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San Diego, CA-based Tang Capital Management, founded in 2002 by Kevin C. Tang is a hedge fund that specializes in the life sciences industry. Prior to founding his firm, Mr. Tang was most recently the Managing Director and head of Life Sciences research group at Deutsche Banc Alex Brown. As of the most recent filing for the March 2012 quarter, filed with the SEC last week, it held $429 million in 13-F assets. Between firm inception and through May, 2010, the firm had generated a total return of 520%, or 26% on an annualized basis, compared to the 5.3% average annual return for the S&P 500 over the same period.

We analyzed Tang's biotech holdings in its Q1 2012 13-F to determine its highest conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are its high conviction bullish positions, that are also trading undervalued compared to the peers in their group (see Table):

Amylin Pharmaceuticals (AMLN): AMLN develops drugs for the treatment of diabetes, obesity and other diseases. Tang added a new $46 million position in Q1. Other leading institutions with large bullish bets on AMLN in Q4 (the most recent quarter for which most institutional filings are available) included mega fund T Rowe Price Associates, with $288 billion in 13-F assets, adding 2.8 million shares to its 1.0 million share prior quarter position, and hedge fund Kingdon Capital Management, with $1.86 billion in 13-F assets, adding a new 1.2 million share position.

AMLN shares have mounted a strong rally recently, up about 130% YTD, with the biggest surge occurring at the end of March after news broke that the company rejected a $3.5 billion unsolicited bid from Bristol-Myers Squib (BMY), a move that effectively put a $22 floor under the stock. On Monday, the company announced that it had hired bankers and was actively looking to sell itself, with Astrazeneca Plc (AZN), Sanofi (SNY) and Merck (MRK) mentioned as potential suitors, that could pay a premium to get access to its valuable BYETTA / BYDUREON diabetes portfolio. The street has been abuzz over the news, with some speculating that the company could ultimately go for as much as $31 a share, still well above Wednesday's closing price of $26.20.

Spectrum Pharmaceuticals (SPPI): SPPI develops innovative therapies with a focus in the areas of hematology and oncology. Tang added a new $20 million position in Q1. Other leading institutions with large bullish bets on SPPI in Q4 (the most recent quarter for which most institutional filings are available) included mutual fund powerhouse Fidelity Investments, with $492 billion in 13-F assets, adding 2.9 million shares to its 1.9 million share prior quarter position, and New York-based biotech-focused hedge fund, Baker Bros. Advisors, with $3.0 billion in 13-F assets, adding a new 0.9 million share position.

SPPI shares have been weak since its announcement on April 5th that its phase 3 clinical trials in bladder cancer failed to meet the primary endpoint of statistically significant difference in the rate of tumor recurrence, the same day it also announced that it way buying Allos Therapeutics (ALTH) for $1.82/share in cash. Its shares are now down about 25% YTD, after a blockbuster 2011 during which share prices more than doubled. Furthermore, in its most recent Q4, the company missed analyst earnings estimates (24c v/s 28c), while revenues came in-line; its shares currently trade at 20-21 forward P/E and 3.3 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 89c in 2012 and 53c in 2013.

Salix Pharmaceuticals (SLXP): SLXP develops branded prescription drugs for the treatment of GI diseases. Tang added a new $15 million position in Q1. Other leading institutions with large bullish bets on SLXP in Q4 (the most recent quarter for which most institutional filings are available) included Pittsburgh, PA,-based mutual fund powerhouse Federated Investors, with $352 billion in assets under management, adding 1.5 million shares to its 0.2 million share prior quarter position, and legendary billionaire investor Ken Griffin's Chicago-based hedge fund Citadel adding a new 0.4 million share position. SLXP shares have performed well recently, almost doubling from the lows last September, and they currently trade at 16 forward P/E and 5.2 P/B compared to averages of 25.9 and 7.1 for its peers in the drug manufacturers group, while earnings are projected to increase slightly from $2.82 in 2011 to $3.05 in 2013.

The following are additional companies that Tang is bullish about, accumulating shares in them in Q1 2012 (see Table):

  • Oncogenex Pharma Inc. (OGXI), a biotech company engaged in the development of new cancer therapies that address treatment resistance in cancer patients, in which it added a new $11 million position;
  • Alexza Pharmaceuticals (ALXA), a development stage biotech company, focused on the research, development and commercialization of a novel proprietary drug delivery system for the acute treatment of central nervous system conditions, in which it added a new $6 million position;
  • 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 it added a new $6 million position;
  • Human Genome Sciences (HGSI), that develops gene-based protein and antibody drugs to treat such diseases as hepatitis C, lupus, anthrax, cancer, rheumatoid arthritis and HIV/AIDS, in which it added a new $2 million position; and
  • Biosante Pharmaceuticals (BPAX), that develops products for female sexual health and oncology, in which it added a new $2 million position.

The following are Tang's high conviction bearish picks, based on its Q1 2012 selling activity (see Table):

  • Optimer Pharmaceuticals (OPTR), that focuses on discovery, development and commercialization of hospital specialty products such as products that treat gastrointestinal infections and related diseases, in which it cut out completely in Q1 2012 its $16 million prior quarter position;
  • United Therapeutics Corp. (UTHR), a biotech company focused on developing therapies to treat cardiovascular, inflammatory and infectious diseases, in which it cut out completely in Q1 2012 its $4 million prior quarter position; and
  • Achillion Pharmaceutical (ACHN), a clinical-stage biotech focused on developing new treatments to patients with infectious diseases, including HCV and resistant bacterial infections, in which it cut $3 million in Q1 2012 from its $6 million prior quarter position.

Table

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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: Biotech-Focused Star Hedge Fund Tang Capital's Q1 2012 Picks In Its $429 Million Portfolio