Micro-cap biotech stocks (those with market-caps of less than $300 million) 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 the world's largest money managers invest even a small portion of their portfolio in these micro-cap biotech companies, thereby giving their seal of approval in what is otherwise considered a very risky investment.
These mega fund managers, such as Fidelity Investments, Goldman Sachs, and Vanguard Group, manage between $50 billion and over $700 billion each, and together control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Together, they are bearish on the group, cutting a net $335 million in Q4 from their $1.83 billion prior quarter position in the group. Furthermore, overall they are under-weight in the group by a factor of 0.3; that is, taken together, the 30+ mega funds have invested 0.03% of their assets in the group, less than the 0.09% weighting of the group in the overall market. This is understandable as many of these companies are typically below the radar screen of institutional investors (for more general information on these mega funds, please look at the end of the article).
The following are the micro-cap biotech companies that these mega fund managers are most bullish about (see Table):
Cell Therapeutics Inc. (CTIC): CTIC is a biopharmaceutical company, engaged in the development of oncology or cancer drugs. Mega funds together added a net $11 million in Q4 to their $25 million prior quarter position in the company, and taken together mega funds hold 13.6% of the outstanding shares. The top buyers were Blackrock Institutional Trust ($8 million) and Fidelity Investments ($4 million) and the top holder was Vanguard Group ($13 million).
CTIC shares recently got a boost last month after the European Medicines Agency's Committee for Medicinal Products for Human Use recommended that Pixuvri be granted conditional approval for the non-Hodgkin's B-cell lymphoma. The expectation among bulls is that Pixuvri will get market authorization for the EU within a few months, a move that can arguably increase the probability of a positive decision by the FDA sometime later this year or early next year.
We have been following CTIC for a while, and the company historically has been 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. On the way down, management and the stock have disappointed legions of believers. As such, we continue to be skeptical on a positive outcome to this long drama. However, the stock has been strong on a technical basis since the positive news last month, consolidating nicely between $1.50 to $2.00, and could easily ride up strongly on positive news, either from the EMA or when the company re-files its NDA for Pixuvri.
Vical Inc. (VICL): VICL develops DNA-based vaccines and therapeutics to prevent and treat cancer and cardiovascular and infectious diseases. Mega funds together added a net $4 million in Q4 to their $50 million prior quarter position in the company, and taken together, mega funds hold 18.9% of the outstanding shares. The top buyers were BNY Mellon Corp. ($1.6 million) and Vanguard Group ($1.5 million), and the top holders were Fidelity Investments ($18 million) and T Rowe Price ($10 million).
VICL shares were among the best performers in the biotech group in 2011, buoyed on positive developments in its pipeline, particularly on its lead product Allovectin being tested in phase 3 trials for metastatic melanoma. However, shares have retreated over 20% so far this year while the biotech index has outperformed the market. The shares have trended down after the company announced a $50M follow-on offering at the beginning of the year.
Galena Biopharma Inc. (GALE): GALE is a biotech company engaged in the development of innovative targeted, oncology treatments. Mega funds together added a net $3 million in Q4 to their $1 million prior quarter position in the company, and taken together, mega funds hold 5.0% of the outstanding shares. The top buyer was Blackrock Institutional Trust ($3 million), also the top holder at $3 million. GALE shares are among biotech's strongest performers this year, up about six-fold at its $3.54 high last week, and slashed by almost half since then, at its $1.88 close on Tuesday. The stock is up this year on positive news around the development of its Neuvax vaccine for breast cancer treatment.
Orexigen Therapeutics (OREX): OREX develops pharmaceuticals by combining various generic drugs to treat central nervous system disorders, including obesity. Mega funds together added a net $4 million in Q4 to their $40 million prior quarter position in the company, and taken together mega funds hold 13.9% of the outstanding shares. The top buyer was Fidelity Investments ($5 million), and the top holders were Fidelity Investments ($13 million) and Vanguard Group ($9 million).
The following are some additional micro-cap biotech stocks that mega funds bought in Q4 (see Table):
- Zogenix Inc. (ZGNX). a five-year old San Diego-based biotech company engaged in the development and commercialization of therapeutics to treat central nervous system disorders and pain, in which mega funds together added a net $2 million in Q4 to their $17 million prior quarter position in the company;
- Siga Technologies Inc. (SIGA), a development-stage bio-defense company, engaged in the development and commercialization of novel products for the prevention and treatment of serious infectious diseases, with an emphasis on products for biological warfare defense, in which mega funds together added a net $1 million in Q4 to their $28 million prior quarter position in the company; and
- Celldex Therapeutics Inc. (CLDX), the first antibody-based combination immunotherapy company, developing a pipeline of drug candidates for the treatment of cancer and other difficult-to-treat diseases based on its antibody focused Precision Targeted Immunotherapy Platform, in which mega funds together added a net $2 million in Q4 to their $28 million prior quarter position in the company; and
- Biosante Pharmaceuticals (BPAX), that develops products for female sexual health and oncology, in which mega funds together added a net $1 million in Q4 to their $7 million prior quarter position in the company.
Besides these, mega funds based on their Q4 trading activity, and indicated that they are bearish on the following micro-cap biotech stocks (see Table):
- Endocyte Inc. (ECYT), that develops targeted therapies using small molecule drug conjugates for the treatment of cancer and inflammatory diseases, in which mega funds together cut a net $13 million in Q4 from their $41 million prior quarter position in the company;
- Geron Corp. (GERN), that develops first-in-class therapies for the treatment of cancer, in which mega funds together cut a net $5 million in Q4 from their $38 million prior quarter position in the company; and
- Zalicus Inc. (ZLCS), that develops new drugs built from combinations of approved drugs to treat inflammatory and metabolic diseases, in which mega funds together cut a net $1 million in Q4 from their $9 million prior quarter position in the company;
- Pharmathene Inc. (PIP), a bio-defense company engaged in the rapid development of important and novel bio-therapeutics to address biological pathogens and chemicals that may be used as weapons of bio-terror, in which mega funds together cut a net $1 million in Q4 from their $6 million prior quarter position in the company; and
- Novavax Inc. (NVAX), a development stage biotech company focused on the development of recombinant vaccines using its virus-like particle (VLP) platform technology, targeting pandemic and seasonal influenza, and other infectious diseases, in which mega funds together cut a net $1 million in Q4 from their $33 million prior quarter position in the company.
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.
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.
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.