A reminder of why biotech investing is difficult

Going into yesterday, the biotech company Allakos had a short interest of about 37%, which means 37% of its outstanding shares had been borrowed and sold short by people betting the company’s stock would fall. For reference, the average short interest among S&P 500 companies is generally around 2%.

The skepticism stemmed from AK002, Allakos’s in-development treatment for a rare stomach disease. An earlier drug, focused on the same biological target, failed in a small trial. Furthermore, AK002 is meant to reduce certain white blood cells, but prior studies with other treatments found no relationship between doing so and improving symptoms. This, to a great many people, was reason enough to bet AK002 would fail in a mid-stage trial.

And then it didn’t. The drug met all of its efficacy endpoints in a 65-patient trial, Allakos said yesterday, including the key metric of patient-reported symptoms. Allakos’s stock price more than doubled on the news, which was an unpleasant development for those who’d shorted the stock.