Shares in Bavarian Nordic dip after short seller posts broadside against its cancer vaccine

The knives are out for Bavarian Nordic (CPH:BAVA). Hedge fund Kerrisdale Capital has orchestrated an attack on the company, the centerpiece of which is a 52-page report that argues the valuation of the Danish drugmaker is based on misplaced faith in the likelihood of its cancer vaccine succeeding in Phase III.

Bavarian Nordic CEO Paul Chaplin

Kvistgaard, Denmark-based Bavarian Nordic has seen its share price soar by more than 150% over the past year as deals with Johnson & Johnson ($JNJ) and Bristol-Myers Squibb ($BMS) have inflated investors' opinion of the stock. The big jump came in March when Bristol-Myers struck a deal worth nearly $1 billion (€810 million)--$60 million was handed over upfront--to get a piece of Prostvac, a therapeutic prostate cancer vaccine in development at Bavarian Nordic. While Bristol-Myers, Bavarian Nordic and their investors have high hopes for Prostvac, Kerrisdale thinks it is destined to fail.

Kerrisdale is backing up its belief by betting against Bavarian Nordic. The New York, NY-based hedge fund established a short position on 2.7% of the drugmaker's shares last month, positioning itself to profit if the stock price sinks. A Phase III flop would likely cause such a cratering, but Kerrisdale is trying to help the process along, too. In the two days after Kerrisdale released the report, Bavarian Nordic's share price slipped by almost 7%. And Danish newspaper Borsen reported that the hedge fund is lobbying fund managers at Danske Capital and Fundamental Invest to offload their shares.

The fund managers are reportedly standing by Bavarian Nordic, while the company itself has laid out what it sees as flaws in the hedge fund's thinking. Kerrisdale's belief that Prostvac will flop is based on its interpretation of data generated to date, which it thinks appear artificially impressive because of differences in the prestudy health of patients in the treatment and placebo arms. The hedge fund also looked at data from a trial combining Bavarian Nordic's cancer vaccine with Bristol-Myers' Yervoy, after which it concluded "Prostvac itself accomplishes nothing."

Bavarian Nordic CEO Paul Chaplin defended the company against the criticisms in an interview with Bloomberg, in which he argued that the placebo arm of the mid-phase trial was a fair reflection of the patient population at the time of the study. With data from the Phase III trial of Prostvac not due until late next year at the earliest, Kerrisdale potentially faces a long wait to see whether its hefty bet against Bavarian Nordic will pay off. In the meantime, the hedge fund is doing what it can to convince investors Bavarian Nordic will be one of the losers of the immuno-oncology boom.

"We really want to distinguish in people's minds the kinds of things Kite ($KITE) and Juno ($JUNO) are trying to do from what Bavarian's doing," Kerrisdale analyst Shane Wilson told Bloomberg.

- read the release
- check out the report (PDF)
- here's Bloomberg's article

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