Short sellers have been getting a lot of attention over the past few days as they rushed to take positions in rapidly rising stocks such as GameStop (NYSE: GME). In this case, they lost their connection with the decline of the stock – and their money. But in some cases the short circuit is do fall. And short sellers come out on top. This happened last week with a strong flying coronavirus vaccine.
Wax species (NASDAQ: VXRT) sank 58% in one trading session after data from its Phase 1 clinical phase were disappointed. Short positions make up more than 39% of the biotech company’s float – or the shares available to the public for trading. Many short sellers probably closed their positions with a win. As long-term investors, we can ask ourselves whether short sellers are right about Vaxart – or was it just a one-time win?
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First, a quick revamp of short selling: investors are borrowing a stock to sell at the current market price. Eventually, they have to buy back shares to return to the lender. Their hope is that the share price will fall. That way, they earn a profit on the operation. If the stock starts to rise sooner, short sellers quickly buy back shares to stem losses. Because the more the stock climbs, the more money they lose.
Phase 1 test results
Now, back to Vaxart. The company calls the results of the Phase 1 trial ‘positive’ because the coronavirus vaccine candidate produced CD8 + T cell responses. Also known as “killer T cells”, they kill virus-infected cells. The T cells recognize the peak protein – the protein responsible for the infection of cells – as well as a viral protein involved in replication. That does sound encouraging.
But what disappoints investors is that the research vaccine did not stimulate the production of neutralizing antibodies. These antibodies are known to block infection. It is therefore seen as the key in the development of an effective coronavirus vaccine.
Today’s Commercialized Vaccines – Developed by Pfizer (NYSE: PFE) and Modern (NASDAQ: MRNA) – produces neutralizing antibodies. And so do vaccine candidates in Phase 3 development such as those by Novavax (NASDAQ: NVAX). It is therefore difficult to imagine that a vaccine candidate would succeed without this important element. Vaxart can still continue after a phase 2 study in people who have not had COVID-19.
The scenario looks pretty bleak, right? Well, maybe not quite. This is why: Vaxart can also study its research candidate as a stimulant in individuals who have already been exposed to COVID-19 or had a vaccination. The Vaxart candidate will be used to boost the immune response.
This could be of particular interest because Vaxart’s research vaccine is being delivered in pill form. This, coupled with the fact that the room temperature is stable, makes it easy and inexpensive to transport, store and apply. It can become an integral part of a vaccination program – especially in areas where it is not easy to transport and store vaccines that require low temperatures. And the T-cell responses, which target more than just the peak protein, mean it can be useful against new viral strains.
What does this mean for investors?
Short sellers were right – this time. But next time could be a different story. Although Vaxart remains risky, there could still be a win. Vaxart is not completely out of the game. A coronavirus pill booster can be an excellent product – and represents billions of dollars in revenue if used widely. Vaxart also has five other programs in the pipeline – and it could bear fruit in the future.
That said, the shares of this biotechnology company remain very risky. Will the coronavirus amplification idea work? Would regulators authorize its use with vaccines from another company? Or can the researching vaccine find its place in the market, even if neutralizing antibodies are not part of the picture?
We will need some clues to address these questions at least in part before we consider buying Vaxart shares. So let’s keep it on the watchlist and stay tuned for information on future trials.