The SPDR S&P Biotech ETF was up over 20% in Q1 of 2012, after just a 5% rise in the prior year, and within the group many microcap biotech companies are up even more sharply. This includes, for example, oncology-focused Galena Biopharma Inc. (GALE), that is up over 250%; XOMA Ltd. (XOMA), that develops antibodies and recombinant proteins to treat infections, immunological and inflammatory diseases and cancer, that is up over 125%, and Discovery Laboratories Inc. (DSCO), a developer of therapies utilizing proprietary surfactant replacement technology to treat respiratory disorders and diseases, that is up over 50% YTD.
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 legendary or guru fund 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.
In this article, via an analysis based on the latest available Q4 institutional 13-F filings, we identify the microcap 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).
The following are the micro-cap biotech companies that these legendary or guru fund managers are most bullish about (see Table):
Targacept Inc. (TRGT): TRGT is a development-stage biotech that discovers and develops NNR Therapeutics, a new class of drugs for the treatment of CNS diseases and disorders. Guru funds together added a net $29 million in Q4 to their $3 million prior quarter position in the company, and taken together guru funds hold 21.8% of the outstanding shares. The top guru fund buyer was Boston-based hedge fund Baupost Group, headed by star Manager Seth Klarman, that added $26 million in Q4, also the top holder at $26 million. However, Mr. Klarman has since bailed out of TRGT, filing a 13G earlier this month, indicating that he completely exited his TRGT position at the end of Q1.
TRGT shares took a strong beating in 2011, down by almost 80%, and they are down another 20% YTD. Its shares currently trade at a 16% discount to book value, and its market-cap of $148 million is currently below the value of its cash and short-term investments on its balance sheet of $195 million (with short- and long-term debt of just over $3 million). The culprit has been a spate of negative news ever since its share price topped out above $30 in March of 2011, including a failure of its RENAISSANCE phase 3 trials of TC-5214 as an adjunct therapy to an antidepressant in patient with major depressive disorder who do not respond adequately to initial antidepressant treatment. However, the company still has promising trials in schizophrenia, Alzheimer's and asthma, and its shares might be interesting as a speculative buy at less than cash-on-hand for the not-so-risk-averse investor.
Endocyte Inc. (ECYT): ECYT develops targeted therapies using small molecule drug conjugates for the treatment of cancer and inflammatory diseases. Guru funds together added a net $6 million in Q4 to their $3 million prior quarter position in the company, and taken together guru funds hold 3.4% of the outstanding shares. The top buyer was billionaire guru fund manager George Soros's Soros Fund Management ($5 million), also the top holder at $5 million.
ECYT shares are among Monday's (April 16th) top gainers, up over 100% at the time of this writing, after the company announced before the market-open of an exclusive worldwide agreement with Merck & Co. (MRK) to develop and commercialize phase 3 cancer candidate vintafolide. As part of the agreement, ECYT stands to receive a $120 million upfront payment, just slightly larger than its entire market-cap before the announcement, and is also eligible for milestone payments of up to $880 million.
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). Guru funds together added a net $3 million in Q4 to their $13 million prior quarter position in the company, and taken together guru funds hold 6.7% of the outstanding shares. The top buyer was Chicago-based hedge fund company Balyasny Asset Management (BAM), headed by Guru Dmitri Balyasny, that added $2 million in Q4, and the top holder was hedge fund guru Andreas Halvorsen's Viking Global Investors ($13 million).
ONTY shares took a huge tumble last month, and are down by about 45% YTD, after partner Merck KgaA revealed that results from its phase 3 trial of Stimuvax will not be released until 2013. Stimuvax is being developed by Merck KgaA under a license agreement with ONTY.
The following are some additional microcap biotech companies that guru fund managers accumulated in Q4 (see Table):
- Sunesis Pharmaceuticals Inc. (SNSS), a development-stage biotech focused on the development and commercialization of oncology therapeutics for the treatment of hematologic and solid tumor cancers, in which guru funds together added a new $2 million position in Q4;
- Vical Inc. (VICL), that develops DNA-based vaccines and therapeutics to prevent and treat cancer and cardiovascular and infectious diseases, in which guru funds together added a net $1 million in Q4 to their $3 million prior quarter position in the company; and
- Vanda Pharmaceuticals (VNDA), that develops compounds that seek to treat central nervous system disorders such as schizophrenia and sleep disorders, in which guru funds together added a net $1 million in Q4 to their $4 million prior quarter position in the company.
Besides these, guru fund managers based on their Q4 trading activity indicated that they are bearish on the following microcap biotech stocks (see Table):
- Ligand Pharmaceuticals Inc. (LGND), a development-stage biotech focused on the development of new drugs that address a variety of diseases including cancer, osteoporosis, and inflammation, among others, in which guru funds together cut out completely their $11 million prior quarter position in the company;
- YM Biosciences (YMI), a developer of products for the treatment of cancer and cancer-related conditions, in which guru funds together cut $5 million in Q4 from their $10 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 guru funds together cut a net $4 million in Q4 from their $6 million prior quarter position in the company;
- Sinovac Biotech Ltd. (SVA), a Chinese developer of vaccines for infectious diseases such as hepatitis A and B and influenza, in which guru funds together cut a net $1 million in Q4 from their $4 million prior quarter position in the company;
- 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 guru funds together cut a net $1 million in Q4 from their $4 million prior quarter position in the company;
- Savient Pharmaceuticals (SVNT), a developer of a treatment to promote weight gain following involuntary weight loss related to disease or medical condition, in which guru funds together cut a net $1 million in Q4 from their $2 million prior quarter position in the company;
- 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 guru funds together cut a net $1 million in Q4 from their $2 million prior quarter position in the company;
- Array Biopharma Inc. (ARRY), 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, in which guru funds together cut a out completely their $1 million prior quarter position in the company;
- Sangamo Biosciences (SGMO), that develops and engineers zinc finger DNA-binding proteins, a naturally occurring class of proteins, for the regulation of disease-associated genes to drive desired therapeutic outcomes, in which guru funds together cut a net $1 million in Q4 from their $2 million prior quarter position in the company; and
- Raptor Pharmaceutical (RPTP), that develops medicines that improve the life of patients with severe, rare diseases, in which guru funds together cut a net $1 million in Q4 from their $24 million prior quarter position in the company.
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.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.