The SPDR S&P Biotech ETF (XBI) is up about 32% in the past twelve months, in new high territory, while the broader market is up about 18% during the same period. Within that group, many small-cap biotech stocks (those with market-caps of less than $2 billion) are up even more sharply. These small-cap biotech companies are generally considered very speculative and a risky investment, in contrast to large-cap and some mid-cap biotech companies that have well established commercialized product portfolios that generate revenues, and maybe even profitability. We believe it is significant when the world's largest or mega money managers invest even a small portion of their portfolio in these small-cap biotech companies, thereby giving their seal of approval in what is otherwise considered a very risky investment.
These mega fund managers, such as Fidelity Investments, Goldman Sachs (GS), BlackRock Inc., Vanguard Group, and 23 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the institutional assets invested in the U.S. equity markets, and have over $30 Trillion assets under management.
Together, these mega fund managers are bullish on the biotech group, adding a net $1.43 billion in the latest available quarter (Q4/2012) to their $249.82 billion prior quarter position in the group. Furthermore, overall they are over-weight in the group by a factor of 1.9; that is, taken together, mega funds have invested 3.8% of their assets in the biotech group compared to the 2.0% weighting of the group in the overall market (for more general information on these mega funds, please look at the end of the article).
In this article, via an analysis based on the latest available Q4/2012 institutional 13-F filings, we identify mega fund activity in ten leading small-cap biotech stocks. The larger list of mega fund picks among all 310 biotech and other pharmaceutical companies can be accessed on our website. We believe that the astute investor can leverage this consensus picks' data, available only on GuruFundPicks.com, and combine it with their own unique research and insights to beat the markets just like leading fund managers have over the long-term.
Infinity Pharmaceuticals (INFI), an innovative cancer drug discovery and development company, is the top pick by mega funds among small-cap biotech companies. In the latest available Q4/2012, mega funds added a net 6.81 million net new shares to their 10.53 million share prior quarter position in the company. At the end of Q4, mega funds held $651.1 million or about a third of the outstanding shares, and the stock had an outstanding 5.0 MegaRank® rating. Besides, INFI also figured as a top guru fund pick, getting a GuruRank® of 5.0, in our earlier preview this weekend on guru fund picks in the small-cap biotech group. Furthermore, per the latest 13D/G 5% ownership filings, compiled on our website, guru fund managers have added another 2.41 million shares since the end of Q4.
Both GuruRank® and MegaRank® are based on a proprietary and relative ranking system that numerically represents on a scale of 1 to 5 the attractiveness of the stock to guru and mega fund managers respectively, based on their holdings, change in holdings, percent of outstanding shares and number of guru or mega funds in the stock, as compared to the rest of the 5,200+ stocks in our database on our website, GuruFundPicks.com.
INFI has been among the most stellar performers in the biotech group rising more than eight-fold in the prior fourteen months before topping in early-April when the company announced a non-dilutive public offering of 8.5 million shares by existing shareholders. The outperformance is driven mostly by the promising pre-clinical and early stage clinical data of its phosphoinositide-3-kinase (PI3k) inhibitor IPI-145 in blood cancers and other indications. The company reported phase 1 data in patients with advanced hematological malignancies at the American Society for Hematology (ASH) meeting in December, with preliminary data showing that the drug was well tolerated to-date and was clinically active in patients with both B-cell and T-cell malignancies. Also, the company is conducting a Phase IIa trial of IPI-145 in patients with mild, allergic asthma, and is planning a Phase II trial in patients with moderate to severe rheumatoid arthritis this year.
Although the stock is up strongly, there is the potential for more gains in the future based on the potential of its lead drug IPI-145. It is generally believed that IPI-145 holds the promise to delivering a multi-billion dollar blockbuster drug, while at the same there is less risk in the drug as it is similar to two other drugs that the Street is bullish on, Pharmacyclics' (PCYC) bruton's tyrosine kinase (BTK) inhibitor ibrutinib and Gilead's (GILD) PI3k inhibitor GS-1101. PCYC currently trades at a $5.5 billion market-cap compared to the $1.8 billion market-cap for INFI. Of the eight Wall St. analysts that cover the company, six rate it at buy/strong buy and the remaining two at hold, with a median price target of $50, well above current prices in the $37 range. The stock is strong, and while it can go higher, there is a risk of it correcting in the short- to intermediate-term given recent gains, so we would scale into the stock in increments, starting small and adding more if it drops lower towards its 200-day moving average in $30 range.
Besides INFI, mega fund managers also accumulated the following small-cap biotech stocks in Q4/2012 (see Table below):
- Sarepta Therapeutics (SRPT), that develops RNA-based therapeutics for the treatment of genetic, infectious and other diseases, in which mega funds together added a net 2.62 million shares in Q4 to their 2.89 million share prior quarter position in the company. In our review earlier of guru fund picks in small-cap biotech stocks, SRPT was also a top buy among guru funds in Q4.
- Mannkind Corp. (MNKD), a developer of treatments for cancer, diabetes, inflammatory and autoimmune diseases, with its lead product candidates the AFREZZA dry powder insulin formulation and its proprietary light, discrete and easy-to-use AFREZZA inhaler through which the powder is inhaled deep into the lungs, in which mega funds together added a net 4.51 million shares in Q4 to their 23.46 million share prior quarter position in the company. MNKD was also a top buy among guru funds in Q4.
- Galena Biopharma Inc. (GALE), that is a biotech company engaged in the development of innovative targeted, oncology treatments, in which mega funds together added a net 0.85 million shares in Q4 to their 3.31 million share prior quarter position in the company.
Mega funds collectively sold the following stocks in Q4/2012:
- Dendreon Corp. (DNDN), that develops targeted therapeutics to treat cancer using active immunotherapies, monoclonal antibodies and small molecules, in which mega funds together cut a net 3.47 million shares in Q4 from their 42.91 million share prior quarter position in the company.
- AVEO Pharmaceuticals Inc. (AVEO), a clinical-stage oncology-focused biotech company, in which mega funds cut a net 1.23 million shares in Q4 from their 22.59 million share prior quarter position in the company. Based on a review of the real-time 13D/G filings on our website, GuruFundPicks.com, we see that an additional 2.65 net shares were sold by mega funds subsequent to the end of Q4.
Mega fund activity in some other leading small-cap biotech companies include:
- Questcor Pharmaceuticals (QCOR), an integrated specialty pharmaceutical company focused on the development, acquisition and marketing of innovative, acute care and critical care hospital and specialty pharmaceutical products, in which mega funds hold 27.45 million shares or $932 million worth of stock, adding 0.43 million net shares in Q4.
- Arena Pharmaceuticals (ARNA), that is a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory, and metabolic diseases, in which mega funds together hold 68.65 million shares or $515.6 million worth of stock, adding a small 31,845 share position in Q4.
- Vivus Inc. (VVUS), that develops innovative therapies to treat obesity, diabetes, and sexual health, in which mega funds hold 22.58 million shares or $280.0 million worth of stock, cutting a small 0.30 million net shares in Q4.
- 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, in which mega funds hold 29.68 million shares or $209.2 million worth of stock, cutting 0.34 million net shares in Q4.
There are hundreds of upcoming catalysts on small-cap biotech companies in the next few months, including PDUFA dates, and pivotal clinical and mid- and early-stage clinical trial results, that could have a significant effect on the prices of the underlying stocks. 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, and the largest or mega 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 in our recent article on Q4/2012 small-cap biotech picks by guru funds. Additional examples of how leading fund managers have successfully predicted stock moves for many popular stocks, across all industries, including in the case of Apple Inc. (AAPL), are outlined on GuruFundPicks.com. There, you can access this information not just for guru and mega funds, but also four other fund groups, including billionaires, new masters, sector-focused funds (including 22 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 the largest 27 mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets, and have over $30 Trillion in assets under management. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors 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.
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.