Tang Capital's Holdings: Insights Into Successful Investing

|
Includes: AZN, HRTX, MDVN, OGXI, SPPI
by: StockMatusow

Examining the regulatory filings of successful hedge funds can often give investors valuable insight into the thinking of top investment managers. Recent filings from the biotechnology fund Tang Capital reveals some emerging companies with strong growth potential. Tang Capital has already chalked up a significant win this year, as AstraZeneca (NYSE:AZN) purchased Ardea Biosciences (NASDAQ:RDEA) for a significant premium. This deal was surprising both for the significant value returned to RDEA investors and because it was not expected by Wall Street's prognosticators. It was clearly expected by Tang Capital, who for over a decade has chalked up one of the most successful investment track records.

Multiple other companies identified in the hedge fund's filings have the potential to likewise generate significant returns for investors, including La Jolla Pharmaceuticals (NASDAQ:LJPC), Spectrum Pharmaceuticals (NASDAQ:SPPI), OncoGenex (NASDAQ:OGXI) and AP Pharma (APPA.OB).

On April 23rd, AstraZeneca announced the acquisition of Ardea Biosciences for $1.26 billion, or about $1.1 billion after accounting for the cash on Ardea's books. The acquisition price of $32 per share represented a 54% premium over the price of Ardea's price before the deal was announced. AstraZeneca is interested in Ardea's lead product candidate lesinurad, which is being tested in Phase III for gout. The Phase III program is expected to be completed in mid-2013, with potential market approval in 2014.

A Form 13D disclosure form filed with the SEC on April 25 revealed that Tang Capital owned 4.1 MM RDEA shares. As of March 2, 2012, there were 36.7 MM shares of the company's common stock ($0.001 par value) outstanding, which means that at the time of the AstraZeneca acquisition Tang Capital owned about 11% of the total shares outstanding. An impressive win for Tang Capital.

On April 16, 2012 La Jolla Pharmaceutical Company announced the acquisition of the galectin-3 inhibitor GCS-100 from Solana Therapeutics (private). The drug has potential to treat chronic kidney disease (CKD), which alone presents a blockbuster opportunity, as well as several types of organ fibrosis. Form 13G filings dated December 31, 2011, indicated that Tang Capital owned 8.3 MM shares of LJPC.PK, which was before they announced a 100:1 reverse split on February 17, 2012. The stock is now trading around $0.07, which gives it an attractive market capitalization and entry point for this unknown story. For comparison, Reata Pharmaceuticals was able to secure lucrative partnership agreements for a treatment for moderate to severe CKD after completing two relatively small proof-of-concept (POC) trials in diabetic patients. In two deals with Abbott, the company has received a jaw-dropping $850 million in up-front licensing payments. Considering La Jolla Pharmaceuticals' low valuation and the similar potential to Reata in kidney disease, this stock has the potential to increase many times over based on proof-of-concept data for GCS-100. I would like to point out however that many pink sheets carry huge risk, and this stock certainly is not for everyone. Having said this, if there was any pink sheet worth the gamble, this one might be it, but be advised; it's a long shot.

A.P. Pharma is developing APF530 (granisetron), a long-acting, subcutaneous drug for the prevention of chemotherapy-induced nausea and vomiting (CINV). APF530 was successfully tested in a large Phase III trial for the treatment of acute- and delayed-onset CINV in cancer patients receiving moderately emetic chemotherapy (MEC). The 10 mg dose of APF530 demonstrated statistical non-inferiority to market leader Aloxi (palonosetron), and numeric superiority on several important measures. A.P. Pharma encountered a delay with the FDA in its quest to gain market approval for APF530. The delay was mainly related to CMC, including a switch from a two-syringe to single-syringe dosing system and an improvement in the final sterilization process.

The FDA also asked for a through heart rhythm (QT) study and a metabolism study, which were combined and successfully completed. If approved, APF530 faces favorable reimbursement dynamics and has clinical advantages over other marketed products. For example, patients are able to achieve a more durable response using APF530 compared to the durability of Aloxi. Furthermore, a generic form of Aloxi will not be available until 2024, creating favorable competitive dynamics for APF530. The overall market for CINV drugs is estimated to be worth at least $900 million per year, and APF530 has the potential to capture a significant portion of this market. A.P. Pharma plans to re-file for with the FDA in the mid- 2012 and gain approval around the end of 2012. Because there is a shortage of late-stage high-value oncology assets, we think AP Pharma could be the next acquisition target in Tang's portfolio.

A.P. Pharma is trading at $0.43 per share and has an enterprise value of only $66 million, so it looks cheap for this soon to be approved product. If APF530 is approved, A.P. Pharma has the potential to realize very strong gains in market capitalization or be acquired at a significant premium. A Form 13D disclosure form filed with the SEC on July 7, 2011 revealed that Tang Capital owned 60.2MM APPA.OB shares, which is about 30% of the total shares outstanding. This could be the next Ardea for Tang Capital.

Spectrum Pharmaceuticals is a small oncology company that markets Zevalin (inritumomab tiuxetan) for non-Hodgkins lymphoma (NHL) and Fusilev (levoleucovorin). With a current price of $10.49 per share, Spectrum has an EV of $436.2 million, which is cheap considering they just did $60 million in 1Q revenue. The company had a setback in early April when they announced that a Phase III trial for apaziquone as a treatment for non-muscle invasive bladder tumors (NMIBC) failed to meet its primary endpoint, leaving the future of the development program unclear. This caused the stock to fall from about $13 to below $10. At the same time that Spectrum announced this trial result, on April 5, the company also announced the acquisition of Allos Therapeutics (NASDAQ:ALTH) and its drug Folotyn for the treatment of relapsed or refractory peripheral T-cell lymphoma (PTCL). Spectrum purchased Allos for $1.82/share in cash. Including Allos' substantial cash position, the deal will only cost $108 million for a drug that sold $50 million last year. Investors did not reward Spectrum for this acquisition in the short term, but this deal should yield dividends from future Folotyn sales as they become accretive to earnings later this year.

Spectrum reported 2011 revenue of $193 million, which was a 160% increase over 2010. The company's strong growth continued into 2012 as they announced first quarter revenue of $60 million, compared to $44 million for the same period in 2011. Spectrum's strong quarter led to record diluted earnings of $0.40/share. Assuming the company reports similar earnings for the rest of the year, this annualizes at earnings of $1.60/share for 2012. With Spectrum shares trading at $10.76, this leads to a very low P/E ratio of 6.7. Part of the depressed valuation in Spectrum shares is due to investors' belief that Fusilev sales will plummet as generic leucovorin returns to the market, but this remains to be seen. Meanwhile, Allos reported 2011 revenue of $50 million, a 43% increase over 2010 revenue of $35 million and Spectrum continues to report record revenue and earnings. A 13F filing from March 31 indicated that Tang Capital owned 4.58 MM shares of Spectrum, representing 7.8% of the outstanding shares. Clearly here is a smart investor that expects Spectrum to continue its strong year over year growth.

A 13F filed on March 31 revealed that Tang Capital owns 833,000 shares of OncoGenex, representing 8.5% of the total shares outstanding. The company is currently developing custirsen (OGX-011) as a potential treatment for numerous different types of cancer. The drug is being tested in a Phase III trial in chemotherapy-naïve castration-resistant prostate cancer (CRPC) in combination with prednisone and docetaxel. The trial is estimated to complete enrollment before the end of 2012, with results expected to follow in the first half of 2014. A trial testing the drug candidate in combination with the newly approved chemotherapy Jevtana (cabazitaxel) has been announced, and is expected to be completed in late 2015. Custirsen accrued promising data in Phase II and OncoGenex is developing the drug in partnership with Teva Pharmaceuticals (NASDAQ:TEVA).

Despite the promising clinical potential of custirsen, OncoGenex stock is currently trading at $12.99/share, giving the company an enterprise value of only $62 million. This strikes us a very cheap given the valuation of other companies developing promising prostate cancer drugs including Medivation (NASDAQ:MDVN), which has an EV of $2.77 billion and Algeta (ALGETA.OL), which has an EV of approximately $974 million. Hence, it appears that Tang Capital expects that OGXI could have similar prospects as these other prostate cancer drug companies when they report Phase III data.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is intended for informational and entertainment use only and should not be construed as professional investment advice, but rather my opinions as a writer only. Always do you own complete due diligence before buying and selling any stock.