Record one-day gain for Novavax Inc. forcing some short sellers betting against the stock to close out their positions at a loss.
Shares of the vaccine maker soared 99% on Friday after the company signed $1.2 billion licensing agreement with Sanofi that includes the commercialization of a combination Covid-19 and flu shot. The move will strengthen the stock, which was down about 99% from its 2021 peak before the deal amid falling demand for its Covid vaccine.
However, Friday’s surge resulted in paper losses of about $255 million for short sellers, according to S3 Partners LLC. Biotech stocks represent an overloaded position for short sellers, with fewer than 1 million shares available to borrow to support new sales, according to S3.
The rapid rise in Novavax shares exposes traders to the risk of being squeezed, a phenomenon in which short sellers are forced to buy back shares to offload their losing positions. Covering short positions causes the company’s stock price to rise, putting additional pressure on opposing traders.
“We expect a sharp short squeeze in Novavax, with short sellers taking huge losses in the open market and exiting positions throughout the day,” said Igor Dusanivsky, managing director of predictive analytics at S3.
Novavax is among the largest shorted stocks in the US, with more than $50 million short.
“Many short sellers may hold out for a while and look for better exit prices over the next few days,” Dusaniwski added.
For its part, Novavax will receive $500 million in upfront payments, plus up to $700 million if the development, regulatory and launch milestones under its licensing agreement with Sanofi are met. The new cash injection prompted an upgrade from JPMorgan’s Eric Joseph, who sees the deal as “transformative for Novavax’s overall business.”
Joseph, who moved to a neutral rating due to underweight, expects many of Novavax’s commercial growth pains carried over into 2023 and 2024 to be much less significant as Sanofi pursues commercialization from 2025.
However, Wall Street analysts remain divided on the stock, with three ratings recommending a buy, three recommending a hold and none recommending investors sell, according to data compiled by Bloomberg. The $17 average price target implies ~91% upside potential over the next 12 months from the current stock price.