A short squeeze can generate outsize returns on capital in a hurry. This process, defined as a flood of short covering following a sharp uptick in a stock's price, can turn into a runaway positive feedback loop, sparking a parabolic upturn in a company's share price.
Beaten-down healthcare stocks Editas Medicine (EDIT 1.92%) and Bluebird Bio (BLUE 1.13%) could be two of the market's best short-squeeze candidates right now. Both companies have become top short-seller targets in recent years, and for good reason (more on this below). With better days ahead, however, these out-of-favor biotech companies might be gearing up for a rapid turnaround. Here's what investors need to know right now.
Editas Medicine: Gene-editing's laggard
Editas is a small-cap genome-editing company. The biotech's lead program is an ex vivo (gene editing occurring outside the body) derived product known as EDIT-301.
EDIT-301 is currently being trialed in early-stage studies for two rare blood disorders, sickle cell disease (SCD) and transfusion-dependent beta thalassemia (TBT). In addition, Editas sports an immuno-oncology collaboration with Bristol Myers Squibb, which is in pre-clinical development.
Since going public, Editas stock has lost almost 37% of its value. By contrast, fellow genome medicine specialists CRISPR Therapeutics (CRSP 0.34%) and Intellia Therapeutics (NTLA 3.70%) have delivered market-crushing gains since going public:
Editas stock has underperformed for a few reasons. In brief, CRISPR and Intellia both rapidly developed a strong lead product candidate, outlined a clear path to market for said product, and partnered early on with biotech heavyweights Vertex Pharmaceuticals and Regeneron Pharmaceuticals, respectively. Editas, on the other hand, started the year off by announcing a reorganization effort.
The bottom line is that Editas has fallen behind its peers from both a business development and clinical pipeline standpoint. As a result, the company's stock has seen a sharp uptick in short-selling over the past few years:
EDIT Short Interest data by YCharts
What could spark a short squeeze? The bad news is that Editas lacks a potent near-term catalyst. Its lead clinical program is targeting a murky commercial opportunity due to the high level of competition in both SCD and TDT, and it hasn't announced any plans to pursue a high-value indication novel to the realm of gene editing. Rather, Editas' potential short-squeeze catalyst will likely have to come from the area of business development.
The good news is that there are several elite drugmakers that would benefit from an Editas partnership. The big picture is that gene-editing is poised to become an important new modality for a variety of human diseases. As such, external investment in this area is likely to surge in the years ahead. Editas, with its unique gene-editing platform, could be a prime beneficiary of this favorable trend. A top-shelf partnership -- especially one with a large up-front cash payment -- could be enough to trigger a short squeeze.
Bluebird Bio: A leader in gene therapy
Bluebird Bio is arguably the world's preeminent gene-therapy company. After an ultra-busy 2022, the biotech now has two commercial-stage products: Skysona for cerebral adrenoleukodystrophy (CALD) and Zynteglo for beta thalassemia. Bluebird also recently submitted a third therapy for Food and Drug Administration review, lovo-cel for SCD patients who are 12 years and older and have a history of vaso-occlusive events. So, if everything goes according to plan, the company might have three commercially available gene therapies by early 2024.
Normally, this kind of robust success on the regulatory front would cause a biotech's shares to soar -- and prompt short-sellers to move to the sidelines. In Bluebird's case, the opposite has occurred. Thanks to the complex logistics involved in administering its gene therapies, along with the company's anticipated cash crunch in 2024, short-sellers have been piling into this stock over the last several years. The key reason is that bears expect Bluebird to lean heavily on public offerings to fund operations over the next 24 months.
BLUE Short Interest data by YCharts
Can Bluebird surprise the short-sellers? Yes, but it won't be easy. The lowdown is no analyst expects the biotech to be cash-flow-positive this year or next. As such, management will have to find a way to navigate this key financial hurdle while its newly approved genetic medicines gain traction in the marketplace.
The good news is that Bluebird has several options to achieve this operating goal without constantly diluting existing shareholders. Bluebird could ink a hefty partnering deal, it could do a royalty deal, or it could explore an outright sale. The point is that Bluebird isn't a terminal short. The company has levers to pull to avoid a worst-case scenario -- some of which may prove potent enough to spark a full-on short squeeze.
