In this article, we explore whether the collective or consensus buying and selling by 78 of Wall Street's legendary or guru fund managers in the small-cap biotech space can clue us in to profitable opportunities.
The biotech group as represented by the NYSE ARCA Biotech Index ($BTK) has been strong recently, up 42% last year followed by another 9% rise YTD. Among the top gainers is Medicines Company (MDCO), a biopharmaceutical company that provides products for the advancement of treatment of critical care patients in hospitalized settings, that is up 64% since the end of 2011. Guru funds have collectively been accumulating MDCO since at least the past year-and-a-half, including 2.4 million net new shares added in Q3/2011, another 0.3 million shares added in Q4/2011 and almost one million net new shares added by guru funds in the latest available Q3/2012. Also, from our database of collective fund holdings, we know that the world's largest or mega funds added 1.3 million shares in Q3/2012. Furthermore, YTD, our summary of the latest available 5% ownership institutional SC 13D/G filings, summarized daily on our website and available free upon registration, indicates that the 245 leading funds in our database have collectively added another 0.9 million shares since the end of Q3/2012.
MDCO just last month announced positive phase 3 trial results of its blood-thinning drug cangrelor, being developed to prevent platelet activation and aggregation that leads to thrombosis (or blood clot formation) in the treatment of hospitalized heart patients undergoing percutaneous coronary interventions (PCI). The trial met both safety and efficacy endpoints, and showed a statistically significant improvement over an old competing drug Plavix, marketed by Bristol-Myers Squibb (BMY) and Sanofi (SNY), that has lost patent protection and is now available as a generic. Cangrelor is quick in action and instantly reversible, and with commercialization targeted for later this year in both the US and EU, it is expected to play a major role in treating PCI patients, especially those who need to discontinue oral P2Y12 inhibitors ahead of surgery. The drug had failed in prior tests in May 2009, when the shares dropped near all-time lows in the $6 range.
The positive recent development at MDCO comes just on the heels of another positive phase 3 trial development announced in mid-December of its antibiotic candidate, oritavancin, for the treatment of acute bacterial skin and skin structure infections (ABSSSI) caused by susceptible gram-positive bacteria. The company plans for regulatory filings for approval of Oritavancin in both the US and EU in 2013/14. The company currently has three commercialized products, with annual revenues in the $500+ million range, and it also recently acquired Incline Therapeutics in December, 2012, and is projecting $800 million in peak sales of the acquired drug Ionsys.
At just over $30, despite the recent surge, the stock still trades at an attractive 21 multiple compared to the 29 average for its peers in the mid-cap biotech group. Also, Wall Street analysts are bullish on the stock, with six of the eight analysts covering the company rating it at buy/strong buy and the remaining two at hold, with an average price target of $33. However, the stock may be running a bit ahead of itself given the strong recent surge, so we would wait to accumulate the stock on a retreat into the $25-$27 range, near the mid-point of its current trading channel.
Besides MDCO, guru fund managers also accumulated the following small-cap biotech stocks in Q3/2012 (see Table below):
- Santarus Inc. (SNTS), a development-stage biotech company focused on acquiring, developing and commercializing proprietary products addressing diabetes, high cholesterol, ulcerative colitis, travelers diarrhea and other diseases, that is up a whopping 300% since the end of 2011. It was accumulated by Guru funds also in the prior Q2/2012.
- Map Pharmaceuticals Inc. (MAPP), a developer of drugs to treat migraine, diabetes, asthma and chronic obstructive pulmonary disease, that was acquired just over a week ago by pharmaceutical drug developer Allergan (AGN) at a 60% premium, and was accumulated by both guru and mega funds in Q3/2012.
- Acadia Pharmaceuticals (ACAD), that develops small-molecule drugs for the treatment of neurological and central nervous system disorders, that is up over five-fold since the end of 2011, based primarily on a near three-fold surge following announcement of positive phase 3 trial results of primavanserin, announced in November, 2012, for the treatment of patients with Parkinson's disease psychosis. The stock was acquired by both Guru and Mega funds in Q3/2012, and by Guru funds in the prior Q2/2012.
- YM Biosciences Inc. (YMI), developer of products primarily for the treatment of cancer and cancer-related conditions, that was acquired in December, 2012, by Gilead Sciences (GILD), a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases, at a near-80% premium. The stock was acquired by both Guru and Mega funds in Q3/2012, and by Guru funds in the prior Q2/2012.
- Athersys Inc. (ATHX), that develops therapeutics to treat obesity, and metabolic and nervous system disorders, was accumulated by both Guru and Mega funds in Q3/2012 and in Q2/2012.
- Dendreon Corp. (DNDN), that develops targeted therapeutics to treat cancer using active immunotherapies, monoclonal antibodies and small molecules.
Guru funds collectively sold the following stocks in Q3/2012:
- Dynavax Technologies (DVAX), that is a clinical-stage biotech company that is engaged in the discovery and development of novel products to prevent and treat infectious and inflammatory diseases, was sold by both Guru and Mega funds in Q3/2012, well in advance of the over-50% gap-down in mid-November following confirmation of a negative decision by the FDA Advisory Committee meeting on the safety of its drug HEPLISAV.
- Amarin Corp. (AMRN), that is a clinical stage Ireland-based global pharmaceutical group, which develops novel drugs for the treatment of cardiovascular diseases using its proprietary advanced oral and trans-dermal drug delivery technologies, was sold by both Guru and Mega funds in Q3/2012, and is down 45% since mid-year 2012.
- Arena Pharmaceuticals (ARNA), that is a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory, and metabolic diseases.
There are over 80 upcoming biotech catalysts on small-cap companies in the next few months, including phase 3 Tavaborole data due from Anacor Pharmaceuticals (ANAC) this month, phase 3 tedizolid phosphate data due from Trius Therapeutics (TSRX) and phase 3 palifosfamide data due from Ziopharm Oncology (ZIOP) next month, phase 3 arbaclofen data due from Xenoport Inc (XNPT) in April, and the PDUFA date in April for Lymphoseek from Navidea Biopharmaceuticals (NAVB).These catalysts offer probably the best opportunities for out-sized gains for the not-so-risk-averse investor.
We believe that knowledge of how the best minds in the investment community, in the form of guru fund managers, are collectively positioning themselves in advance of these catalysts, can inform our investment decision-making, often clueing us in to a potential outcome, like in the examples cited above. Alternatively, one can conceive of going long and short large basket of these stocks with upcoming catalysts, based on the consensus buy & sell activity of guru funds. At our website, gurufundpicks.com, you can access this information not just for guru funds, but for mega funds and four other fund groups, including billionaires, new masters, sector-focused funds (including healthcare-focused funds as a group), and tiger funds. And you can do so for not just biotech stocks, but for all 5,200+ U.S. traded stocks categorized into over 200 industry groups. For your convenience, the site offers memberships as well as individual reports that can be purchased a la carte.
General Methodology and Background Information: The latest available institutional 13-F filings of 78 legendary or guru hedge fund and mutual fund managers, such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, analyzed to determine their capital allocation from among different industry groupings, and to determine their favorite picks and pans in each group. The hedge fund and mutual fund managers included in this select group include only high profile names who by virtue of their long-term market-beating returns have earned their standing in the investment community and are worthy of our attention. They include well-known names such as those mentioned above, as well as perhaps relatively lesser-known names that also have a stellar long-term history of beating the markets, such as Seth Klarman, John Griffin, Prem Watsa, Robert Karr and Lee Ainslie. Each guru has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 78 guru funds that justify their inclusion in this elite group were detailed in our previous articles that can be accessed from our author page
These legendary or guru fund managers number about 0.5% of all investment fund managers and yet they control almost seven percent of the U.S. equity discretionary fund assets. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the guru funds best picks.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Additional disclosure: The article has been written by the Hedge and Mutual Fund Analyst at GuruFundPicks.com. GuruFundPicks.com is not receiving compensation for it (other than from Seeking Alpha). GuruFundPicks.com has no business relationship with any company whose stock is mentioned in this article.