The biotech group as represented by the NYSE ARCA Biotech Index ($BTK) has been strong this year, now up over 21% YTD. 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, via an analysis based on the latest available Q4 institutional 13-F filings, we identify the small-cap biotech stocks that are being accumulated and those being distributed by legendary or guru fund managers, such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, that are well-known for their savvy in picking winning stocks year after year. Taken together, these guru managers are bullish on the biotech group, adding a net $797 million in Q4 to their $5.53 billion prior quarter holdings in the group (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 legendary or guru fund managers are most bullish about (see Table):
Idenix Pharmaceuticals (IDIX): 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, hepatitis B virus (HBV), human immunodeficiency virus (HIV) type-1, and acquired immune deficiency syndrome (AIDS). Guru funds together added a net $40 million in Q4 to their $32 million prior quarter position in the company, and taken together guru funds hold 8.8% of the outstanding shares. The top guru fund buyer was Boston-based hedge fund Baupost Group, headed by star Manager Seth Klarman, that added $24 million in Q4, and the top holders were Baupost Group ($43 million) and legendary billionaire investor Ken Griffin's Chicago-based hedge fund Citadel ($13 million).
IDIX shares have given back most of their gains from an early start-of-the-year rally in first two weeks of the year that took shares up more than 100%, benefiting from both the January 9th announcement of the acquisition of rival INHX by BMY that ignited a rally in the group, as well as positive interim phase 2b clinical trial data on its HCV Nucleotide Inhibitor, IDIX 184, that was released the same day by the company. The collapse in the share price from the January rally has in part been triggered by profit-taking, and also in part by an early-April announcement by Abbott Laboratories (ABT) of positive results from its hepatitis C trials that sent most rival hepatitis C drug developers down. Meanwhile, IDIX continues to be talked about as a takeover target for Merck & Co. (MRK), and there are a number of other potential positive developments, including a possible licensing deal with Gilead Sciences (GILD) that could end the patent fight over certain nucleoside compounds useful in treating patients with hepatitis C virus infection, that could easily send shares back up into double-digit territory.
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. Guru funds together added a net $24 million in Q4 to their $14 million prior quarter position in the company, and taken together guru funds hold 5.1% of the outstanding shares. The top guru fund buyer was billionaire star fund manager Stephen Cohen's hedge fund SAC Capital Advisors ($19 million), also the top holder at $33 million.
DVAX shares are up almost 50% YTD, after being nearly flat in 2011. The company reported last month 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.
Achillion Pharmaceutical (ACHN): ACHN is a clinical-stage biotech focused on developing new treatments to patients with infectious diseases, including HCV and resistant bacterial infections. Guru funds together added a new $15 million position in Q4, and taken together guru funds hold 2.5% of the outstanding shares. The top guru fund buyer was legendary billionaire investor Ken Griffin's Chicago-based hedge fund Citadel ($8 million), also the top holder at $8 million.
Like in the case of IDIX above, ACHN shares also had a strong start-of-the-year rally, up 50% at its peak in the first two weeks of the year, triggered by the announcement of the INHX acquisition by BMY. However, shares since have given back most of those gains, in part also due to diminished expectations of a take-out. Analysts, however, continue to be optimistic about its hepatitis C assets, and of the fourteen analysts that cover the company, twelve rate it at buy/strong buy, one at hold, and one at underperform, with a mean price target of $15, well above current prices in the $8-$9 range.
The following are some additional small-cap biotech companies that guru fund managers accumulated in Q4 (see Table):
- Halozyme Therapeutics (HALO), a developer of recombinant human enzymes for the infertility, drug delivery, endocrinology, oncology, and dermatology markets, in which guru funds together added $7 million in Q4 to their $4 million prior quarter position;
- Intermune Inc. (ITMN), a development-stage biotech company engaged in the development and commercialization of therapies in the areas of pulmonology and fibrotic diseases, in which guru funds together added $3 million in Q4 to their $55 million prior quarter position; and
- Spectrum Pharmaceuticals (SPPI), that develops innovative therapies with a focus in the areas of hematology and oncology, in which guru funds together added $1 million in Q4 to their $2 million prior quarter position.
Besides these, guru fund managers based on their Q4 trading activity indicated that they are bearish on 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 guru funds together cut $3 million in Q4 from their $81 million prior quarter position;
Also, in addition to CRIS, guru fund managers can be interpreted as being bearish on the following small-cap biotech companies, in which they did not have any position in Q3 or Q4 (see Table):
- Arena Pharmaceuticals (ARNA), a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory, and metabolic diseases;
- 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;
- Ista Pharmaceuticals Inc. (ISTA), a developer of pharmaceutical drugs for diseases and conditions of the eye, and an emerging allergy drug franchise;
- Protalix Biotherapeutics (PLX), an Israeli developer of recombinant proteins indicated for various disorders using plant cell-based expression technology; and
- Sciclone Pharmaceuticals (SCLN), a developer of therapies to treat life-threatening diseases such as cancer and infectious diseases.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.