Short-sellers are generally not your run-of-the mill investor. Specifically, investors that "go short" expose themselves to potentially unlimited losses, requiring them to have a fairly good reason to believe a stock is about to crater. Put simply, you should pay close attention to the short interest in any stock you put in your portfolio.

Insys Therapeutics (NASDAQ:INSY) has recently seen a spike in short interest combined with a plummeting share price. With this in mind, let's take a look at two reasons why shorts have started to move into this small-cap pharma. 

INSY Chart

INSY data by YCharts

Reason No. 1
Most Insys shareholders are aware by now that the company is under investigation by the Department of Health and Human Services for its marketing practices for Subsys. Subsys is a sublingual fentanyl spray for breakthrough cancer pain in opioid-tolerant patients that competes primarily against Galena Biopharma's (NASDAQ:GALE) Abstral in the growing opioid resistant cancer market. 

The news of the investigation broke on May 8, causing shares to crater by over 50% over a week's time. And shares are still down over 40% for the quarter.

What's key to understand is that the investigation alleges that a single Michigan doctor was responsible for approximately 20% of the total nationwide Subsys prescriptions, with many of these prescriptions being written for illegal uses of the drug. Going forward, the investigation appears to center on Insys' potential role in this doctor's off-label uses of Subsys.

In sum, the impact of losing these off-label sales are sure to hurt Subsys revenue going forward and there is the potential for even more fallout stemming from this marketing scandal. 

Reason No. 2
Insys' other commercially available product is Dronabinol SG Capsule, a generic version of a synthetic form of THC marketed as Marinol. Insys sells Dronabinol exclusively to Mylan Pharmaceuticals (NASDAQ:MYL) through a supply and distribution deal signed in 2011.

The problem is that the two companies are in legal disputes about floor pricing and marketing efforts for the drug.

One of the key issues investors should focus on is the potential termination of this distribution agreement altogether. In short, Insys could win its ongoing litigation with Mylan but end up losing its marketing partner for Dronabinol. Then again, Insys might benefit from finding a new partner given that Dronabinol garnered less than $1 million in sales in the first quarter of this year. 

Foolish wrap-up
The marketing scandal over Subsys is likely to have a negative impact on the company's top-line growth moving forward. At the same time, Insys is developing an intriguing cannabinoid line extension in Dronabinol Oral Solution. To date, Insys has completed the required bioequivalence study, a pre-NDA meeting, and is planning on filing a regulatory application within the next two months. An approval could help replace the revenue lost from Subsys for its alleged off-label uses.  

That being said, Insys is presently trading at a price-to-earnings ratio of 21, which puts it roughly in the middle of the biotech pack valuation-wise. Viewed this way, I think Insys is probably fairly valued at current levels but is still facing the uncertainty of the ongoing investigation. Moreover, Galena's Abstral is reportedly gaining significant market share in the opioid resistant drug space, presumably putting further pressure on Subsys sales moving forward. All told, I think investors with long-term mind-sets might want to exercise caution with Insys because of these outstanding issues.


George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.