(Editor's Note: This article has been corrected to remove reference of a Adam Feuerstein's coverage of CLVS. The original version referenced a tweeted comment on the stock's move. Mr. Feuerstein has not covered CLVS to date.)
Small-cap oncology biotech Clovis Oncology (CLVS) is among the strongest gainers Monday, surging well over 100% after announcing during pre-market hours that initial findings from the phase I dose-escalation portion of its ongoing Phase I/II monotherapy study of rucaparib in patients with solid tumors were encouraging. Rucaparib is an oral, small-molecule poly ADP-ribase polymerase (PARP) inhibitor, being investigated by CLVS as a potential anti-cancer agent, targeting cancers such as those with defective BRCA function as in ovarian cancer that are predisposed to PARP inhibitor sensitivity. The results, being presented for the first time during the American Society of Clinical Oncology (OTC:ASCO) Annual Meeting in Chicago, suggest that rucaparib is both well-tolerated and predictably absorbed, with an astonishing 89% clinical benefit rate in ovarian cancer patients, and objective responses also seen in BRCA-mutant breast and pancreatic cancer patients. Specifically, eight of the nine ovarian cancer patients enrolled in the study showed stable disease or better twelve weeks after study initiation, and in the case of germline BRCA-mutant ovarian cancer patients, all seven patients enrolled in the study showed disease control.
The rise in CLVS started about three months ago, on March 1st, after the company released its March quarter report, and the subsequent management conference call in which the company announced additional details concerning its pipeline, including the possibility that the addressable market for rucaparib therapy could expand from the 15% of ovarian cancer patients with germ-line BRCA-mutations to an estimated 40%-50% who have DNA repair deficiencies, including those caused by BRCA-mutations as well as resulting from mutations by a number of other genes. The stock has been in a rally-mode since then, barring small corrections, rising about 100% from the early March prices, even before Monday's 100% surge. The strong surge Monday can be explained based not just on the strong positive news, but also as it seems that most Wall Street analysts were not positive on the outcome of the rucaparib study prior to Monday's news. Overall, four analysts covering the stock had a median price target of $42.50 on the stock prior to Monday's news, just slightly higher than the $36.58 closing price last week.
Legendary or guru fund managers have been accumulating CLVS shares since the last three quarters, and collectively or in consensus they added a net 0.23 million shares in the latest available Q1/2013 to their 0.12 million share prior quarter position. In the prior Q4/2012, guru fund managers added 42,786 shares, and they also added 11,734 shares in Q3/2012. Overall, CLVS got a 4.8 GuruRank® in Q1/2013, based on our proprietary and relative ranking system that numerically represents on a scale of 1 to 5 the attractiveness of the stock to guru fund managers, based on their holdings, change in holdings, percent of outstanding shares and number of guru funds in the stock, as compared to the rest of the 5,200+ stocks in our database on our website, GuruFundPicks.com.
Clovis management has indicated that they plan to move rucaparib into the second phase trial by the 2H/2013 in women with relapsed, platinum-sensitive high grade serious ovarian cancer. Also, besides rucaparib, the company has CO-1686 EGFR inhibitor in phase I/II dose-escalation trials in non-small cell lung cancer (NSCLC) in the US and Europe, and it is expected to identify the recommended dosage and initiate phase II study by year-end. The company has $129.6 million in cash available as of the latest quarter, and it is expected to burn $60 to $65 million in 2013. We believe that Monday's news is very bullish on the long-term outlook for the stock, but that entry at current prices has a high downside risk, at least for the intermediate-term. Both of its anti-cancer drugs have blockbuster potential, but it may be a bit too early in the process to be buying after such a big rally, and we would wait for a retreat and buy in advance of future news catalysts in the stock. The company is also expected to present tomorrow morning, on Tuesday, June the 4th, a poster titled, "First in-human evaluation of CO-1686, an Irreversible, Selective, and Potent Tyrosine Kinase Inhibitor of EGFR T790M" at the ASCO conference in Chicago.
Overall, the 79 guru fund managers included in our database are bullish on small-cap biotech companies, adding $133.7 million in Q1/2013 to their $1.66 billion prior quarter holdings in the group. Also, together guru fund managers hold 2.7% of the outstanding shares in the small-cap biotech group, slightly higher than their 2.4% weighting in the overall market. This slight over-weighting in the group is in fact 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 CLVS, guru fund managers also accumulated the following small-cap biotech stocks in Q1/2013 (see table below):
- Sarepta Therapeutics (SRPT), that develops RNA-based therapeutics for the treatment of genetic, infectious and other diseases, in which guru funds together added a net 0.84 million shares in Q1/2013 to their 0.87 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 guru funds together added a net 1.66 million shares in Q1/2013 to their 4.68 million share prior quarter position in the company.
- Keryx Biopharmaceuticals (KERX), a developer of novel pharmaceutical products to treat cancer, renal disease and other life-threatening diseases, in which guru fund managers together added a net 0.69 million shares in Q1/2013 to their 0.05 million share prior quarter position in the company.
- Mannkind Corp. (MNKD), a developer of treatments for cancer, diabetes, inflammatory and autoimmune diseases, in which guru fund managers together added a net 0.51 million shares in Q1/2013 to their 1.02 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 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 into a potential outcome. CLSN 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 79 legendary or guru hedge fund and mutual fund managers, such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, were 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 79 guru funds that justify their inclusion in this elite group were detailed in our previous articles that can be accessed from our author page and from the 13-F pages for those funds on our website, GuruFundPicks.com
These legendary or guru fund managers number less than one percent of all funds and yet they control over ten 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.