Top March 2012 Quarter Picks From $1 Billion Pure-Play Biotech Swiss Hedge Fund BB Biotech

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Includes: AMGN, ARIA, CELG, DNDN, GILD, IDIX, INCY, IONS, MDCO, ONXX, VRTX
by: GuruFundPicks

Switzerland-based BB Biotech, founded in 1993, is one of the largest pure-play biotech investment companies, and also a public company with its shares are listed on the Swiss Stock Market. About a third of its assets are invested in oncology-focused biotech companies, another 20% in infectious-disease focused biotech companies, and about 15% each in metabolic and cardiovascular focused biotech companies. As of the most recent filing for the March 2012 quarter, filed with the SEC on Wednesday, it held $1.01 billion in 13-F assets, making concentrated bets in just 20 companies. Based on the net asset value (NAV), its stock has returned 23.7% YTD and 390.5% since inception in November, 1993.

Two of BB Biotech's companies got acquired during the quarter. This included Micromet, in which it owned 6.8 million shares or almost $75 million worth at the end of Q4, that got acquired by leading biotech company Amgen Inc. (NASDAQ:AMGN) at a steep premium of almost 35%. The second major deal it benefited from was the acquisition of its portfolio company Pharmasset Inc., in which it held 0.15 million shares or almost $20 million worth, that got acquired at a steep premium of about 80% by Gilead Sciences (NASDAQ:GILD).

We analyzed BB Biotech's 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 moves (see Table):

Medicines Company (NASDAQ:MDCO): MDCO is a biopharmaceutical company that provides products for the advancement of treatment of critical care patients, including products for use in coronary interventions and anti-coagulation therapy. BB Biotech added a new $31 million position in the company in Q1 2012. Besides BB Biotech, leading institutions making large bullish bets on MDCO in Q1 include Jersey City, N.J.,-based investment management firm Lord, Abbett & Co., with $41.6 billion in 13-F assets at the end of Q4, adding a new 1.1 million share position, and billionaire star fund manager Stephen Cohen's hedge fund SAC Capital Advisors, with over $15.7 billion in 13-F assets, adding a (almost) new 0.8 million share position.

MDCO shares are currently forming a tight 12%-15% consolidation base at multi-year highs in the $20-$23 range, after a two-year rally from the lows in 2009-10 that has lifted shares almost four-fold. The shares trade at 16-17 forward P/E and 2.2 P/B compared to averages of 31.3 and 18.2 for its peers in the biotech group, while earnings are projected to fall from $1.57 in 2011 to $1.31 in 2013. Earlier, the week before last, on Wednesday, the company reported a strong Q1 (March), beating analyst revenue and earnings estimates (27c v/s 14c), and its shares have traded up about 9% since the report.

Onyx Pharmaceuticals Inc. (NASDAQ:ONXX): ONXX is a biotech company engaged in the development of small molecule drugs designed to target mechanisms that cause cancer cell proliferation and angiogenesis. BB Biotech added a new $7 million position in Q1 2012. Besides BB Biotech, leading institutions making large bullish bets on ONXX in Q1 include SAC Capital Advisors adding 1.0 million shares to its 0.1 million share prior quarter position, and healthcare-focused hedge fund Visium Asset Management adding a (almost) new 0.6 million share position.

ONXX reported its Q1 (March) on Wednesday, beating revenue and missing on earnings estimates (68c loss v/s 60c loss). Its shares currently trade near multi-year highs, at 3.4 P/B and 6.0 PSR (price-to-sales ratio) compared to averages of 7.1 and 2.9 for its peers in the medical drugs group. Last month, Goldman included the company in a select list of likely take-out candidates in the small-cap arena.

Idenix Pharmaceuticals (NASDAQ: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). BB Biotech sold $8 million in Q1 2012 from its $19 million prior quarter position. Besides BB Biotech, another healthcare-focused institution sold IDIX in Q4 (the most recent quarter for which most institutional filings are available), namely New York-based biotech-focused hedge fund, Baker Bros. Advisors, with $3.0 billion in 13-F assets at the end of Q4, that closed its 0.6 million share prior quarter position in the company.

The stocks of hepatitis C players such as IDIX have been very volatile this year. During Q1, the stock traded in a wide range between $7 and $15, and since hedge funds only have to disclose their positions at the end of the quarter (other than the 5% ownership threshold requirements), we don't know when BB Biotech, or for that matter Baker Bros., may have sold their positions. For example, if they sold during the January rally near the highs, then their sale does not necessarily reflect bearishness at current price levels that are almost 50% below the January peak prices.

The rally in IDIX in January was triggered mostly by the January 9th announcement of the acquisition of rival Inhibitex by Bristol-Myers Squibb Co. (NYSE:BMY), that ignited a rally in the entire hepatitis C group of stocks, as well as also by 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 (NYSE: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. (NYSE:MRK), and there are a number of other potential positive developments, including a possible licensing deal with Gilead Sciences 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. The stock was recently upgraded to Market Perform by JMP Securities, and of the 12 analysts that cover it, five rate it buy/strong buy, four at hold, and the remaining three at underperform/sell, with a price target of over $12, well above current prices in the $7-$8 range.

The following are additional companies that BB Biotech is bearish about, selling shares in them in Q1 2012 (see Table):

  • Celgene Corp. (NASDAQ:CELG), that develops therapies to treat cancer and immune-inflammatory related diseases by regulating cells, genes and proteins, in which it cut $14 million in Q1 2012 from its $195 million prior quarter position; and
  • Vertex Pharmaceuticals (NASDAQ:VRTX), that engages in the discovery, development and commercialization of small molecule drugs for the treatment of hepatitis C, cystic fibrosis, epilepsy and other life-threatening diseases, in which it cut $10 million in Q1 2012 from its $166 million prior quarter position.

Other major holdings of BB Biotech at the end of Q1 2012 include:

  • Incyte Corporation (NASDAQ:INCY), that develops small molecule drugs for hematologic and oncology indications, and inflammatory and autoimmune diseases, in which it held a $112 million position at the end of Q1 after cutting a minor $2 million during the quarter;
  • Ariad Pharmaceuticals Inc. (NASDAQ:ARIA), that is engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules, in which it held a $50 million position at the end of Q1 after cutting a minor $2 million during the quarter;
  • Dendreon Corp. (NASDAQ:DNDN), a developer of targeted therapeutics to treat cancer using active immunotherapies, monoclonal antibodies and small molecules, in which it held an $18 million position at the end of Q1, unchanged from the prior quarter;
  • Isis Pharmaceuticals (ISIS), that is a leading genomics-based drug discovery and development company that develops treatments for cardiovascular, metabolic and neurodegenerative diseases and cancer using its antisense drug discovery platform, in which it held a $59 million position at the end of Q1, unchanged from the prior quarter; and
  • Gilead Sciences Inc., a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases, in which it held a $106 million position at the end of Q4, that shows an $8 million adding to the prior quarter holdings, but can be interpreted differently as it also includes BB Biotech's prior quarter holding of about $20 million of Pharmasset stock that got acquired by GILD during Q1.

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.

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