The biotech group as represented by the NYSE ARCA Biotech Index ($BTK) has been strong this year, up about 35% year-to-date vs. the 18% rise for the broader S&P 500 index. Within that group, many small-cap biotech stocks 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 legendary or guru fund managers, that is, those with proven long-term track records of consistently beating the markets, and that are generally recognized by the investment community as gurus, 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. And it is even more significant when a large number of them collectively buy or sell a single stock in large amounts in just one or more recent quarters, with very few of them taking opposing positions.
Such moves by leading fund managers can give us a clue to finding profitable opportunities in the market, as it is reasonable to believe that these leading fund managers with tens of billions of dollars of assets under management, that have generated long-term market-beating returns, may have information and knowledge at their disposal that may alert them to potential opportunities or threats ahead of retail investors. In this article, we examine the collective or consensus buying and selling by 79 guru fund managers in the small-cap biotech space for the latest available 2Q'13. For more information on these leading fund managers and our methodologies, please refer to the discussion at the bottom of this article.
Shares of Ariad Pharmaceuticals (ARIA), that is engaged in the development of drugs that treat acute and chronic forms of leukemia and other hard-to-treat cancers, gave up about three-quarters of its valuation last week after it announced on Wednesday that it was suspending the enrollment of new patients in all clinical trials of its leukemia drug Iclusig due to increased incidence of vascular toxicity observed in the updated clinical data from its pivotal PACE trial in chronic myeloid leukemia (CML) patients.
ARIA shares have been under heavy distribution by guru fund managers for each of the last four quarters in a row. From a peak of 9.77 mill. shares held by guru fund managers at the end of Q2'12, a year ago, guru fund managers dumped 0.73 mill. shares, 3.80 mill. shares, 0.58 mill. shares & 4.20 mill. shares in Q3'12, Q4'12, Q1'13 & Q2'13 respectively, ending with only 0.47 mill. shares at the end of Q2'13. This is significant as in just one year, guru fund managers dumped more than 95% of their holdings in the stock. Also, in the latest Q2'13, eight guru fund managers sold the stock and none bought it, and the stock also ranked at the bottom, at 1.0 GuruRank® for Q2'13, based on a 1 to 5 scale, with 1 indicating Strong Sell and 5 a Strong Buy. The top guru fund sellers were billionaire Stephen Cohen's hedge fund SAC Capital that sold 6.82 mill. shares over the last 4 quarters, Andreas Halvorsen's hedge fund Viking Global Investors that sold 1.93 mill. shares in the last 3 quarters, and Daniel Loeb's event-driven hedge fund Third Point LLC, that sold 2.10 mill. shares in the last 4 quarters.
Besides Guru fund managers, other leading fund groups that we track also dumped ARIA heavily in recent quarters. Specifically, 25 healthcare sector-focused funds, many focused exclusively on biotech, collectively dumped a net 5.41 mill. shares in the last four quarters. Furthermore, our group of 57 billionaires & billionaire fund managers collectively dumped a net 10.77 mill. shares in the last four quarters. This included a massive sell by New York-based biotech-focused hedge fund, Baker Bros. Advisors, which sold 4.37 mill. shares in the last 4 quarters.
The vote of guru fund managers on their lack of confidence in ARIA's outlook stands in sharp contrast to that of mainstream Wall St. analysts, with 18 out of 22 ranking its shares at Buy/ Strong Buy prior to last week's negative news, with price targets of $24-$29. This included none other than mighty Goldman that put a $21 target on ARIA just last month, including upgrades also by Maxim Group, Summer Street, Oppenheimer, and Chardan Capital Markets, among others. We should note, however, that after Wednesday's news, nine brokers did come out with revised views, lowering their targets to the $4 to $7 range, but that may be a little too late for most investors trapped in the position.
The merits of broker recommendations aside, for the average investor, though, the question is, what should they do now? If they are holding it, should they sell it at these low prices or buy more? And if you are lucky enough to be watching it, but not yet in it, should you now dip a toe in it or wait.
Iclusig was approved last December for the treatment of adult patients with chronic, accelerated or blast phase CML that is resistant or intolerant to prior tyrosine kinase inhibitor (TKI) therapy or Philadelphia chromosome-positive acute lymphoblastic leukemia that is resistant or intolerant to prior TKI therapy. However, the approval was tempered with an FDA Boxed Warning that the drug can cause blood clots and liver toxicity, with the concern being about the 8% of patients that experienced serious adverse events related to thrombosis or blood clots, which can cause a stroke, heart attack, or other serious health conditions depending on the organ that it impacts. As a result, ARIA shares have been flat-to-week since the approval. We can also interpret from the selling by guru fund managers over the last year, that they saw the thrombosis and liver toxicity issues as a signal to sell ARIA shares after the approval, particularly given that the market was already valuing ARIA shares at a premium of over three times peak sales.
The FDA approval last December was followed up with an EU approval in July 2013 for the treatment of chronic phase, accelerated phase or blast phase CML in adults who do not respond to or cannot tolerate Bristol-Myers Squibb's (BMY) Sprycel or Novartis' (NVS) Tasigna, and also for patients in whom Novartis' Gleevec is not appropriate as a subsequent treatment. As a result, investors were beginning to be excited about the expansion of the approval to a number of other cancer indications, including other leukemia, lung, gastrointestinal and thyroid cancers. Many were putting peak sales of Iclusig to well over $1 billion, and with valuations in the biotech space of at least 3-5 peak sales, ARIA prices in the high teens did not seem excessive.
On Wednesday, however, it was revealed that follow-up data after one year showed that the rate of serious arterial blood clots in patients treated with Iclusig had risen to 11.8%, a 50% jump over the results from one year ago. The higher incidence of thrombosis translated into heart-related safety events in 6.2% of patients, strokes in 4% of patients, and 3.6% had peripheral vascular trouble, with some patients having more than one serious side effect. Also, another 2.9% of patients experienced serious venous occlusion, or blockages in the veins, and a total of 20% of patients experienced either serious or non-serious artery or vein troubles after being treated with Iclusig. As a result, the company has halted enrollment in all ongoing Iclusig clinical trials, and it is lowering the prescribed dose to those currently enrolled in trials.
The market has reacted swiftly to this negative news, and the move seems largely justified. For one, the probability of expansion to other indications seems distant for now, as safety concerns unlike efficacy issues run across all indications. Also, much of the market valuation for the company was built on the premise that it would expand to become a first-line treatment for cancer indications. With the higher rate of thrombosis events, this seems less likely. Furthermore, Iclusig competes in a very crowded space with some very deep-pocketed competitors, including Novartis' Gleevec and Bristol-Myers Squibb's Sprycel.
The fear is that with these heightened concerns, Iclusig, even if approved, may become a drug of last resort, and that its sales for the currently approved indications will also suffer. Of course, the company will be testing Iclusig at lower doses, and those results if effective and with lower serious adverse effects, could revive its chances, and make it a viable as a first-line treatment vs. its peers. But that appears to be a risky bet, given that Iclusig is now on life support right now. Furthermore, even under the best scenario, the timeline for approval of Iclusig has been extended, and the company is going to need more cash before it becomes cash flow positive. Also, there is risk going of more adverse news events as the FDA works on further evaluation of the data so as to notify the public as more information is available.
That said, for the strong at heart, there is some opportunity here, although fraught with high risk. While analysts have already brought down peak sales estimates for the drug from well over $1 billion, they are still expecting worldwide peak sales in the $400-$700 million. Were that to happen, say in year 5, even with some dilution, it could easily support current prices in the high single digits, which would be almost twice Friday's closing price of $4.26 per share. The opportunity here also is that part of the huge negative reaction last week may be exaggerated due to the U.S. government shutdown and the reversal in the overall biotech indices as the current news cycle focused on a top-out in the biotech index after a double in past two years, and that this will be reversed with a counter-rally in the next month or two.
Besides ARIA, another stock that also reversed sharply recently included Achillion Pharmaceuticals (ACHN), which is a clinical-stage biotech focused on developing new treatments to patients with infectious diseases, including HCV and resistant bacterial infections. It has been among the top losers this year, after a near two-thirds hair-cut resulting from a Sept. 27th news release that the FDA decided that its earlier clinical hold on sovaprevir, ACHN's protease inhibitor treatment for HCV, was not warranted, and it also released lackluster data from its Phase IIa combo trial of ACH-3102 in genotype 1 HCV.
ACHN has been under heavy distribution by guru fund managers in the latest 2Q'13, with one guru fund manager buying and four selling, cutting a net 0.94 million shares. The big sellers included legendary billionaire investor Ken Griffin's Chicago-based hedge fund Citadel Advisers, with $58 billion in 13-F assets in its latest filing, which sold 0.80 mill. shares; hedge fund Kingdon Capital Management, that invests in growth and value stocks, and with $1.69 billion in 13-F assets, that sold 0.31 mill. shares, and multi-strategy hedge fund Balyasny Asset Management (BAM) that sold 0.11 mill. shares. The stock ranked at the bottom at GuruRank® 1.0, indicating strong sell, based on guru fund manager activity in 2Q'13. Besides guru fund managers, other fund groups that we track also sold during 2Q'13, including 27 mega fund managers that sold 1.99 mill. shares, 57 billionaires & billionaire fund managers that sold 0.65 million shares, and 40 Tiger fund managers that sold 0.47 mill. shares.
In contrast to ARIA and ACHN, Incyte Corporation (INCY), that develops small molecule drugs for hematologic and oncology indications, and inflammatory and autoimmune diseases, has been under accumulation by gurus and other leading fund managers. In the latest 2Q'13, three guru fund managers bought and only one sold, collectively adding a net 1.36 mill. shares to their prior 1.51 mill. shares in the company. This is in addition to the 0.38 mill. shares and 0.78 mill. shares that guru fund managers collectively bought in the prior 1Q'13 and 4Q'12 quarters respectively. Also, besides guru fund managers, healthcare sector-focused fund managers also collectively bought 0.74 mill. shares in 2Q'13, in addition to a net 6.72 mill. shares bought in the prior 3 quarters. The stock was also under accumulation by Billionaire, New Masters and Tiger fund manager that collectively bought 2.21 mill. shares, 0.78 mill. shares & 0.78 mill. shares respectively in the latest 2Q'13. INCY shares are up a sharp ~65% since the end of Q2'13.
Besides ARIA, ACHN & INCY, guru fund managers made moves in the following small-cap biotech stocks in Q2/2013 (see Table below):
- Amarin Corp. (AMRN), which 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 guru fund managers collectively sold a net 1.09 mill. shares from their 3.18 mill. shares holdings from the prior quarter. This is in addition to the 7.14 mill. shares sold by guru fund managers in the prior 3 qtrs. AMRN shares are down ~55% in the last year.
- Vivus Inc. (VVUS), which develops innovative therapies to treat obesity, diabetes, and sexual health, in which guru fund managers collectively sold a net 0.73 mill. shares from their 2.94 mill. shares holdings from the prior quarter. VVUS shares currently trade near multi-year lows.
There are well over 100 upcoming biotech catalysts, many of them on small-cap companies between now and the end of the year, including PDUFA's, FDA Advisory Committee meetings, NDA's, and phase 2 and phase 3 clinical trial results. 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 fund managers, and other leading fund managers.
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, 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
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.