Are Investors Wrong About NewLink Genetics?

Clinical-stage biotechs are frequently targeted by short-sellers because these types of companies can (and sometimes do) crater overnight. By the same token, a positive clinical or regulatory catalyst can send shares ripping higher in the blink of an eye, so short-sellers are playing a high-risk game when it comes to these companies.

NewLink Genetics (NASDAQ: NLNK  ) is a small-cap biotech focused primarily on the development of small molecule drugs and biologics in the treatment of cancer. Presently, the company's platform can be divided into two general approaches. First, there is the HyperAcute vaccine platform that seeks to trigger an immune-specific response against cancer cells. Second, NewLink Genetics is developing a series of IDO (Indoleamine 2.3-dioxygenase) pathway inhibitors that aim to block immunosuppression. 

Despite some recent success by NewLink on the clinical front, short-sellers have still gobbled up over 20% of the outstanding float in this developmental biopharma. Here are three reasons why short-sellers are targeting NewLink. 

NLNK Chart

NLNK data by YCharts.

Reason No. 1
NewLink's most advanced clinical candidate is algenpantucel-L, or HyperAcute Pancreas. HyperAcute Pancreas is being studied in two late-stage trials for pancreatic cancer: The "IMPRESS" trial assesses the vaccine's ability to increase survival following surgery, while the trial dubbed "PILLAR" is looking at the immunotherapy as a treatment for patients for whom surgery is no longer an option.

While cancer treatments tend to be high-margin products with rapidly growing markets, pancreatic cancer is a bit of an oddball. The current front-line treatments -- Celgene's Abraxane and Eli Lilly's Gemzar -- have historically generated most of their sales for indications other than pancreatic cancer (given that the market is only estimated at being worth around $700 million in annual sales).

Put simply, the pancreatic cancer market does not easily produce blockbusters like many other cancer types do, potentially hampering NewLink's upside potential from a positive top-line data readout. 

Reason No. 2
NewLink's stock cratered by 36% in March after independent monitors allowed the IMPRESS trial to proceed after a planned interim analysis of 222 patient events. Because the commercial opportunity for pancreatic cancer is small when compared to other cancers, investors had hoped that the trial would be stopped early for efficacy, potentially pushing the drug into the top tier of available treatment options. The study should report out by January 2015, according to clinicaltrials.gov.

I suspect that shorts believe that HyperAcute Pancreas will ultimately fail to provide an improved survival benefit compared to the current standard of care. Given the long history of clinical disappointments for this particularly difficult to treat cancer, the risk of clinical failure shouldn't be ignored.

Reason No. 3
NewLink is rapidly expanding its clinical efforts for both the HyperAcute and IDO platforms. Nonetheless, the company lacks any significant form of revenue.

NewLink expects to end the year with only $40 million in cash and cash equivalents.  Given that IMPRESS will be close to a pivotal data readout, I would expect major financing to come down the pike well before this event. Note that secondaries tend to result in hefty short-term downturns in share price.

Foolish wrap-up
NewLink is a prototypical developmental biotech; its near-term hopes are riding on a pivotal data readout that is quickly approaching. I believe the company has positioned itself well to create long-term value by developing multiple clinical candidates simultaneously and by spreading the risk between two broad platforms. So while its risks shouldn't be pushed aside, I think the company is fairly valued at its presently market cap of roughly $750 million. 

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