investor. Specifically, investors that "go short" expose themselves to potentially unlimited losses, requiring them to have a fairly good reason to believe a stock is about to crater. Put simply, you should pay close attention to the short interest in any stock you put in your portfolio.

Insys Therapeutics (NASDAQ:INSY) has recently seen a spike in short interest combined with a plummeting share price. With this in mind, let's take a look at two reasons why shorts have started to move into this small-cap pharma. 

INSY Chart

INSY data by YCharts

Reason No. 1
Most Insys shareholders are aware by now that the company is under investigation by the Department of Health and Human Services for its marketing practices for Subsys. Subsys is a sublingual fentanyl spray for breakthrough cancer pain in opioid-tolerant patients that competes primarily against Galena Biopharma's (NASDAQ:GALE) Abstral in the growing opioid resistant cancer market. 

The news of the investigation broke on May 8, causing shares to crater by over 50% over a week's time. And shares are still down over 40% for the quarter.

What's key to understand is that the investigation alleges that a single Michigan doctor was responsible for approximately 20% of the total nationwide Subsys prescriptions, with many of these prescriptions being written for illegal uses of the drug. Going forward, the investigation appears to center on Insys' potential role in this doctor's off-label uses of Subsys.

In sum, the impact of losing these off-label sales are sure to hurt Subsys revenue going forward and there is the potential for even more fallout stemming from this marketing scandal. 

Reason No. 2
Insys' other commercially available product is Dronabinol SG Capsule, a generic version of a synthetic form of THC marketed as Marinol. Insys sells Dronabinol exclusively to Mylan Pharmaceuticals (NASDAQ:MYL) through a supply and distribution deal signed in 2011.

The problem is that the two companies are in legal disputes about floor pricing and marketing efforts for the drug.

One of the key issues investors should focus on is the potential termination of this distribution agreement altogether. In short, Insys could win its ongoing litigation with Mylan but end up losing its marketing partner for Dronabinol. Then again, Insys might benefit from finding a new partner given that Dronabinol garnered less than $1 million in sales in the first quarter of this year. 

Foolish wrap-up
The marketing scandal over Subsys is likely to have a negative impact on the company's top-line growth moving forward. At the same time, Insys is developing an intriguing cannabinoid line extension in Dronabinol Oral Solution. To date, Insys has completed the required bioequivalence study, a pre-NDA meeting, and is planning on filing a regulatory application within the next two months. An approval could help replace the revenue lost from Subsys for its alleged off-label uses.  

That being said, Insys is presently trading at a price-to-earnings ratio of 21, which puts it roughly in the middle of the biotech pack valuation-wise. Viewed this way, I think Insys is probably fairly valued at current levels but is still facing the uncertainty of the ongoing investigation. Moreover, Galena's Abstral is reportedly gaining significant market share in the opioid resistant drug space, presumably putting further pressure on Subsys sales moving forward. All told, I think investors with long-term mind-sets might want to exercise caution with Insys because of these outstanding issues.

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.

 

George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers