This week, Ligand Pharmaceuticals (NASDAQ:LGND) found itself at the center of unexpected attention. The second-most shorted company in the U.S. saw its shares rise from $120 to almost $200 as Reddit users sought the next GameStop (NYSE:GME) to squeeze.
Meanwhile, insiders have started to cash out. On Wednesday, CEO John Higgens allowed his 10b5-1 sales of employee stock options to move ahead, reversing the ESOP purchases he had made just weeks before.
As Ligand’s stock continues its relentless upward march, investors should pay close attention. The firm remains one of the few highly shorted companies still available on the popular trading app Robinhood. And with trading in GameStop now halted, Redditors could turn their attention to a new hedge-fund target, sending prices to $500 and beyond before they come back to earth.
LGND Stock: Don’t Get in the Way of an Angry Bull
Since falling from its $275 peak in 2018, Ligand Pharmaceuticals has been a favorite hedge fund punching bag. Andrew Left’s 2019 Citron Research paper drew parallels to Valeant Pharmaceuticals, another company run by former Wall Streeters. There are some similarities. Rather than invest in research and development, Ligand and Valeant rely on investment bankers to sniff out profitable M&A deals. Why take the development risks, the thought went, when you could choose promising Phase 1 drug candidates and buy them outright?
Mr. Left and other hedge funds weren’t impressed. Today, Ligand has a 62% short interest ratio. And if you remove non-floated shares, the figure rises to almost two-thirds; it would take fourteen days for short sellers to liquidate their positions.
And that’s caused quite a headache for short sellers in recent days.
Short Sellers Starting to Look Nervous
With the rise (and fall) of GameStop stock, short-sellers have suddenly realized the combined power of retail investors. And there are three reasons why Ligand short-sellers should panic. Firstly, unlike GameStop, Ligand’s biotech bets could potentially pay off. Many of Ligand’s biotech peers have bought what turned out to become $5+ billion drugs, and many of Ligand’s 55 pipeline drugs show similar potential.
Secondly, the company still sells for relatively cheap, even after its latest run-up. Though its recurring licensing revenues will decline from 2023 onwards, the company generated so much cash from its current lineup of drugs that its backward-looking PE ratio sits at just 5.0x. Its price-to-sales ratio of 22x remains only a hair above the 17x biotech sector median.
Finally, there’s the question of Reddit’s wrath. At $2.6 billion, Ligand stock is a minnow compared to the $33 billion that GameStop shares achieved. Even a small push from Redditors can cause short sellers to panic, sending shares from $200 to $600. An enormous 2018-styled short squeeze, meanwhile, could see Ligand hit the thousands.
Why Insiders Have Started Selling
Insiders haven’t always been so bearish on LGND stock. In November, director Patel Sunil bought 1,000 shares at $82. And insiders have also consistently used their employee stock options to load up on shares in the $80 to $90 range.
The stock’s recent rise changed all that. As stock options came due, executives allowed their 10b5-1 plans to exchange stock options for cash, selling shares anywhere from $159 to $182. The insiders have a good reason for taking profits. Not only are biotech executives generally rewarded by stock options. But the people who run Ligand are investment bankers. In other words, they know a good deal when they see one.
That leaves Redditors in an awkward position. Would they choose to support a company with investment banking management? Or would they say, “soak the rich” and bet against the hedge funds selling Ligand short?
What’s LGND Stock Worth?
Whatever the crowd decides, whether you invest in Ligand depends if you’re a long-term investor or a short-term speculator.
Reddit Fan: If you have a strong desire for short-term gains, then Ligand looks set to run even higher. The company is the most heavily shorted stock available for Robinhood investors to buy. And its options chain, a measure of bullish/bearish sentiment, points to more gains. As of writing, February calls are up almost 60% for the day. In addition, the company’s estimated fair value of $180 means there’s less risk of significant losses.
Long-Term Investor: If you’re interested in long-term potential, make sure you’re willing to stomach the short-term swings. And because Ligand’s pipeline remains in the “show me” stage, make sure you’re only investing a small portion of your portfolio in this hot stock. Though the company trades close to its fair value today, a series of disappointing Phase 3 trials will send its fair value back to $80 and below.
Buyer beware. At $180, Ligand still shows some splendid short-term potential. But even its management knows to tread lightly.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.