|Bristol-Myers and Short Selling: The Inside Story|
By Phil Erlanger AUG 10, 2006 12:45 PM
The story is far from over...
Geoff Garbacz contributed to this article.
Is a change in short selling intensity a factor that influences the direction of a stock’s price? From Erlanger Research's vantage point, the two best indicators to track stock moves are price action and sentiment. We created a classification system called the Erlanger Types that measures each day’s price action and sentiment. We track four types:
The reason we mention the Types is because CNBC’s lead story yesterday was that Bristol Myers Squibb’s (BMY) short position almost doubled last month. Then, several weeks after the release of short interest data the world has come unglued for Bristol-Myer. The July short interest data for NYSE names is collected between trade dates June 12 to July 11. The short position rose from 27,649,472 to 47,893,613. We often note that short sellers are sometimes correct.
In our work Bristol-Myers has been ranked a Type 3: Shorts Are Correct. The stock price on July 28 was $24.04; today it sits at $21.04. A generic version of BMY’s best selling drug, Plavix, has been released into the market place by Apotex. This news has come out in the past two days. Rite Aid (RAD) has noted that it will have the generic brand in 3,000 of its stores today. This is a bold move by Apotex because they decided not to wait for a court to rule on the Plavix patent held by Bristol Myers and Sanofi-Aventis (SNY). Bristol Myers told investors not to worry about a Plavix generic until late 2007 and now investors, like rats, are leaving the sinking ship.
The NYSE now wants to investigate the short sellers for potentially trading on inside information? Did short sellers have inside information from Apotex insiders, executives at Rite Aid, Bristol Myers, Sanofi-Aventis insiders, the lawyers involved in the patent dispute or some doctor hired by a hedge fund to consult on the outcome of the generic?
Short sellers MUST be more timely because stocks gravitate higher 2/3 of the time. Smart investors and speculators constantly track and seek out catalysts that will move a stock price. In our review, we note that short sellers in BMY have been adding to positions since April:
The sudden increase in short interest from June to July in the short position of Bristol Myers seems unusual. However we note that during the period of May to June another stock hated by short sellers, Home Depot (HD), saw a dramatic increase in its short position:
Did the NYSE call for an investigation of this change in short position? Short sellers were simply shorting the stock to voice their displeasure with the Chairman, Chief Executive and President Robert Nardelli of Home Depot. He held his annual meeting on May 25, which the Board of Directors did not attend. He did not answer any questions from shareholders present, and he avoided all issues related to the eight shareholder resolutions proposed. We thank Tom Brown of www.bankstocks.com for bringing this to light in May.
A serious issue is that regulatory bodies have no control of the flow of information over the internet. Technical indicators in general and short interest in particular are measures of the action of people in the market place. As the information is disseminated and as market participants act on it (either legally or illegally) these indicators will reflect that flow of information. The observation that short sellers are taking positions draws attention to those fundamentally close to situations like Bristol-Myers.
We ran Google searches on these words: Plavix, generic and Apotex. The August 5, 2006 The New York Times reported that, “Apotex was known to have begun manufacturing a generic form of Plavix early this year after gaining FDA approval in January, despite the existence of the United States patent.” Analysts may have figured out that Apotex had started to produce generic Plavix. The approach by Apotex to launch in spite of a patent held by Bristol-Myers and Sanofi is called an “at-risk launch.” If the court upholds the patent, then they will pay three times Bristol-Myers sales losses. The huge short position would quickly go from a Type 3: Shorts are Correct type to a Type 1: Short Squeeze. This seems to be a big risk to the short sellers, which is why we avoid shorting Type 3s.
What else could have caused the short position to move higher in April? We note that in March Bristol-Meyers and Sanofi-Aventis reached an agreement with Apotex to settle a patent dispute on generic Plavix. Then Bristol-Meyers announced on July 27 that the federal government was conducting a criminal antitrust probe of this potential settlement. On July 28, several news sources reported that FBI agents raided the office of Bristol-Myers chief executive as a part of their investigation to pay Apotex to hold off their generic launch until 2011 when the patent expires. Finally, the Southern District of New York and the U.S. Justice Department said “not so fast” on July 29 and killed any proposed deal.
In any situation there is often a plethora of fundamental considerations. We decided to poll several healthcare managers and ask them if they were aware months ago about the risk of Plavix. They all responded in the affirmative. Good managers do their homework to avoid the land mines; short sellers seek the land mine situations.
The conclusion is that changes to short positions are often a precursor to dramatic news or fundamental events… therefore short interest statistics must be followed closely by all investors. The BMY story is far from over. Currently the shorts are right. If they cover, BMY will become a long squeeze. If BMY rallies the shorts could be squeezed out in a short covering buying spree. The key is price action. Price action defines how we classify the relative correctness of short sellers.