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TheStreet Open House

This Biotech Stock Could Be the Next Big Short Squeeze

DELAFIELD, Wis. (Stockpickr) -- The biotech sector is back in play on Wall Street in a big way, and anyone short the sector has to be feeling nervous after a major takeover that hit the space on Monday.

>>5 Big Health Care Stocks to Trade for Big Gains

Shares of Idenix Pharmaceuticals (IDIX) exploded to the upside on Monday by over 200% after Merck (MRK) said it will buy the company for $3.85 billion in cash to compete in the expanding market for hepatitis C drugs. The boards of both companies have already approved the deal, which is slated to close in the third quarter.

The Idenix takeover news spilled over into another hepatitis C player, Achillion Pharmaceuticals (ACHN), which exploded higher on Monday by 47% as traders looked for sympathy plays. Shares of ACHN are exploding higher again today by over 60% after the FDA removed its clinical hold on sovaprevir, one of Achillion's four experimental hepatitis C drugs. The company also announced it has started initial dosing with ACH-3422, another of its experimental hepatitis C drugs.

>>5 Toxic Big Pharma Stocks You Need to Sell

Anyone who was caught short Idenix or Achillion, both of which sport very large short interests, is not a very happy camper right now. The current short interest as a percentage of the float for IDIX is 39%, and for ACHN it stands at 35%. The bears took it on the chin in these two stocks, and my guess is that traders will start scanning the biotech sector in search of other heavily shorted biotech stocks that could be ripe for squeezes.

One clinical-stage biopharmaceutical player that caught my eye as I scanned the sector for the next potential short-squeeze candidate is Geron (GERN), which is developing a telomerase inhibitor, imetelstat, in hematologic myeloid malignancies. Telomerase is an enzyme that enables cancer cells to maintain telomere length, which provides them with the capacity for limitless cellular replication. Imetelstat is a specific inhibitor of telomerase.

>>3 Stocks Spiking on Unusual Volume

Shares of GERN are down sharply this year by 54%, and most of that decline is due to the fact that the FDA put a clinical hold on a couple of trials involving imetelstat. The FDA at that time said the hold was due to persistent, low-grade liver function test abnormalities and the potential risk of chronic liver injury after long-term exposure to the drug. That FDA hold was derived out of a phase II trial evaluating imetelstat in essential thrombocythemia. Due to that hold, Geron had to put all its clinical trials on pause, even though the company had previously announced it did not plan to develop imetelstat for commercial use in ET.

The ET trial Geron was doing was a mechanistic proof-of-concept study, so the hold might not mean much in the long run, since it was not for the more targeted diseases the company is focusing on with imetelstat, such as myelofibrosis, myelodysplastic syndromes and acute myelogenous leukemia. This creates a potential catalyst for Geron if the FDA was just simply doing its due diligence on the ET trial and they will eventually lift the hold and allow Geron to move forward with its other trials.

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