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Muddy Waters Shorts Prothena On Doubts Of Drug Candidate's Efficacy

Muddy Waters Shorts Prothena On Doubts Of Drug Candidate's Efficacy

Short-seller Muddy Waters Research has a new target for its cynical trade strategy.

The firm’s Carson Block announced a short position in Prothena Corporation PLC (NASDAQ: PRTA) Thursday on Bloomberg TV, prompting an immediate, 7-percent plunge. Prothena recovered nearly all of its losses but remained down about 3 percent on the day.

Muddy Waters justified its short by questioning the efficacy of the pharmaceutical’s NEOD001 candidate.

“We believe that perceived positive responses to the drug are quite possibly – if not likely – due to previous plasma cell directed (PCD) therapy, and also to the manner in which some early trial data has been presented,” the firm wrote in a follow-up note. “Further, NEOD001’s proposed mechanism of action is not proven.”

Even if it secures regulatory approval, the drug’s peak annual sales wouldn’t likely meet Street estimates above $1.5 billion, according to Muddy Waters, which considered the limitations of a small patient population and high expected costs.

Management’s attitude toward the candidate’s Phase 3 study and choice not to release interim data reinforce the thesis.

“A recent investor conversation with PRTA’s CFO led him to take a tone described as defensive when asked pointed questions about the trial data,” Muddy Waters reported. “These observations lead us to believe that management might share our concern about the efficacy of NEOD001.”

The financial strategies of Prothena’s staff also shook the short-seller’s confidence.

“We note that insiders hold virtually no shares, immediately sell substantially all stock received through option exercises, and that PRTA raised an additional $155.3 million gross in an equity offering in March 2017,” the note read.

Muddy Waters maintains short positions on a number of stocks and isn’t shy of publicizing its perspective, from its enduring bet against St. Jude Medical, which was acquired this year by Abbott Laboratories (NYSE: ABT), to its most recent short of Asanko Gold Inc (NYSE: AKG).

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