Why Idenix Could Rise Even Higher, and Challenge Gilead and Vertex

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Idenix Pharmaceuticals Inc. (NASDAQ: IDIX) was the biggest gainer of all listed stocks on Friday with a rally of 40%. Its trading volume of almost 9.2 million shares was almost eight-times the normal volume. By many counts this is also close to a penny stock because its share price is under $5.00. Idenix is far from being without risk and would still be considered a highly speculative stock. That being said, the strength of the stock and the possible treatment target could indicate even more rallying ahead.

Analysts hated Idenix going into this news. Back on June 21 the stock received four analyst downgrades after its hepatitis-C drug candidate IDX20963 was given a request for more information by the FDA: cut to Market Underperform from Market Perform at JMP Securities; cut to Neutral from Overweight at JPMorgan; cut to Underperform from Neutral at R.W. Baird; and cut to Hold from Buy at Deutsche Bank. Drug news that day took shares down from $5.13 to $3.56 and that took place on almost 8.6 million shares. What if these analyst become slightly positive or less negative here?

Friday’s 40% gain took the stock from $3.29 up to $4.62 on almost 9.2 million shares. It almost felt like groundhog day in reverse. Hepatitis C is a very volatile market with big gains and bad losses for those who enter it. Gilead Sciences Inc. (NASDAQ: GILD) is the latest beneficiary of the treatment targets in HCV. Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) appears to be the latest victim. The reality is that both Gilead and vertex will be watching Idenix closely.

A driver for Friday’s gain is the increased hopes of a hepatitis C virus infection treatment now looking as though it has a better chance of approval. Idenix said that its IDX21437 has received approval to enter clinical trials in Canada and Belgium, it has started Phase I/II enrollments, and that it has demonstrated favorable antiviral activity across genotypes 1-6 and a safety profile. Idenix also said that it is conducting additional preclinical work as requested by the United States Food and Drug Administration for IDX20963, a uridine nucleotide prodrug candidate.

Another helpful gain here is that Idenix appears to need no new cash. As of September 30, its cash equivalents totaled $148.8 million, which the company signaled is sufficient to sustain its operations through December 2014. Its forecast assumes no milestone payments or license fees, no reimbursement for development programs and no financing activities. Idenix is effectively pre-revenue, but it has lost $93.6 million so far in the first three quarters of 2013.

What keeps Idenix in the highly speculative category is three-fold. First, it is dealing with FDA study requests. Second, it has a market cap of only $618 million. Idenix also has a very high short interest.

The trading pattern in Idenix on Friday was rather unusual. This was not the typical gap-up with a 40% closing gain. Shares rose from the open at $3.26 and traded up to $4.50 throughout the morning. Then shares fought between $4.50 and $4.74 before closing at $4.61 after ticking up in the last 30 minutes of trading.

It can sometimes be considered a tell that last 30 minutes that often identifies the real strength or weakness of good news. If you have huge gains on a day on strong volume and the price manages to go up rather than down at the end of the day, then investors and traders may have determined that more good news is coming. Otherwise you would see profit takers (or short sellers) try to drive the stock down.

Another consideration is that when this stock has big volume and price reactions, that trading volume remains elevated for a few days after the news hits. The initial reaction tends to be directional as well, with higher prices on good moves and lower prices after initial negative moves.

Again, Idenix is a very heavily shorted stock. Short sellers had over 17.6 million shares in the mid-October short interest. This is down only slightly from the peak but that is more than nine days to cover. The news driver for traders buying and short sellers covering was “only” 9.2 million shares on Friday. That means there are still millions of shares which are short and which could enter even more of a short-squeeze trade.

Hep-C impacts about 150 million people. Vertex Pharmaceuticals Inc. (NASDAQ: VRTX) was a previous winner but recently announced it was trimming 370 jobs after weaker Hep-C treatment sales of its Incivek. Those Vertex drug sales peaked above $450 million before declining. Now Gilead Sciences Inc. (NASDAQ: GILD) has a drug sofosbuvir that is expected to be the next Hep-C winner.

Idenix previously announced a non-exclusive collaboration with Janssen Pharmaceuticals, Inc. back in January 2013 for the clinical development of all-oral direct-acting antiviral HCV combination therapies.

24/7 Wall St. would warn investors that chasing speculative stocks is a very dangerous game. That being said, the tide seems to have more than turned here. Analysts might take less of a negative stance next week, short sellers may continue to cover their bets, and it now seems less likely that the company will announce any sudden highly dilutive stock offering or convertible debt offering that punishes holders.

On the flip side, the sentiment could remain and investors on Monday may decide that a price of $4.61 versus a 52-week trading range of $2.93 to $5.92 is a large enough gain or recovery of losses enough to call it a day. Stay tuned.

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