Moonlake Immunotherapeutics (NASDAQ: MLTX) stock jumped 77% yesterday on the back of good news about one of the company's drug candidates. Which is nice, obviously, but this price move was clearly emphasized, exaggerated, by the short position in MLTX stock. There will have been some dash to cover and this will have pushed the price up in itself - in fact, we can see the time span when it did so on the daily trading chart. What happens next is a little more hazy - maybe the shorts will turn out to be right in the long run.
Moonlake does clinical-stage biopharma work. Exactly where matters tend to be all or bust. Either a drug - or treatment - candidate passes the next set of tests, Phase II and so on, or it doesn't. Passing one set of such tests doesn't mean instant glory and fortunes, it just allows progression to the next set of tests on the long road to FDA approval and being able to go to market. But failure means that's that, the end of the road. There can be - will be in fact - wild swings in value as drug candidates do, or do not, pass these testing stages.
So, the news from the company: “Drug developer MoonLake Immunotherapeutics (NASDAQ:MLTX) climbed ~128% pre-market Monday after announcing that a Phase 2 trial for sonelokimab targeted at skin disorder hidradenitis suppurativa reached its main goal.”
Moonlake Immunotherapeutics stock price from NASDAQ
Well, that's good and so on. But it's a heck of a reaction to fairly minor news in a company worth $1 billion at the start. It's really not worth the $2 billion in additional value that that peak $60 stock price would indicate. So, why such a big reaction to this news? Sure, if Moonlake were some microcap that achieved that Phase II result then great, but not a company this large.
The answer is that there's a big short position in Moonlake stock. All such things depend upon what we use as the measurement but some reports put the shorts as 75% of the free float, or perhaps more usefully, 10% or so of total issuance. That's an awful lot of people betting on drugs not passing testing phases, an awful lot of people who will have had to scramble to close their short positions - ie, buy in the market - on the release of this news. Thus the rocket under that MLTX stock price.
What happens next is uncertain of course. It's possible that the short positions will redouble from this new and higher price - or that the position being bet upon has now been determined to be wrong, so that's that.
