Soleno Therapeutics' stock fell over 30% despite beating sales estimates, partly because management publicly acknowledged a short-seller report on their earnings call. This tactical error gives credence to the short thesis and signals defensiveness to investors, often leading to a negative market reaction regardless of the launch's fundamental performance.
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Despite its theoretical role as a market check, short selling is often a tool to create chaos and innuendo for profit. Activist short-sellers release reports to move markets for their own gain, which rarely uncovers true malfeasance and is an extremely difficult way to consistently make money. It's more about creating narratives than finding fraud.
In an attempt to dispel rumors of "circular financing," NVIDIA's memo to analysts referenced Enron. The very act of invoking one of corporate history's most infamous scandals, even in denial, is a major communications misstep. It introduces a highly negative association into investors' minds that likely wasn't there before.
To manage investor expectations effectively, adopt a contrarian communication cadence. Only report good news (like a major deal) after it has officially closed, since many B2B deals fall through at the last minute. Conversely, report bad news as early as possible. This builds trust by preventing over-promising and demonstrating transparency when it matters most.
Early-stage biotech companies are vulnerable to short selling in public markets because their experiments run for 12-24 months, creating long periods without news flow. With no catalysts to drive buying ("no bid"), hedge funds can short the stocks until data is released, highlighting a structural disadvantage of being public too early.
When a client offers harsh, fundamental criticism during a pitch, the best response is not to defend the work but to acknowledge the miss. One CEO won a pitch by immediately conceding the point and offering to re-pitch, demonstrating humility and confidence.
Astute biotech leaders leverage the tension between public financing and strategic pharma partnerships. When public markets are down, pursue pharma deals as a better source of capital. Conversely, use the threat of a public offering to negotiate more favorable terms in pharma deals, treating them as interchangeable capital sources.
The fall of Valiant Pharmaceuticals illustrates that even sophisticated investors can be duped. A charismatic CEO's compelling story, combined with the powerful social proof of a rising stock price, creates a reinforcing narrative that can cause diligent investors to ignore clear warning signs.
In a capital-constrained market, positive clinical data can trigger a stock drop for biotechs with insufficient cash. The scientific success highlights an immediate need for a highly dilutive capital raise, which investors price in instantly. Having over two years of cash is now critical to realizing value.
Even with strong initial sales, Soleno's stock was punished due to a growing investor fear of the 'launch plateau.' Citing examples like Skyclaris, the market is now skeptical that a few good quarters can be sustained, discounting strong early performance and demanding proof of long-term growth trajectory before rewarding a stock.
Post-IPO, credibility is a biotech's most valuable asset. Leaders should "under-promise and over-perform" by avoiding specific quarterly guidance for clinical milestones. Instead, use broader windows like "first half of the year" to build in flexibility, as clinical trials rarely run on a perfect schedule.
