2023-04-10 01:17:32 ET
Summary
- Zymeworks has an enterprise value approaching zero, as milestone drug development payments were paid to the company in 2022.
- A significant pipeline, with partners helping to finance drug trials, is worthy of consideration.
- Numerous short sellers may be trapped on overly aggressive downside bets. Short covering could spike the share quote later this year.
- My momentum quant-sort formulas are now suggesting ZYME is primed to rise in the coming months.
My last short squeeze idea, Zynex ( ZYXI ), almost doubled over the next three months, after I mentioned the positive technical setup in October here . Below is a chart of the situation, with the share price still outperforming the S&P 500 by +20% over six months, even after a sizable selloff of late.
StockCharts.com - Zymeworks, Author Reference Point, 12 Months of Daily Price & Volume Changes
Another name with a high short interest position, that may be trapped in a company with a bright growth future, is Zymeworks Inc. ( ZYME ). Zymeworks is a biotechnology business with a number of very promising drugs under development, many of them licensed to partners paying milestone fees and a percentage of future sales when commercialization approval is reached. The leading candidate, with estimates of sales by 2025 is Zanidatamab, a Bispecific Antibody for HER2 Expressing Cancers. The company just received a $375 million milestone payment from collaboration partner Jazz Pharmaceuticals ( JAZZ ), with total Zymeworks revenues of $1+ billion possible by the end of 2029 from this drug invention.
Business Summary
The best way to describe the operating business is to look directly at a PowerPoint presentation posted by the company earlier this year. I am not a medical expert, but I pulled some of the more interesting slides from my perspective as a financial writer. Management is top notch. Using a diverse set of partners to help fund R&D and eventually manufacture drugs is an interesting strategy to reduce risks and costs. A focus on hard-to-cure cancers should make approval easier in the end, if some efficacy is found without much downside for patient side effects. And, a number of potential drug-trial buy "catalyst" announcements for shareholders are on deck in 2023-24.
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Wells Fargo upgraded ZYME a few weeks ago with a price target of $12, based on the constructive pipeline, and now $492 million in cash on the balance sheet, measured against minor liabilities ($155 million in total at the end of December). The great news for investors is the equity market capitalization is only $601 million currently, meaning the adjusted "enterprise value" is sitting at a miniscule and hard to justify $109 million. The reason is research & development spending ($200 million annual pace in 2021-22) is expected to rapidly eat away the cash stash until 2025, assuming no new milestone payments are received on other drugs in the pipeline. I would note current Wall Street analyst estimates are calling for some milestone payments, with annual operating losses of $75 to $150 million between 2023-25.
Amazingly, enterprise value has declined to almost zero from $1.7 billion a little over two years ago, despite growing confidence about the drug pipeline. Why the disconnect? The excuse is large short sellers are betting against Zanidatamab approval, with the extra shares sold (borrowed from others without owning first) putting pressure on price.
YCharts - Zymeworks, Cash, Debt, Enterprise Value, 5 Years
The Short Position
Remember, 90% of U.S. stocks have short positions out of outstanding units issued under 5% and short ratios vs. average daily trading volume under 5x.
Below I have graphed both Zymeworks and Zynex shorting trends over the last year. First, you will notice the short position of 10.3% of outstanding shares was essentially built during 2022 for Zymeworks. The net position has also been in decline since July, about the same time as price bottomed around $5.
YCharts - Zymeworks vs. Zynex, Shares Short vs. Outstanding Issued, 1 Year Reported Monthly
Still, the number of theoretical days of trading to cover ratio around 10.1x (assuming the extra buying could be done easily) has not changed much from late summer. My read of this much higher than normal short position is buyers could really overwhelm sellers on good news from the company, just like what happened as Zynex reported better-than-expected operating results the last two quarters.
YCharts - Zymeworks vs. Zynex, Days to Cover Ratio, 1 Year Reported Monthly
Bullish Technical Trading Pattern
Mirroring Zynex, Zymeworks holds an equally attractive trading chart, with a number of momentum indicators pointing higher. If you go back to the top of this story and compare charts, you will see the foundational September to October 2022 pattern for Zynex looks remarkably similar to the current Zymeworks zigzags.
Included in the bullish setup are positive movements in the Accumulation/Distribution Line , Negative Volume Index , and On Balance Volume . Take together, having each move in the right direction adds to the odds of immediate-future price advance success.
For Zymeworks specifically, a super-strong ADL gain over the last nine months is particularly noteworthy, marked with a green arrow. This indicator looks at intraday buying pressure. The NVI has been more of a sporadic performer, but a nice move higher in late March is circled in red below. The latest pattern is remarkably similar to the September upmove, which pinpointed a major turn in price. This indicator reviews buying/selling on lower volume days, searching for buying on weakness. Lastly, OBV shows no slowing whatsoever in buying interest since the summertime, marked with a blue arrow. OBV is created as a function of price change multiplied by volume trading.
StockCharts.com - Zymeworks, Author Reference Points, 9 Months of Daily Price & Volume Changes
Final Thoughts
Why invest in "short squeeze" ideas? Basically, the supply/demand setup for share trading is stacked in your favor, assuming bullish company news flow is approaching. A whole different layer of presold shares must be bought back at some point to cover the short trade. When unexpectedly positive news hits, short sellers cover en masse, providing additional buying fuel on top of new buyers turning bullish and purchasing shares in the business. When such happens, oversized price gains can be achieved for intelligent traders/investors.
What are the downside risks? For Zymeworks there are many. Drug trial results may disappoint. There are no guarantees of future royalties on commercialization sales if no patents/approvals are granted. Even milestone payments from its partners could disappear on failed trials. The U.S. stock market could crash and hold the price down or move it even lower. Plus, any increased level of short selling could prevent a major up-move in price for a spell.
For me, the smartest risk-adjusted way to play both early-stage biotech concerns and short squeeze candidates is through small position sizing. That way you can hold 10, 20, or more ideas, without one blowing up in value becoming a big deal to your net worth. This design will help prevent major hurt to your brokerage account, as a few are destined to fall closer to zero in price. I wish I knew which ones exactly, so I would not write about or invest in them.
On the flip side, the percentage gain reward potential of a short squeeze investment is usually far greater than your typical equity name. They are kind of like lottery tickets, where you cannot win if you don't play. The biggest winning short squeeze was the GameStop ( GME ) moonshot in late 2020 and early 2021. Of course, the amount of theoretical buying fuel from short sellers is dramatically less for Zymeworks, but the buy cycle, swing higher idea is the same. GameStop's short interest was well above 100% of shares outstanding at the beginning of its record-breaking squeeze for reference.
The ultimate bullish scenario is drug trials go well; leading to terrific news flow; which causes short sellers to re-evaluate their bearish positioning; causing a stampede of covering; on top of new buyers chasing future drug sales revenue and income. The end result could be a double or more in price during 2023 from $9 currently.
A short squeeze is possible without any specific news event appearing into the summer, in my view. Short sellers simply changing their outlook on Zymeworks' business future could morph them important net buyers (covering shares), supporting a price advance. The next potential news event trigger may come on April 18th, when management is slated to present updated data on multiple products in development at the American Association for Cancer Research (AACR) annual meeting. Then, on May 3rd, Q1 earnings are expected to be posted, with new bullish commentary possible.
I rate shares a Buy and plan to purchase a position in the weeks ahead.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
For further details see:
Zymeworks: Exciting Short Squeeze Candidate With Large Cash Holdings