Written by Kyle Dennis.
Investor Joseph Edelman leads Perceptive Advisors and since 1999 the fund has returned an annualized 30.2%. Last year, the fund returned about 48%. Edelman works with six biotech analysts to find companies that can be huge winners. The fund's strategy focuses on finding the right products, as Edelman states:
"The critical thing we are doing is evaluating the science and the data to decide whether a drug will work and whether it will be approved. If we think there is a higher probability that a drug will work than the Street does, we may have a long on that position."
Perceptive's most recent buy is Amicus Therapeutics (NASDAQ:FOLD). The fund bought 8,339,444 shares on May 29 and then again added another 4 million shares on June 30. The 4 million additional shares were added on the day that Amicus announced trial updates and analysis plan for its Phase III Fabry Monotherapy Study 012. Additionally, the company's CEO John Crowley added shares a few weeks before Perceptive.
Company History and Pipeline
Amicus is a biotechnology company focused on developing therapies for rare and orphan diseases, specifically Lysosomal Storage Disorders. The company's drug furthest along in development is Migalastat for Fabry's Disease.
Fabry's Disease is a deficiency of lysosomal enzyme alpha-galactosidase A. The leading causes of death for the disease are renal failure, cardiac failure, and stroke.
Amicus has been on a rough road for the last couple of years. Many biotech analysts (including us) were expecting the company to present positive Phase III data in late 2012. However, the company surprisingly disappointed investors and announced the study did not meet primary endpoints. Later, partner GlaxoSmithKline (NYSE:GSK) gave up co-commercialization and co-development rights on the drug.
Perceptive Advisors claims its unique skill is identifying successful products. So, if the drug failed studies before, why is Perceptive buying Amicus stock?
The Turn Around
The trial failure in 2012 surprised many people and several analysts speculated that the failure was due to trial design and not lack of efficacy. We think this may actually be the case.
In the original study, about half of the patients enrolled had a mild case of Fabry's Disease, while the other half had a severe case. The study was constructed for patients that had a severe case of the disease. Thus, when Amicus announced Phase III trial results, the patients with a mild case of the disease "diluted" the trial results.
The study was not setup to have both types of patients and, in a sense, missed primary endpoints by a formality. Patients with a mild case of the disease were treated with the drug or placebo. Of the patients treated with the drug, 32% were responders. Conversely, of the patients treated with placebo, 44% were responders. The mild case of Fabry's Disease is difficult to measure and this is what most likely caused the trial to miss primary endpoints.
However, the patients with a severe case demonstrated different results. Of the patients who received the drug, 64% were responders, while of the patients who received placebo, 14% were responders. The standard in the industry for testing Fabry's Disease patients is to use the severe cases. So, these results are most meaningful because they would have been statistically significant by industry standards.
Clearly, if the study had been designed correctly, the company would have announced positive data. Over 2013, the company redesigned the trial and worked with the FDA to correct the errors.
On April 29, 2014, the company announced positive 12- and 24-month data from the Phase III 011 study. Additionally, on June 30, 2014, the company announced several positive updates from the Phase III 012 study. These updates included the following highlights:
- Following randomization, 34 of 36 patients who switched to migalastat and 18 of 24 patients who continued with ERT, completed the primary 18-month treatment period.
- Among patients completing the 18-month primary treatment period, 32 out of 34 in the migalastat group and 16 out of 18 in the ERT group had GLP HEK amenable mutations.
- 97% of patients with GLP HEK amenable mutations in the migalastat group (31 out of 32) elected to continue to receive migalastat in the 12-month treatment extension.
- 94% of patients with GLP HEK amenable mutations in the ERT group (15 out of 16) elected to switch from ERT to migalastat for the 12-month treatment extension.
Amicus also announced that it is doing the final analysis on the completed trial and results should be out in 3Q 2014. As mentioned prior, on the day of this announcement, Perceptive added another 4 million shares, which is obviously a bullish move for them. Perceptive prides themselves on finding products that the street has discounted, and it certainly seems they believe in the chances of positive data emerging for Amicus here.
Perceptive Advisor's History
Looking back into Perceptive's history, we can see they have found several companies before they caught investor attention. Many of these companies have been big winners.
Perceptive had a call option position in InterMune (NASDAQ:ITMN) before it announced data this year. InterMune is a biotechnology company focused on therapies for the treatment of idiopathic pulmonary fibrosis. On February 25, 2014, the company announced that top-line data from its ASCEND Phase III trial was positive.
The data demonstrated that pirfenidone significantly reduced idiopathic pulmonary fibrosis disease progression. According to a March 31, 2014 filing, Perceptive now controls about $9 million worth of InterMune. We think the company will eventually receive approval.
One of Perceptive's larger positions is in Sarepta (NASDAQ:SRPT). Sarepta focuses on developing RNA-based treatments for rare and infectious diseases. Eteplirsen is the company's lead product and is in clinical trials for Duchenne muscular dystrophy.
It has been a bumpy road for Sarepta investors over the last couple of years, as the stock has gapped up (and down) several times on various data releases and ongoing discussions with the U.S. Food and Drug Administration (FDA). Perceptive owns about $69 million worth of Sarepta stock, which is about 7.75% of its portfolio. We have covered Sarepta several times and continue to believe that Eteplirsen will eventually receive approval in the long term.
Perceptive's largest position is in AcelRx (NASDAQ:ACRX). We just covered AcelRx recently and are bullish on its long-term future. The company has a PDUFA date of July 27, but many are expecting that the FDA will release news this Friday. We think the FDA will approve the company's lead product Zalviso due to strong clinical trial data. Perceptive seems incredibly bullish on the company because they own about $78 million worth of stock. This is about 9% of its total portfolio.
Perceptive also has a position in ACADIA Pharmaceuticals (NASDAQ:ACAD). ACADIA has been one of the biggest biotech runners since late 2012, going from about $2 a share to over $30 a share. We covered ACADIA in May 2012 when the stock was under $2, suggesting that the company could end up being a big winner. ACADIA is a biopharmaceutical company that works on developing therapies to treat neurological and other related central nervous system disorders.
The company's lead drug is Pimavanserin to treat Parkinson's disease psychosis. The company announced positive Phase III data in late 2012 and the stock has been on a tear since. Perceptive has been a buyer as early as 2005 and currently holds about $16 million worth of stock.
We believe that Amicus has a good risk-to-reward profile at this level. Perceptive has a strong history of identifying companies who have drugs that work. Although it has been a bumpy road for Amicus, we think 2014 might be the inflection point for the company. However, trial failure would definitely take a huge toll on the stock. If the trial fails, the stock would fall hard as sentiment will likely turn negative again, with most investors bringing into question the company's entire technology platform.
If the trial is successful, (as we believe it will be) we think the stock will trade above $7 a share. We base this on potential peak sales of migalastat reaching $150 million to $200 million. Three times sales of $150 million would equate to a market cap of $450 million. With 65 million shares outstanding, this equates to around $7 a share.
It's worth noting that there are 6728 call contracts for the August $5 in open interest and 1602 put contracts for the August $2.50 put. This represents over 4 to 1 bullish sentiment that traders feel the stock will be over $5 a share before the August contract expires.
Also, GlaxoSmithKline might be inclined to buy Amicus, since they already own a large stake in the company. Other biotech companies who look to acquire specialty assets would also likely have interest in acquiring Amicus.
Disclosure: The author is long FOLD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.