Clinical-trial data can drive the valuation of biotech companies higher, but investors need to be able to recognize how much of the valuation increase is justified by the data and how much might be driven by external forces like a short squeeze. IGM Biosciences (NASDAQ:IGMS) seems to have experienced the latter after releasing data at the American Society of Hematology Annual Meeting earlier this month.

In this video from Motley Fool Live, recorded on Dec. 14, Corinne Cardina, bureau chief of healthcare and cannabis, and Fool.com contributor Brian Orelli discuss what caused IGM's apparently unwarranted increase.

Corinne Cardina: We're going to give you all some updates from the virtual American Society of Hematology Annual Meeting. That wrapped up last week. It is the conference of companies and experts involved in hematology. That's the disease of the blood, including blood cancers; genetic blood disorders, like sickle cell, graft versus host disease, which is transplant related; and other rare diseases. Brian, you've said this market could be worth upwards of $100 billion when you add everything up. There is one stock that got a lot of interest over the conference in the days after. Can you tell us about IgM Biosciences?

Brian Orelli: Yes. This is a stock that I own just for full disclosure. This is a bi-specific antibody. Typical antibodies bind two different targets. You often see them drawn as a Y and the two tips of the Y bind usually to the same target. There are people who are developing antibodies that bind at two different targets and so what you can do with this bind to a cancer cell on one target and bind to a T-cell, immune cell on the other target, and then that will allow the T-cell to kill the cancer cell.

IGM's is a little bit different. The typical Y shape is an IgG antibody. There's different kinds of antibodies and the other IgM is named after the IgM antibody. This is a ring of five Y's that are all attached at the bottom of the Y and then the tips stick out. That mean that gives you 10 different targets. They're using all 10 to the same target and then they add an 11th antibody to a different target. So that gets them a 10-1 ratio. The idea here is that it should hopefully lower the amount of immune cells that are around a cancer cell. So instead of having a whole bunch of antibodies interacting with a T-cell to one cell, there will be less binding of the T-cells and that will lower the likelihood of the cytokine release syndrome, which is when the immune system goes haywire and starts having a positive feedback loop. Then eventually, the immune system starts attacking the patient and the patient's normal cells, and then they cause a lot of problems and can even cause death.

Cardina: Definitely. Can you tell us what happened with data that this company presented at ASH and what's happened with its stock since?

Orelli: Yeah, it's a really crazy story. The initial data at ASH was week at best, but then they presented after ASH in their own conference call, they presented updated data, which was pretty decent and showed that the drug was clearly working. These are late-stage patients, so it's hard to tell exactly how well it worked. Definitely, they had some responses, which is great. Then the share went up 16%on Monday after the presentation, which seemed about right. Then they announced they were going to raise some money Monday night, and then shares went up 58% on Tuesday. I don't think announcement that they were going to raise money had nothing to do with the 58% jump.

I think it was short squeeze. When there was a lot of people that we're betting against that the data wasn't going to be very good. So to cover their short, they have to buy stock. It's a positive feedback loop where people start buying back shares to cover shorts and now the other shorts are down even more money, so they buy back shares to cover their shorts, and then it just keeps going up and up. So that's the reason why it jumped up 58%. They they raised $200 million at $90 a share. Then as short squeezes almost always happen, they have to come back down to the reality of the situation. I didn't look where it's at today, but on Friday, it closed below $90.

Cardina: Wow. You were definitely on the right side of that bet last year.

Orelli: It was a smart move and then luck. It didn't really matter because it's all going to come back to reality anyway.

Cardina: Right. But another good reminder that shorting stocks is something that you should do very carefully.

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