Sage Plunges as Short-Seller Warns About Lead Drug's Future

  • Biotech company's shares decline as much as 21%, most ever
  • Sage says Kerrisdale report is `inaccurate,' `misleading'

Sage Therapeutics Inc. dropped as much as 21 percent on Wednesday after short seller Kerrisdale Capital Management LLC issued a report saying the biotechnology company’s leading drug candidate is likely to underperform in an upcoming final-stage trial.

The shares were down 15 percent to $28.30 at 3:04 p.m. in New York, after earlier dropping the most since the stock began trading in 2014. Short sellers like Kerrisdale seek to profit by betting a stock will decline, and sometimes publish research taking their case to the public.

Maureen Suda, a spokeswoman for Sage, said in an e-mail that the company disagrees with the Kerrisdale report, saying it includes “incorrect factual characterizations, misleading inferences and selective data interpretations.” She said the company “looks forward to sharing top-line data” from a late-stage, placebo-controlled trial in the second half of the year.

Kerrisdale declined to disclose the size of its short position but confirmed it had one.

The Cambridge, Massachusetts-based biotechnology company is positioning the drug, SAGE-547, to treat patients with super-refractory status epilepticus, a form of epilepsy in which people haven’t been able to stop seizures after multiple therapies. Kerrisdale said that the drug doesn’t use particularly novel approaches to the disease and that results from an early trial without a placebo-controlled group wasn’t enough to give confidence that the drug could show impressive results in the final-stage trial.

Temporary Effect

The drug is “is little more than a Band-Aid, achieving, at best, a temporary reduction in brain activity -- very similar to many other treatments that doctors already use,” New York-based Kerrisdale said in the report. “We believe that, in Phase 3, SAGE-547 will fail to outperform placebo to a statistically significant degree, throwing Sage’s future into question.”

Ritu Baral, an analyst at Cowen & Co., said Sage was her best pick for 2016 and Kerrisdale’s report didn’t dissuade her. Analyzing the effects of a drug on a disease in patients who have failed multiple treatments requires careful comparison, which she said she found lacking in the report. Kerrisdale said the response rate that Sage had seen in its early-stage study of SAGE-547 wasn’t entirely surprising without a placebo-control arm.

“You can’t compare response rates across refractory populations -- it’s not comparing apples to apples,” Baral said by phone, referring to patients whose conditions failed to improve after taking different treatments. “I thought it was a great value at yesterday’s close. I think it’s an even better value right now.”

Response Rate

In an early-stage trial last year, patients on the experimental drug had a 77 percent response rate, the company said at the time. Kerrisdale said in its report Wednesday that the early trial, with 22 evaluable patients, wasn’t strong enough to suggest the drug would succeed in a final-stage trial.

Kerrisdale also said it expects the ultimate size of the patient population with super-refractory status epilepticus to be significantly smaller than the 25,000 patients in the U.S. that Sage has cited in press releases. The fund estimates there are 4,000 such cases in the U.S. each year.

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