Short Sellers Go for ICN Pharmaceuticals

Is ICN Pharmaceuticals Inc. overpriced on the stock market?

Plenty of investors must think so.

That’s because the short interest in the controversial Costa Mesa drug maker’s stock has increased more than 10-fold over the last six months to more than 2.5 million shares in January, according to the New York Stock Exchange. The increase is an even more staggering 3,333% when contrasted with the 73,700 shares that had been shorted a year ago.

Short interest refers to the number of shares of a particular stock sold by market players who expect it to drop in price. These speculators, called “short sellers,” essentially sell stock borrowed from shareholders in hopes of buying it back later at a lower price.

In contrast to the steep increase in ICN’s short interest, the total short interest in all NYSE-listed stocks only rose 53.5% between January, 1986, and Jan. 15, 1987. According to exchange officials, 409.3 million shares of Big Board-listed companies have been sold short, contrasted with 266.6 million shares a year ago.

The steady increase in ICN’s short interest underscores the speculative interest that has driven the stock since early 1986. Over the last year, ICN’s price has ranged from $10.25 a share to $34, largely because many people believe its drug Virazole is a treatment for AIDS. ICN closed Friday at $23.25 a share.

Seller Can Lose

Sometimes shorting a speculative stock like ICN works. But, when a stock doesn’t drop as expected, a short seller can get wiped out. That’s because if the stock goes up in price, the short seller must eventually repurchase and return the stock at the higher price.

The amount of stock in ICN that has been sold short equals nearly 15% of the company’s total outstanding shares.

With that amount of money at stake, some people--including Milan Panic, ICN’s chairman--believe that some aggressive short sellers may sometimes try to undermine ICN’s share price.

“I think that’s obvious from the numbers,” said Eugene Melnitchenko, a drug analyst for the Dallas investment firm of Rauscher Pierce Refesnes Inc.

Melnitchenko, who has followed ICN for more than 15 years and is consistently bullish on the stock, says he frequently receives phone calls from brokers and speculators with rumors and other bits of information that could potentially drive ICN’s stock price down.

“I’m constantly being called by people who claim that clinicians have told them that the drug was not effective with pre-AIDS patients and, therefore, ICN doesn’t have a good drug,” he said. “The short sellers are trying to make sure that their position is vindicated.”

Can Push Price Up

However, one Wall Street analyst noted that when short interest gets too high, it can actually drive a stock higher because of the buying volume that results when shorted shares are eventually purchased.

The analyst, who asked not to be identified, downplayed the role short sellers may play in the movement of ICN shares. The volatility, the analyst said, is due primarily to the heavy speculation that Virazole is an AIDS miracle drug.

Mike Murphy, editor of the Overpriced Stock Service, a San Francisco stock letter, agrees that aggressive short sellers do their best to spread bad news and innuendo. But, he said, players who are bullish on ICN are equally aggressive.

“There is a good, solid network of shorts, and there is a good solid network of longs,” said Murphy, who recommends that investors short shares of ICN’s Viratek Inc. subsidiary while buying ICN as a hedge. That way, he says, if the stocks go up, losses on Viratek will be offset by profits on ICN.

Although it is impossible to know for certain who is shorting a stock, Murphy believes that hedge funds and members of the investment community itself account for the bulk of ICN’s short interest. Most ICN traders these days--including those who are short and those who are long--appear to be professionals, he said.

And because of the pressures the two camps exert on ICN stock, the issue will drop sharply one day and rebound the next. In that struggle, Murphy said, the bulls have a distinct advantage.

“The company puts out a press release and gooses the stock,” he said. “The shorts can’t do that.”