On a sharply down day at the tail end of the week, Reata Pharmaceuticals (NASDAQ:RETA) provided a dramatic counterpoint. While the benchmark S&P 500 index slipped near 2% down, RETA stock gained over 16% after rising 15% earlier. The only question that market observers have is why?
Yesterday afternoon, Reata announced that U.S. Food and Drug Administration (FDA) delivered not-so-encouraging news. The regulatory agency does not plan to hold an advisory committee meeting in connection with Reata’s new drug application (NDA) for omaveloxolone. This therapeutic targets patients with Friedreich’s ataxia.
“Friedreich’s ataxia is a rare, genetic, debilitating, and degenerative neuromuscular disorder with no approved therapies, and we are committed to our goal of working to secure approval for omaveloxolone for patients living with this severe disease,” said Reata CEO Warren Huff.
The consequences of the disease can be devastating. According to the accompanying press release, patients often require a wheelchair in their twenties due to motor incapacitation. Further, they may “also experience visual impairment, hearing loss, diabetes, and cardiomyopathy. On average, patients with Friedreich’s ataxia die in the mid-thirties.”
Reata believes Friedreich’s ataxia impacts 5,000 children and adults in the U.S. and 22,000 individuals globally. Thus, the FDA’s denial to review omaveloxolone poses obstacles for both RETA stock and for patients of the disorder. Nevertheless, shares shot up while most other securities tumbled.
Possible Short-Squeeze Attempt at Play for RETA Stock
With the advent of meme trading, bad news sometimes translates to good news. Therefore, the suspicion for RETA stock centers on similar undercurrents. Below are the facts surrounding the strange price action.
First, RETA stock features a beta of 1.08, according to Yahoo Finance at the time of writing. Generally, a beta of 1 indicates that the underlying security moves with the market. Therefore, while RETA is more volatile than the benchmark index, it’s not dramatically so. As further confirmation, Reata does not currently rank among Fintel’s Short Squeeze Leaderboard.
However, as of data on Sept. 30, 2022, the short percentage of float for RETA stock stood at 25.3%. Analysts consider anything over 10% as a relatively high figure.
Interestingly, the put/call open interest ratio for RETA stock presently stands at 0.86. Mathematically, a 1:1 ratio indicates an even number of purchased puts and calls. However, because the U.S. market features an upward bias, the delineation point between bullish and bearish sentiment stands at 0.70. The figures above indicate bearish sentiment as more people are buying puts than calls.
Therefore, it’s possible that because RETA stock dipped into bearish territory recently, contrarian bulls decided to move in, setting off a panicked reaction. For the year, Reata shares now find themselves up nearly 7%. That’s quite an accomplishment considering the ugly market circumstances.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.