Are Short-Sellers Onto Something at Pluristem Therapeutics?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below we take a look at stem cell researcher Pluristem Therapeutics (PSTI -9.48%), which saw a jump in shares sold short, but which amounts to less than 2% of its float, so its short interest ratio is only one day to cover. Don't expect a short squeeze here. So let's see if the tiny pharmaceutical has the power to make short work of short-sellers.

Pluristem Therapeutics snapshot

Sources: wsj.com, FinViz.com. N/A = not available; Pleuristem Therapeutics doesn't pay a dividend.

Just because the shorts are piling in doesn't mean you should, too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
Did a blistering Bloomberg article cause the spike in Pluristem's shares sold short? If so, we could see them just as quickly evaporate because it appears the story was heavily biased against the company, and the stem cell researcher has publicly called for a correction of the article, which doesn't seem to have happened.

It should have been titled, "Girl Dies, Pluristem Lies." On Nov. 8, an article appeared on the business news site suggesting the biotech concealed the death of a patient who had received the company's placental stem cells because it was out raising capital at the time. Where it had previously touted its stem cells as having helped "save" the girl, it was strangely silent on her death because it was inconvenient for its business' fortunes.

If true, those allegations would be an egregious and serious violation and should rightly subject Pluristem to regulatory sanctions and shareholder lawsuits. The stock plunged 23% that day following the article's publication.

But the following day Pluristem fired back, calling the article factually wrong. Not only did the biotech only learn of the patient's death four days after the financing had closed, but the patient was a 7-year old girl who was critically ill and had exhausted all other treatments. She was given Pluristem's PLX cell treatment, which delivers a cocktail of therapeutic proteins, on an experimental basis and wasn't part of any clinical trial.

According to the biotech, she subsequently ended up being able to leave the hospital and survived six additional months before dying. Pluristem's stock recovered 14% of its lost value that day as it appears the claims by the article's author couldn't stand up to scrutiny.

Three's a crowd
Last year, Pluristem signed a licensing agreement with Untied Therapeutics (UTHR 1.52%) to treat pulmonary hypertension, but it also saw positive results from trials using its cells to treat critical limb ischemia, which is the end stage of peripheral artery disease.

Stem cell researchers haven't had an easy time of it, as evidenced by Geron (GERN 2.79%) leaving the field altogether to concentrate on oncology. Research dollars have been in short supply for those that remain like Cytori Therapeutics (NASDAQ: CYTX) and Osiris Therapeutics (NASDAQ: OSIR), which is why Pluristem's round of capital raising that added $32 million to the company's coffers was so important. Investors needn't worry that it will burn through its cash any time soon.

Biotech investing remains risky, and stem cell research doubly so. The short story here seems to have been based on misinformation and with the biotech forcefully answering the allegations it appears it won't be an issue going further.