The biotech group as represented by the NYSE ARCA Biotech Index ($BTK) has been strong this year, now up over 27% YTD, and still trending higher. With both the market and the biotech sector in strong bull mode, now maybe an opportune time to go 'shop' for biotech stocks. In this article, we discuss the investing activities of the world's largest fund managers, managing between $50 billion and over $700 billion in 13-F assets, in small-cap biotech stocks, based on the latest available Q4 institutional 13-F filings (other articles focusing on the investing activities of mega funds in micro-cap, mid-cap and large-cap biotech can be accessed from our author page, as they become available).
Taken together these mega fund managers 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. Also, taken together, they are bullish on the small-cap biotech group, adding a net $549 million in Q4 to their $6.52 billion prior quarter position, and they are also slightly under-weight in the group by a factor of 0.8 (for more general information on these guru funds, please look at the end of the article).
We have broken the biotech group by capitalization due to the sheer size of the group, and the fact that larger biotech companies with commercial product portfolios attract a more risk-averse and conservative investors who look for revenues and sustained profitability in constructing their value thesis. Small-cap and micro-cap biotech companies 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, and hence they generally attract a more speculative investor due to the uncertainty associated with the cash flow from their product portfolios.
The following are the small-cap biotech companies that these mega fund managers are most bullish about (see Table):
Affymax Inc. (AFFY): 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. Mega funds together added a net $41 million in Q4 to their $95 million prior quarter position in the company, and taken together mega funds hold 28.8% of the outstanding shares. The top buyer was Fidelity Investments ($40 million), also the top holder at $62 million.
AFFY shares have been among the strongest small-cap biotech gainers this year, almost doubling YTD. They have been especially volatile this week, first on rumors and then following confirmation that its peginesatide anemia drug for the treatment of anemia in chronic kidney disease [CKD] in adult patients on dialysis, won FDA approval. Although shares have retreated almost 20% from the $16+ highs they hit on Tuesday due to pricing concerns, a number of brokers have expressed optimism, with Baird raising its price target to $17 from $15.
Dynavax Technologies (DVAX): DVAX is a clinical-stage biotech company that is engaged in the discovery and development of novel products to prevent and treat infectious and inflammatory diseases. Mega funds together added a net $63 million in Q4 to their $140 million prior quarter position in the company, and taken together mega funds hold 27.0% of the outstanding shares. The top buyers were Fidelity Investments ($22 million) and Vanguard Group ($18 million), and the top holder was Fidelity Investments ($111 million).
DVAX reported Tuesday that final phase 3 data for HEPLISAV in chronic kidney disease patients demonstrated superiority of seroprotection compared to Energix-B, thereby confirming earlier results. The company is currently engaged in preparing to submit its first Biologics License Application [BLA] for the HEPLISAV Hepatitis B Vaccine to the FDA in the second quarter, followed soon perhaps by a submission of Marketing Authorization Application for European approval.
Spectrum Pharmaceuticals (SPPI): SPPI develops innovative therapies with a focus in the areas of hematology and oncology. Mega funds together added a net $40 million in Q4 to their $163 million prior quarter position in the company, and taken together mega funds hold 26.5% of the outstanding shares. The top buyer was Fidelity Investments ($37 million), and the top holders were Fidelity Investments ($62 million) and Vanguard Group ($36 million).
SPPI was among the best performing stocks in the biotech group last year, having more than doubled in 2011, but its shares have trended weaker this year. In its most recent Q4, it missed analyst earnings estimates (24c v/s 28c), while revenues came in-line; its shares currently trade at 22-23 forward P/E and 4.1 P/B compared to averages of 22.8 and 4.8 respectively for its peers in the drug manufacturers group; however, earnings are expected to drop from $1.25 in 2011 to 90c in 2012 and 58c in 2013.
The following are some additional small-cap biotech stocks that mega funds bought in Q4 (see Table):
- Lexicon Pharmaceuticals (LXRX), a development stage biotech company focused on the discovery and development of protein drugs to treat various human diseases, and a leader in defining the functions of genes for drug discovery using large-scale knockout mouse technology, in which mega funds together added a net $45 million in Q4 to their $163 million prior quarter position in the company;
- Exelixis Inc. (EXEL), that develops small-molecule therapies for the treatment of cancer, in which mega funds together added a net $40 million in Q4 to their $379 million prior quarter position in the company;
- Nektar Therapeutics (NKTR), 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., in which mega funds together added a net $16 million in Q4 to their $441 million prior quarter position in the company;
- Infinity Pharmaceuticals (INFI), an innovative cancer drug discovery and development company, in which mega funds together added a net $4 million in Q4 to their $81 million prior quarter position in the company;
- Avanir Pharmaceuticals (AVNR), a biotech developing therapeutic products for the treatment of central nervous systems disorders of high unmet medical need, in which mega funds together added a net $3 million in Q4 to their $173 million prior quarter position in the company;
- Keryx Biopharmaceuticals (KERX), a developer of novel pharmaceutical products to treat cancer, renal disease and other life-threatening diseases, in which mega funds together added a net $1 million in Q4 to their $40 million prior quarter position in the company;
- Mannkind Corp. (MNKD), a developer of treatments for cancer, diabetes, inflammatory and autoimmune diseases, with its lead product candidates the AFREZZA dry powder insulin formulation and its proprietary light, discrete and easy-to-use AFREZZA inhaler through which the powder is inhaled deep into the lungs, in which mega funds together added a net $1 million in Q4 to their $33 million prior quarter position in the company; and
- Curis Inc. (CRIS), a development stage biotech company focused on the development of targeted cancer therapies that modulate signaling pathways controlling the repair and regeneration of tissues, in which mega funds together added a net $1 million in Q4 to their $44 million prior quarter position in the company.
Besides these, mega funds based on their Q4 trading activity indicated that they are bearish on the following small-cap biotech stocks (see Table):
- Arena Pharmaceuticals (ARNA), a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory, and metabolic diseases, in which mega funds together cut a net $9 million in Q4 from their $89 million prior quarter position in the company;
- Neurocrine Biosciences (NBIX), a neuroscience-based company focused on the discovery and development of novel therapeutics to treat endocrine-related and neurological diseases and disorders, in which mega funds together cut a net $8 million in Q4 from their $168 million prior quarter position in the company; and
- Threshold Pharmaceuticals Inc. (THLD), a biotech company focused on the discovery and development of therapeutics based on tumor hypoxia, a powerful scientific platform that offers broad potential to treat most solid tumors, based on the realization that tumors thrive in areas with low levels of oxygen, or hypoxic regions, in which mega funds together cut a net $1 million in Q4 from their $23 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.