Sahm Adrangi's Kerrisdale Capital has singled out Sage Therapeutics ($SAGE) as its next center-ring biotech short seller play, laying out a detailed argument aimed at stoking doubt in the biotech's rare disease drug while trying to slash the company's stock price.
The Wall Street hedge fund issued a 28-page report this morning that asserts the biotech's SAGE-547--designed to treat rare cases of protracted seizures called super-refractory status epilepticus--is essentially doomed, likely poised to fail the ongoing Phase III study or come up far short on a market that's much smaller than the developer has asserted.
Kerrisdale is betting that Sage, with a bearish stock price far below its bullish 12-month high, still has a long way to drop. And Sage's shares started the day with a 15% dive.
Adrangi's team zeroed in on a biotech that went from a small Phase I/II study into a pivotal Phase III, creating an upcoming catalyst that could make or break the company in the current bear market. In many ways, it's a case study in high-wire drug development common in biotech circles. And short sellers like Kerrisdale have been flocking to the sector in search of big payoffs, a harsh reality for more and more of the biotech newcomers on the public markets.
Kerrisdale's report picked apart data from a single-arm study with no comparison group of patients, which they believe set the stage for the biotech to claim a big win without actually putting the therapy to the test. And they add that there are existing therapies that go after the exact same target with similar outcomes.
"(O)ur review of the literature shows that the chances that patients recover from even very severe bouts of status epilepticus are actually quite good; one large, ongoing study found that 74% of patients recovered," says the report. "In light of these results, SAGE-547 appears to contribute very little to standard treatments, paving the way for a Phase 3 failure. The firm may be Sage, but its big bet on an unexceptional drug will likely prove unwise."
SAGE-547 is nothing but a Band-Aid, Kerrisdale asserts, "another way to temporarily suppress brain activity and give patients a chance to heal. It can't rewire axons. But why would a new, slightly different Band-Aid help patients who already had access to many others--and why would it fetch a high price, as Sage bulls expect?"
Even if it does get a green light at the FDA, Kerrisdale continues, "a thorough analysis of the scientific literature suggests that Sage's estimates of the size of the SRSE market are inflated by a factor of 6; thus, even if SAGE-547 does manage to produce passable data, its commercial prospects are far murkier than the market appreciates. As a result, Sage is worth little more than its cash balance, [[75%]] below the current stock price."
A spokesperson for Sage responded to a query from FierceBiotech later in the day, saying that the report is riddled with "incorrect factual characterizations, misleading inferences and selective data interpretations." Kerrisdale also doesn't understand the drug's mode of action, "clinical outcomes and the seriousness and unmet need in the treatment of SRSE."
Added Sage: "We are very pleased with our progress to date and look forward to sharing top-line data in 2H this year from the SAGE-547 SRSE Phase 3, placebo controlled trial, being conducted under a Special Protocol Assessment."
Love shorts or hate them, and the sentiment among biotech execs tilts hard to the hate side, Kerrisdale's latest assault spotlights several common vulnerabilities among new-wave biotechs that the industry would be well advised to pay careful attention to, if they want to avoid or at least prep for a similar Wall Street showdown.
Sage is a graduate of the Third Rock portfolio of startups, which zoomed into the public market during the latest 3-year bull run for biotech IPOs. That profile is similar to Zafgen's, which IPO'd in 2014 and attracted Kerrisdale's attention after back-to-back deaths in its pivotal study placed its lead drug under a cloud and on a clinical hold at the FDA. The hedge fund also recently challenged Zafgen's comeback plan, saying the drug was too dangerous to be approved and wasn't all that efficacious in any case.
Sage shares started out this morning at $33.40, down about 60% from its 12-month high last summer, a common sight after the savage correction in biotech stocks in recent months. As for Zafgen, shares are just a fraction of what they were last year, and still down about $6 from the day before Kerrisdale's attack.
Adrangi and Kerrisdale, which outperformed most hedge funds during a rocky 2015, clearly believe there's plenty more money to be made betting against biotechs with sizeable valuations built on single assets.
- here's the report