By Fred Fuld
Posted on July 9, 2009
Last Tuesday, Geron (GERN) spiked by as much as 21% after forming an alliance with GE Healthcare, a unit of General Electric (GE), to develop test products from embryonic stem cells.
A likely contributor to Geron's quick rise was that more than 16% of the stock's float was shorted, which could have caused a short squeeze.
A short squeeze occurs when short-sellers quickly buy in shares of a stock in order to cover their bearish positions, driving the price of the stock up sharply. The ratio for measuring short squeeze opportunities, called the short ratio, reflects the number of days it would take the short-sellers to cover their positions based on recent average daily volume.
With Geron's recent move in mind, we thought we'd take a closer look at the biotech sector for other potential short squeezes. Stockpickr has reviewed the heavily shorted biotech stocks with market caps of more than $250 million and created a portfolio of the top biotech short-squeeze opportunities.
One of the highest short interests in a biotech stock is in InterMune (ITMN). The developer of pulmonology and hepatology therapies has a short ratio of 19.6, which means that it would take over 19 days for the shorts sellers to cover their positions, based on the recent trading volume of the stock.
InterMune has started to move up in anticipation of President Obama's government-backed health plan. According to TheStreet.com's Kevin Baker, "Pharmaceutical companies should gain if more people can afford prescription drugs."
InterMune has total debt of $156.7 million, with $157.7 million in cash in the bank and $99 million in negative cash flow.
Shares of InterMune are owned by Deerfield Management, a New York-based hedge fund with about $1 billion under management. Deerfield also invests in Sepracor (SEPR), which has a 1.8 short ratio; The Medicines Company (MDCO), with a 3.1 short ratio; and Beckman Coulter (BEC), with a fairly high short ratio of 5.2.
Another heavily shorted biotech stock, with a short ratio of 8.6, is BioMarin Pharmaceutical (BMRN), a California company that develops products to treat various types of genetic diseases. In June, Genzyme (GENZ), which markets BioMarin's Aldurazyme, shut down a manufacturing plant after discovering a virus, but BioMarin said the closure would not affect production of the enzyme disorder treatment.
BioMarin generates $34 million in operating cash flow and has a debt load of $497 million, with $551 million in cash.
Winslow Green Growth Fund , an environmentally responsible mutual fund managed by Jackson W. Robinson, owns a large number of BioMarin shares. The fund ranks in the top 5% of all small growth funds over the last six months. Other stocks it owns include LSB Industries (LXU), with a short ratio of 1.6; First Solar (FSLR), with a 2.7 short ratio; and Repligen (RGN), with a 5.8 short ratio.
For more ideas, check out the Top Biotech Short-Squeeze Plays portfolio.
At the time of publication, the author had no positions in stocks mentioned.
