Seeking Alpha
Research analyst, growth at reasonable price, newsletter provider, Top 300 fund picks
Profile| Send Message| ()  

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.

In this article, we discuss the investing activities of the legendary fund managers or gurus in small cap biotech stocks, based on the latest available Q3 institutional 13-F filings. Taken together these guru funds are bullish on the group, adding a net $13 million in Q3 to their $864 million prior quarter position, and they are also overweight in the group by a factor of 1.6.

The following are the small cap biotech companies that guru fund managers are bullish about (see table):

Oncothyreon Inc. (ONTY) develops synthetic vaccines and targeted small molecules for cancer immunotherapy and management. Its primary product candidate, Stimuvax is in phase 3 clinical trials for the treatment of non-small cell lung cancer.

Guru funds added a net $20 million in Q3 to their $6 million prior quarter position, and together they hold an outsized 7.6% of the outstanding shares versus their 4.1% weighting in the group. The top guru fund buyer was Viking Global Investors ($26 million). ONTY shares are up strongly by over 150% year-to-date, based on positive clinical data from its Stimuvax cancer vaccine in non-small cell lung cancer, and its PI-3 Kinase Inhibitor PX-866 in Glioblastoma, and bolstered by outperform ratings from brokers Wedbush and Rodman & Renshaw.

Dynavax Technologies (DVAX) is a developer of drugs to treat and prevent allergies, infectious diseases, and chronic inflammatory diseases using versatile, proprietary approaches that alter immune system responses in highly specific ways. DVAX's clinical development programs are based on immunostimulatory sequences, which are short DNA sequences that enhance the ability of the immune system to fight disease and control chronic inflammation.

Guru funds added a net $7 million in Q3 to their $2 million prior quarter position, and together they hold an outsized 7.6% of the outstanding shares. The top guru fund buyer was Stephen Cohen’s SAC Capital Advisors ($10 million). DVAX is currently engaged in preparing to submit its first Biologics License Application (BLA) for HEPISLAV™ Hepatitis B Vaccine to the FDA in the first quarter of 2012, followed soon by a submission of Marketing Authorization Application (MAA) for European approval.

PDL Biopharma Inc. (PDLI) develops treatments for cancer and immune disorders based on proprietary antibody humanization technology. Guru funds added a net $45 million in Q3, and together guru funds hold an out-sized 12.2% of the outstanding shares. The top guru fund buyer in Q3 was Seth Klarman’s hedge fund Baupost Group LLC ($39 million), which is the largest institutional holder with 11.2% of the outstanding shares.

Micromet Inc. (MITI) develops antibodies for the treatment of cancer, inflammation and autoimmune diseases. Guru funds added a net $1 million in Q3 to their $60 million prior quarter position, but together they control an out-sized 9.4% of the outstanding shares. The top guru fund holders include Columbia Wagner Asset Management ($53 million) and First Eagle Investment Management ($8 million).

MITI’s development pipeline includes novel antibodies generated with its proprietary bispecific T-cell engager (BiTE) antibody platform, as well as conventional monoclonal antibodies. However, it is their BiTE platform that has investor attention, as it includes a new class of antibodies that activate the T-cells of a patient’s immune system to eliminate cancer cells.

The following are the small cap biotech companies that guru funds are bearish about (see table):

Idenix Pharmaceuticals (IDIX) engages in the discovery and development of drugs for the treatment of human viral and other infectious diseases, including a focus on hepatitis C virus (HCV), hepatitis B virus (HBV), human immunodeficiency virus (HIV) type-1, and acquired immune deficiency syndrome (AIDS). Guru funds cut $8 million in Q3, and they hold only 3.2% of the outstanding shares versus their 4.1% weighting in the group.

Spectrum Pharmaceuticals (SPPI) develops innovative therapies with a focus in the areas of hematology and oncology. Guru funds cut a net $1 million in Q3, and they hold only 0.1% of the outstanding shares versus their 4.1% weighting in the group. The stock has been among the best performers in the biotech group lately, having more than doubled since the beginning of October.

Antares Pharma Inc. (AIS) is a developer of trans-dermal and intra-dermal therapeutic delivery systems, including needle-free and mini-needle injector systems and gel technologies. Guru funds cut a net $1 million in Q3, and they hold only 0.4% of the outstanding shares versus their 4.1% weighting in the group. AIS shares have risen up strongly by more than ten-fold since the 2008/09 pullback, and currently trade at eight-year highs. It recently announced, on December 8, that the FDA approved its Oxybutynin gel product for the treatment of overactive bladder.

General Methodology and Background Information: The latest available institutional 13-F filings of over 60+ 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 50+ 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 60-odd 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 less than one percent of all funds and yet they control almost 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.

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.

Source: Top Fund Buys And Sells In Small Cap Biotechs