How Sky-High Short Interest Could Impact These Biotechs

Biotechs have been garnering attention of late, with a number of drugmakers taking it on the chin -- and, as a result, weighing on the Nasdaq. While the sector is on the mend today amid a broad-market surge, Schaeffer's Quantitative Analyst Chris Prybal recently noticed that short interest on a handful of biotechs was at levels not seen in years, among stocks trading above $5. Three names he flagged -- and which will become the focus of our discussion -- are Heron Therapeutics Inc (NASDAQ:HRTX), The Medicines Company (NASDAQ:MDCO), and BioDelivery Sciences International, Inc. (NASDAQ:BDSI).

Over 5 million HRTX shares are sold short right now -- an amount that hasn't been exceeded in at least a decade. During the latest reporting period, short interest popped almost 12%, and now accounts for 14.2% of the equity's float -- representing roughly four days of pent-up buying power, at average volumes.

This, despite HRTX's phenomenal track record on the charts. Today, the stock has surged 4.5% to hover near $22.30, bringing its year-to-date advance near 122%. Of course, not everything's been sunshine and lollipops for the equity, which pulled back sharply after hitting a five-year high of $42.25 one week ago on positive drug data. However, if HRTX can regain its longer-term footing going forward, a capitulation among shorts could result in tailwinds.

Moving along, 23.2% of MDCO's float is sold short -- the highest amount in at least a decade. At the stock's average trading rate, it would take over six sessions to cover these positions -- suggesting there's plenty of cash on the sidelines.

That pent-up buying demand could soon be unleashed, assuming MDCO continues to run higher. The shares have tacked on roughly 37% in 2015 to trade at $37.81, and earlier this month topped out at a record $43.79. They've since pulled back to their 40-day moving average, and a bounce from this trendline could force short sellers to throw in the towel.

Finally, BDSI short interest is at decade-high levels. By the numbers, 12.8 million shares are sold short -- or 27.4% of the stock's total float. At the equity's typical trading pace, it would take more than two weeks to buy back these shorted shares.

Unlike the other equities we've mentioned, though, this bearish attention is warranted. BDSI has lost over half its value in 2015 to trade at $5.61. Continued short selling -- or a capitulation among analysts, all of whom consider the shares a "strong buy" -- could send the stock even lower.