NJ-based small-cap biotech Aegerion Pharmaceuticals (AEGR), focused on the treatment of debilitating, often fatal and rare, diseases, has been on a tear lately, rising five-fold in the last eight months. The rally is based on trial results, FDA review and generally improving potential of its primary asset, Juxtapid, a lomitapide inhibitor for adult Homozygous Familial Hypercholesterolemia (HoFH), a rare, life-threatening genetic disease that affects about 3,000 in the U.S. and about 5,000 globally. The initial surge in October came after a positive FDA Advisory Committee meeting review of Juxtapid, followed by another surge in December after the FDA approval of Juxtapid. The rise early this year was probably unexpected as many biotech stocks are known to fall in the months following the initial surge after FDA approval. In the case of AEGR, analysts continued to guide higher, based on a stronger launch than expected, improved annual pricing per patient, and an increase in the estimate of the number of peak patients on the drug globally.
While the recent surge from the $40's to mid-$70's in the last two weeks looks like a blow-off rally, calling for at least an intermediate-term consolidation, investors who follow the buying and selling activities of leading fund managers could have bought into this position much sooner, when the stock traded in the mid-teens. Specifically, 27 of the world's largest or mega fund managers that together have well over $30 trillion in assets under management, have been loading up on AEGR every quarter for the last year. In the latest available Q1/2013 mega fund managers added a net 2.18 million shares to their 12.70 million share prior quarter position in the company, now controlling over half of the outstanding shares, a rarity in the small-cap space, as institutional managers are generally severely under-weight in the small-cap space. Prior to Q1/2013, mega fund managers added 1.46 million net shares in Q4/2012, 3.71 million shares in Q3/2012, 2.13 million shares in Q2/2012, and 0.70 million shares in Q1/2012. Thus, effectively, they increased their position in the stock by 176% in the last five quarters. Furthermore, in the latest Q1/2013, 23 biotech/healthcare sector-focused funds added 0.53 million shares to their 3.81 million share prior quarter position in the company.
The company had a 4.7 MegaRank® and an overall GFPRank® of 4.2 in the latest Q1/2013, and it has ranked above a 4.5 MegaRank® for each of the last four quarters. MegaRank® and GFPRank® are based on our proprietary and relative ranking system that numerically represents on a scale of 1 to 5 the attractiveness of the stock to 27 mega fund managers and all 300 leading fund managers in our database respectively, based on their holdings, change in holdings, percent of outstanding shares and number of mega or all leading funds in the stock, as compared with the rest of the 5,200+ stocks in our database on our website, GuruFundPicks.com.
We believe that AEGR shares have long-term upside potential based on the value of its key asset, Juxtapid, but that shares may be a bit ahead of themselves, based on what looks like a blow-off rally in the last two weeks. Juxtapid has billion dollar blockbuster potential based on its global market size of 5,000, annual treatment cost approaching $300,000, and improved efficacy relative to its rival Kynamro, Sanofi's (SNY) drug with Isis Pharmaceuticals (ISIS) that also targets HoFH. Furthermore, Juxtapid is delivered orally while Kynamro is injected, and Kynamro has had problems related to a high discontinuation rate among patients due to adverse side effects. We believe that AEGR shares will most likely consolidate in the coming weeks, and we would look to accumulate shares starting below $55, adding more on the way down as it drops towards its 50-day moving average in the mid-to-high-$40's.
Overall, the 27 mega fund managers included in our database are bullish on small-cap biotech companies, adding $1.14 billion in Q1/2013 to their $19.61 billion prior quarter holdings in the group. Also, together mega fund managers hold 35.2% of the outstanding shares in the small-cap biotech group, significantly higher than their 21.8% weighting in the overall market. This over-weighting in the group is very bullish, as typically institutional managers are over-weighted in large- and mega-cap stocks, and severely underweighted in small-cap and micro-cap equities.
Besides AEGR, mega fund managers also accumulated the following small-cap biotech stocks in Q1/2013 (see table below):
- Arena Pharmaceuticals (ARNA) is a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory, and metabolic diseases, in which mega funds added a net 6.61 million shares in Q1/2013 to their 68.65 million share prior quarter position in the company.
- Mannkind Corp. (MNKD), a developer of treatments for cancer, diabetes, inflammatory and autoimmune diseases, in which mega funds added a net 7.98 million shares in Q1/2013 to their 27.97 million shares prior quarter position in the company.
- Acadia Pharmaceuticals (ACAD) develops small-molecule drugs for the treatment of neurological and central nervous system disorders, in which mega funds added a net 3.60 million shares in Q1/2013 to their 15.86 million share prior quarter position in the company.
- Celldex Therapeutics Inc. (CLDX), the first antibody-based combination immunotherapy company, developing a pipeline of drug candidates for the treatment of cancer and other difficult-to-treat diseases based on its antibody focused Precision Targeted Immunotherapy Platform, in which mega funds added a net 11.88 million shares in Q1/2013 to their 14.43 million share prior quarter position in the company.
The biotech group is up about 40% in the past twelve months, in new high territory, in tandem with the move in the broader indices. 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. Furthermore, investment in small-cap biotech stocks (those with market-caps of less than $2 billion) is 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 that knowledge of how the world's largest or mega funds are collectively positioning themselves in advance of these catalysts, can inform our investment decision-making, often cluing us into a potential outcome. AEGR is not unique, as we have observed similar predictive power in the moves of leading fund managers, as reported in their quarterly 13-F and periodic 13-D/G filings, some of which are documented in our earlier article on Q4/2012 small-cap biotech picks by guru funds. Additional examples of how leading funds 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.
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.