What happened

Insys Therapeutics (INSY) is down 14.6% at 12:05 p.m. EST Thursday after a two-day run that had shares start the new year up 39%. Like the run up, there isn't any obvious news to justify Thursday's lower price for the biotech.

So what

It shouldn't be surprising that the share price would backtrack when the rally ended since there didn't seem to be any reason to justify a higher valuation for Insys other than a so-called "short squeeze," which is when short investors buy to close their positions. As I warned yesterday, a short squeeze can change the valuation in the short term, which is only defined by the current buyers and sells.

In a short squeeze, when there are more investors looking to buy, shares will naturally go up. But the short-term needs of investors don't define the long-term value of the company, which should be based on the potential sales of Insys Therapetuics' drugs. As equilibrium sets in with a more normal number of buyers, the share price is likely to return to the intrinsic value of the company.

Man looking at stock charts on computer pulling his hair

Image source: Getty Images.

Now what

Even with Thursday's drop, shares are still about double where they started December, so there's potential for shares to fall quite a bit more. Fortunately, the low point was when pessimism over allegations of off-label marketing for its fentanyl opioid spray, Subsys, were at their maximum. Investors seem to be hoping a $150 million reserve Insys has set aside to settle lawsuits will be enough to squelch the Subsys problem.

Insys' long-term value will be tied to Syndros, which hit the market last year and its buprenorphine sublingual spray for moderate-to-severe acute pain, which is currently under review by the Food and Drug Administration. If Insys can make the Subsys lawsuits go away and produce decent sales from the two new drugs, its current $800 million market cap is certainly a reasonable valuation. Unfortunately, it's unclear if management can produce those value-increasing events this year.