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San Francisco-based Biotechnology Value Fund Partners (BVF), with $250 million in equity assets under management per their latest Q3 filing, was founded by President and Portfolio Manager Mark Lampert in 1993. The firm pursues a shareholder activist approach, with all of their current investments in small-cap biotech stocks. Within the small-cap universe, 40% of their investments were in micro-caps and ten percent in nano-cap biotech equities. Overall, the firm maintains a concentrated portfolio of only 22 positions. Prior to founding BVF, Mr. Lampert was a VP at Oppenheimer & Co. where he created various biotechnology investment vehicles. He also founded Biotechnology Royalty Corp., which pooled university patent royalties, prior to joining Oppenheimer.

With the biotech index down by almost 30% since the peak in May this year, now may be a good time to hunt for some bargains in the group. Based on its most recent Q3 filing, the following are BVF's most bullish picks (see Table):

Nektar Therapeutics (NKTR): NKTR is a development stage biotech company, engaged in developing a pipeline of drug candidates that utilize its PEGylation and polymer conjugate technology platforms to target various therapeutics areas, including oncology and pain. BVF initiated a new $4 million position in the company in Q3, and then last Friday, as we reported earlier in our daily and weekly review of insider and institutional trades, BVF filed SEC Form SC 13G indicating that it now holds 7.4 million shares or a $40 million position in the company, after purchasing an additional 6.6 million shares since the end of Q3. This makes BVF the fourth largest institutional holder of NKTR, behind Oppenheimer Funds (22.7 million shares), Healthcor Group (10.6 million shares) and PRIMECAP Management (8.1 million shares).

NKTR shares have been weak all year, now off 58% YTD after falling almost 70% at its lows last month. The shares recently gained back some of its losses after its partner Affymax Inc. (AFFY) gained FDA approval earlier this month of its peginesatide treatment of anemia in dialysis patients. NKTR is expected to benefit from the FDA approval as it has an exclusive agreement with AFFY by which it will provide the company with its proprietary technology for use in the drug's manufacturing in exchange for manufacturing revenue, milestone and other payments. Besides, NKTR is also entitled to receive royalties on the global sales of peginesatide for all indications.

Neurocrine Biosciences (NBIX): NBIX is a neuroscience-based company focused on the discovery and development of novel therapeutics to treat endocrine-related and neurological diseases and disorders. This is the largest Q3 buy for BVF, as it added $15 million to its $31 million prior quarter position in the company. NBIX's lead product in its portfolio that also has blockbuster potential is Elagolix that it is developing with partner Abbott Laboratories (ABT). Elagolix is the first oral gonadotropin-releasing hormone (GnRH) antagonist, currently in late stage development for the treatment of endometriosis, a medical condition caused by excess estrogen that affects an estimated 50-100 million women of reproductive age worldwide, including about five-ten million women in the U.S. Besides endometriosis, Elagolix is also in phase two trials for the treatment of uterine fibroids, another large market.

Isis Pharmaceuticals (ISIS): ISIS is a leading genomics-based drug discovery and development company that develops treatments for cardiovascular, metabolic and neurodegenerative diseases and cancer using its antisense drug discovery platform. This is the largest new position (almost) initiated by BVF in Q3, adding $13.60 million to its prior $0.35 million prior quarter position. ISIS shares currently trade near five-year lows, down 30% YTD. The company is currently working with its partner Genzyme on preparing its submission of a new drug application to the FDA seeking approval for KYNAMRO, its lead drug for the treatment of homozygous familial hypercholesterolemia that is now scheduled for the first quarter of 2012. Genzyme is a fully owned subsidiary of French pharmaceutical giant Sanofi (SNY).

Array Biopharma Inc. (ARRY): ARRY is a development stage biotech company focused on the discovery, development and commercialization of small molecule drugs that regulate target proteins to treat cancer and inflammatory diseases in North America, Europe and the Asia Pacific. This is the second largest buy and new buy for BVF in Q3, initiating a new $11 million position in the company. ARRY is down 30% YTD and trades near all-time lows. Two of its drugs, ARRY-520 for multiple myeloma and ARRY-797 for pain are in phase two trials, and another two, namely, ARRY-614 for myelodysplastic syndromes and ARRY-502 for asthma are in phase one trials.

Pharmacyclics Inc. (PCYC): PCYC is a development stage biotech company that is developing ring-shaped small molecule drugs called texaphyrins to treat cancer by disrupting the biochemical pathways in cancer cells. BVF added $3 million in Q3 to its $14 million prior quarter position. PCYC shares have been among the strongest performers in the biotech sector this year, up 150% YTD, and now trading at ten-year highs. Even so, analysts are still optimistic about the prospects for the company, with a mean target of $19, and of the eight analysts that follow the company, six rate it buy/strong buy, two a hold, and none at underperform/sell. Also, recently on December 13th Wedbush added PCYC to its "Best Ideas" list, raising the price target to $25 from $17.

Affymax Inc. : AFFY is a biotech company that is developing a pipeline of synthetic peptide-based drug candidates for the treatment of serious and life-threatening conditions, including for the treatment of kidney diseases. BVF added a new $7 million position in the company in Q3. AFFY shares have been among the biggest movers in the biotech group in December, up as much as 60% at their highs earlier this month after winning FDA advisory panel backing for its peginesatide anemia drug for the treatment of anemia in chronic kidney disease (CKD) in adult patients on dialysis. If approved, the drug would compete with AMGN in a multi-billion dollar market for anemia drugs.

The following is the only bearish position in BVF's portfolio at the end of Q3, based on their trading activity:

Oncothyreon Inc. (ONTY): 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 (NSCLC). BVF cut in half in Q3 its $12 million prior quarter position in the company. ONTY shares are up strongly by over 130% YTD, 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.

Other stocks that BVF is bullish on based on its Q3 trading activity (see Table) include development-stage biotech Rigel Pharmaceuticals Inc. (RIGL), focused on the development of small-molecule drugs for the treatment of inflammatory diseases, cancer and viral diseases, in which BVF added $9 million in Q3; development-stage biotech Ligand Pharmaceuticals Inc. (LGND), focused on the development of new drugs that address a variety of diseases including cancer, osteoporosis, and inflammation, among others, and in which BVF added $8 million in Q3; and development-stage biotech Targacept Inc. (TRGT) developing a new class of drugs for treatment of CNS diseases and disorders, in which BVF added $8 million in Q3. Also, BVF is slightly bearish on innovative cancer drug discovery and development company Infinity Pharmaceuticals Inc. (INFI), in which it cut a minor $1 million in Q3 from a large $24 million prior quarter position.

Table
(Click to enlarge)

Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way, the list is not biased towards the largest companies in the group.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, 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.

Source: Small-Cap, Biotech-Focused Hedge Fund BVF's Top Q3 Picks