Short interest is an important factor to consider when investing in any stock. Within the biotech sphere, rising short interest could signal a pending clinical failure or regulatory setback, making it a vital metric to keep a close watch on.
Celldex Therapeutics (NASDAQ: CLDX ) is a clinical-stage biopharma focusing primarily on the development of new cancer treatments. Despite advancing its lead drugs into mid- and late-stage testing for potential blockbuster indications, short-sellers have piled into this stock this year. And perhaps correlated with this rising short interest, Celldex shares have fallen a noteworthy 28% year to date. With this in mind, let's consider two reasons shorts are targeting this mid-cap biopharma.
Reason No. 1
Celldex's most advanced clinical candidate, rindopepimut, is indicated as a potential treatment for glioblastoma multiforme, a particularly aggressive and difficult-to-treat form of brain cancer. What's key to understand is that numerous experimental treatments for glioblastoma have failed in clinical trials over the years. Roche's Avastin was the first pharmaceutical approved by the Food and Drug Administration to treat any form of glioblastoma in over a decade, and even it can only claim marginal clinical benefits for this terrible disease.
Although rindopepimut did show encouraging signs of improving survival rates and progression-free survival compared to historical benchmarks in a mid-stage study, we have seen similar results from other drugs that went on to fail in late-stage studies. Put simply, shorts are betting that rindopepimut will ultimately fail in its quest to become a breakthrough treatment for this devastating form of cancer.
Reason No. 2
The company's second most advanced clinical candidate, Glembatumumab vedotin, is based on Seattle Genetics' (NASDAQ: SGEN ) promising antibody-drug conjugate, or ADC, technology that consists of a human monoclonal antibody linked to a potent cellular toxin. Glembatumumab is being tested as a potential treatment for breast cancer and melanoma.
Although Roche, Seattle Genetics, and others have invested heavily in this technology for nearly two decades, we have only seen a handful of approvals so far. Moreover, the first ADC to be approved, Mylotarg, was withdrawn from the market due to serious adverse events.
The problem is that off-site toxicity issues haven't been completely resolved and researchers are still working on ways to improve tissue targeting for ADCs. So while Celldex is pursuing a hot-ticket item in oncology research with Glembatumumab, the technology is far from perfect. The short thesis would thus appear to be that Glembatumumab won't succeed where the majority of experimental ADCs have failed. Time will tell.
Celldex has decided to target two of the hottest areas in oncology with its lead clinical candidates, namely immunotherapy and ADCs. Moreover, these drugs are indicated for diseases that have strong growth prospects going forward. It's therefore not surprising that investors once pushed Celldex's market cap to above $3 billion at one point last year. Now that some of the enthusiasm for clinical-stage biopharmas has worn off and investors are looking more toward actual revenue streams, Celldex has fallen by more than 50% from its former highs.
Viewed in this light, Celldex might now be considered a bargain. The high and rising short interest, however, shouldn't be ignored. In my view, Celldex's management has decided to plot a high-reward, high-risk course for its clinical program. And they should be applauded for pursuing treatments for diseases like Glioblastoma that have proven to be very difficult to treat with pharmaceuticals.
That being said, the company is a way away from reporting data from a clinical trial that could be used to gain approval (its phase 3 trial will report out in late 2016, according to clinicaltrials.gov), and the risk of failure for these indications is perhaps higher than usual. Consequently, I think investors with a long-term outlook would be best served by taking a wait-and-see approach with this one.
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