The biotech group is among the largest in the market in terms of the number of companies, which number well over 300. Within the group, large-caps (those with market-caps over $5 billion) have well established commercialized product portfolios that generate revenues, and in most cases generate profitability. Micro-cap biotech companies (those with market-caps of less than $300 million) in contrast generally have no commercial products, but rather a pipeline of product candidates being tested in early- to sometimes mid- or late-stage clinical trials for a variety of disease conditions.
Furthermore, the micro-cap biotech companies attract a more speculative investor due to the uncertainty associated with the cash flow from their product portfolios, whereas the large-caps attract more risk-averse and conservative investors who look for revenues and sustained profitability in constructing their value thesis.
In between the two are mid-cap (between $1 billion and $5 billion in market-cap) and small-cap biotech (between $300 million and $1 billion in market-cap) companies, that in the case of small-cap are more biased towards clinical stage product portfolios, and in the case of mid-caps are more biased towards one or more commercialized products in their portfolio and a clinical development pipeline. Both due to the size of the sector, investor interest and the differing characteristics of the constituent companies, we have broken the sector by capitalization, and in this article we discuss the investing activities of the world’s largest funds in micro-cap biotech stocks.
The world’s largest fund managers, managing between $100 billion and over a trillion dollars, are bearish on micro-cap biotech stocks. During Q3, these mega fund managers together cut a net $43 million to their $2.44 billion prior quarter position in the group, selling $226 million and buying $183 million worth of stocks in the group. Furthermore, overall they are under-weight in the group by a factor of 0.5; that is, taken together, the 30+ mega funds have invested 0.05% of their assets in the group, less than the 0.10% weighting of the group in the overall market.
A majority of the hedge fund and mutual fund managers included in the mega funds list manage well over $100 billion in U.S. equity assets, with some managing between $50 and $100 billion. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others. The following are the micro-cap biotech companies that these mega fund managers are most bullish about (see Table):
Raptor Pharmaceutical (RPTP): RPTP develops medicines that improve the life of patients with severe, rare diseases. It has products in development that target rare diseases such Nephropathic Cystinosis, Huntington’s, non-alcoholic steatohepatitis (NASH), and aldehyde dehydrogenase (ALDH2) deficiency. Mega funds together added a net $9 million in Q3 to their $18 million prior quarter position in the company, and taken together mega funds hold 13.5% of the outstanding shares, slightly less than their 14.9% weighting in the group. The top buyer was JP Morgan & Chas ($4 million) and the top holder is Blackrock ($6 million).
Overall, 71 institutions hold 33.6% of RPTP shares, with Columbia Wanger Asset Management ($21 million) being by far the largest holder with 7.9% of the outstanding shares. RPTP recently completed a pre-NDA meeting with the FDA related to its lead product RP103 (DR Cysteamine) that successfully completed its phase 3 pivotal trial for Nephropathic Cystinosis, a rare genetic disorder that may affect as many as 500 in the U.S. and about 2,000 worldwide. The company is scheduled to file its NDA for RP103 in the first quarter of next year. Furthermore, the company is also scheduled to release six-month tolerability data on RP103 sometime this month.
Cell Therapeutics Inc. (CTIC): CTIC is a biopharmaceutical company, engaged in the development of oncology or cancer drugs. Mega funds together added a net $5 million in Q3 to their $23 million prior quarter position in the company, and taken together mega funds hold 11.0% of the outstanding shares, less than their 14.9% weighting in the group. The top buyer was Fidelity Investments ($3 million), and the top holder is Vanguard Group ($12 million). Overall, 70 institutions hold 13.2% of CTIC shares, with Vanguard Group being by far the largest holder with 4.6% of the outstanding shares.
We have been following CTIC for a while, and the company is a classic case of over-promise and under-deliver. One only needs to look at the long-term chart to realize this as the stock has gone only one-way, down, since peaking in mid-2000 at a split adjusted price of almost $18,000 versus current prices of $1-$2, and along the way down management and the stock have disappointed legions of believers. CTIC is heavily dependent on the outcome for its lead candidate, pixantrone that has an PDUFA goal date of April 24, 2012.
Biosante Pharmaceuticals (BPAX): BPAX develops products for female sexual health and oncology. Its lead products include Libigel for the treatment of female sexual dysfunction, and Elestrin for the treatment of moderate-to-sever vasomotor symptoms associated with menopause. Mega funds added a net $3 million in Q3 to their $28 million prior quarter position, and taken together mega funds hold 11.4% of the outstanding shares, less than their 14.9% weighting in the group.
Top mega fund holders of BPAX at the end of Q3 included Barclays Global Investors ($7 million), Vanguard Group ($6 million) and Blackrock ($6 million). Overall, 116 institutions hold 35.2% of BPAX shares, with Kopp Investment Advisors ($14 million) being by far the largest holder with 4.9% of the outstanding shares. BPAX recently released received a boost after it reported positive libigel pharmacokinetic study results last month.
Peregrine Pharmaceuticals (PPHM): PPHM develops targeted monoclonal antibodies to treat solid cancers and viral infections such as hepatitis C virus. Mega funds added a net $1 million in Q3 to their $10 million prior quarter position, and taken together mega funds hold 11.3% of the outstanding shares, less than their 14.9% weighting in the group. Top mega fund holders of PPHM at the end of Q3 included Barclays Global Investors ($3 million) and Blackrock ($2 million).
Overall, 61 institutions hold 17.1% of PPHM shares, with Barclays and Ayer Capital Management ($3 million) being the largest holders with 3.3% and 2.8% of the outstanding shares respectively. PPHM shares shot up earlier this week after the company released preliminary results from its randomized phase 2 trial of Bavituximab showing a 50% improvement in overall tumor response in non-small lung cancer patients. The company is scheduled to report on secondary endpoints, including median progression-free survival and overall survival once reached during 2012.
The following are select micro-cap biotech companies that these mega fund managers are most bearish about (see Table):
Affymax Inc. (AFFY): AFFY develops drugs for the treatment of serious and life-threatening conditions include a peptide-based drug, Hematide, in phase 3 clinical trials for the treatment anemia associated with chronic renal failure. Mega funds cut a net $6 million in Q3 from their $55 million prior quarter position, and taken together mega funds hold 23.5% of the outstanding shares, significantly more than their 14.9% weighting in the group. Top mega fund sellers of AFFY in Q3 included Fidelity Investments ($6 million) and Janus Capital Management ($2 million). Overall, 115 institutions hold 78.1% of AFFY shares, with Orbimed Advisors ($18 million) being by far the largest holder with 9.5% of the outstanding shares. AFFY shares shot up earlier this week after the FDA released briefing documents for its upcoming Advisory Committee Meeting on peginesatide that appear to support the approval of the drug for the treatment of anemia related to chronic kidney disease (CKD) in adult patients on dialysis.
Arena Pharmaceuticals (ARNA): ARNA is a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory, and metabolic diseases. Mega funds cut a net $6 million in Q3 from their $72 million prior quarter position, and taken together mega funds hold 23.6% of the outstanding shares, significantly more than their 14.9% weighting in the group. The top mega fund seller by far in Q3 was Wellington Capital Management ($8 million). Overall, 100 institutions hold 35.7% of ARNA shares, with Wellington ($21 million) and Vanguard Group ($13 million) being the largest holders with 7.6% and 4.7% of the outstanding shares respectively. ARNA shares have rallied strongly recently, up 50% since the beginning of last week, after positive comments from Piper Jaffray regarding its upcoming NDA re-submission to the FDA for lorcaserin.
Antares Pharma Inc. (AIS): AIS is a developer of trans-dermal and intra-dermal therapeutic delivery systems, including needle-free and mini-needle injector systems and gel technologies. Mega funds cut a net $1 million in Q3 from their $30 million prior quarter position, and taken together mega funds hold 10.2% of the outstanding shares, less than their 14.9% weighting in the group.
The top mega fund sellers in Q3 were JP Morgan & Chase ($0.8 million) and Barclays Global Investors ($0.8 million). Overall, 71 institutions hold 36.9% of AIS shares, with Orbimed Advisors ($25 million) being by far the largest holder with 8.8% of the outstanding shares. AIS shares have risen up strongly by more than ten-fold since the 2008/09 pullback, and currently trade at eight-year highs as the company approaches its PDUFA data of December 8th for Anturol for the treatment of overactive bladder.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ 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. 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.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.