The SPDR S&P Biotech ETF is up almost 40% YTD, after just a 5% rise in 2011. Within that group, many micro-cap biotech stocks (those with market-caps of less than $300 million) are up even more sharply. These micro-cap biotech companies 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 the world's largest money 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.
These mega fund managers, such as Fidelity Investments, Goldman Sachs, BlackRock Inc., Vanguard Group, and 22 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the assets invested in the U.S. equity markets. Together, these mega fund managers are bullish on the biotech group, adding a net $4.2 billion in Q1 to their $117.4 billion prior quarter position in the group. Furthermore, overall they are over-weight in the group by a factor of 1.2; that is, taken together, the 25 mega funds have invested 2.0% of their assets in the group, slightly more than the 1.7% weighting of the biotech group in the overall market (for more general information on these mega funds, please look at the end of the article).
The following are micro-cap biotech companies that these mega fund managers are most bullish about (see Table):
Trius Therapeutics Inc. (TSRX): TSRX is a biotech focused on the development of antibiotics for serious, life-threatening infections. Mega funds together added a net 5.32 million shares in Q1 to their 2.78 million share prior quarter position in the company, and taken together mega funds held $48 million or 21.0% of the outstanding shares.
The top buyers was Wellington Management, one of the largest private independent investment management companies in the world, with $634 billion in assets under management, that purchased 3.70 million shares. Other large mega fund purchasers included Vanguard Group (0.62 million shares), with $1.7 trillion in assets under management, and T Rowe Price Associates (0.32 million shares), with $520 billion in assets under management. Overall, institutional investors loaded up on TSRX in Q1, adding 10.03 million shares to their 7.46 million share prior quarter position.
The driver for TSRX is Tedizolid Phosphate, currently in phase 3 trials for the treatment of acute bacterial skin and skin structure infections, including methicillin-resistance Staphylococcus aureus (MRSA). MRSA has recently emerged to be a significant threat in hospital and nursing-home settings, where patients with open wounds and weakened immune systems are particularly at risk. In fact, in 2005, more than 18,000 deaths were attributed to MRSA, more than the 16,000 people that died from HIV/AIDS in the same year.
The prospects for the drug received a boost recently, when the US Congress with bipartisan support two weeks ago approved 92-4 the Prescription Drug Users Fee Act that contains key incentives for antibiotic drug developers such as TSRX, under the Generating Antibiotic Incentives Now or GAIN Act. The first of phase 3 trials met both primary and secondary endpoints, and the second phase 3 trial is currently underway. If approved, the drug is projected to be a blockbuster, with annual peak sales approaching $1 billion. The company currently has over $95 million in cash and cash equivalents, and no debt, and trades at a market-cap of $230 million, and is a speculative bargain at these levels.
Other microcap biotech companies that mega fund managers are bullish about include:
- Oncogenex Pharma Inc. (OGXI), a biotech company engaged in the development of new cancer therapies that address treatment resistance in cancer patients, in which mega funds together added a net 1.66 million shares to their 1.37 million share prior quarter position in the company;
- Horizon Pharma Inc. (HZNP), that develops therapeutics for the treatment of arthritis, pain and inflammatory diseases, in which mega funds together added a net 2.34 million shares to their 2.25 million share prior quarter position in the company;
- XOMA Ltd. (XOMA), that develops antibodies and recombinant proteins to treat infections, immunological and inflammatory diseases and cancer, in which mega funds together added a net 2.23 million shares to their 1.82 million share prior quarter position in the company; and
- Cell Therapeutics Inc. (CTIC), that is a biopharmaceutical company engaged in the development of oncology or cancer drugs, in which mega funds together added a net 9.35 million shares to their 34.42 million share prior quarter position in the company.
The following are micro-cap biotech companies that mega funds are bearish about (see Table):
- Three S Bio ADS (SSRX), that is a Chinese developer of genetically engineered, protein-based products for nephrology, oncology and infectious diseases, in which mega funds together cut a net 0.38 million shares from their 4.20 million share prior quarter position in the company;
- Chelsea Therapeutics Intl (CHTP), that is a clinical-stage biotech that is developing prescription products in multiple therapeutic categories such as rheumatoid arthritis, psoriasis, and other inflammatory conditions, in which mega funds together cut a net 2.75 million shares from their 16.84 million share 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 mega funds together cut a net 1.12 million shares from their 5.29 million share prior quarter position in the company; and
- Dyax Corp. (DYAX), that is engaged in the use of its proprietary phage display drug discovery technology to identify and develop a broad range of chemical compounds for the treatment of a wide range of unmet medical needs, with an emphasis on inflammatory and oncology indications, in which mega funds together cut a net 0.82 million shares from their 19.38 million share prior quarter position in the company.
Furthermore, the following are additional micro-cap biotech companies that are among the top holdings of mega funds in the group (see Table):
- Xenoport Inc. (XNPT), that is engaged in the development of drugs that utilize the body's natural nutrient transporter mechanisms for the treatment of neurological disorders, in which mega funds together hold 19.47 million or 54.5% of the outstanding shares;
- Immunomedics Inc. (IMMU), that develops monoclonal antibody-based products to treat cancer and autoimmune and other diseases, in which mega funds together hold 20.96 million or 27.7% of the outstanding shares;
- Novavax Inc. (NVAX), a development stage biotech company focused on the development of recombinant vaccines using its virus-like particle (NYSE:VLP) platform technology, targeting pandemic and seasonal influenza, and other infectious diseases, in which mega funds together hold 27.36 million or 21.5% of the outstanding shares;
- Keryx Biopharmaceuticals (KERX), a developer of novel pharmaceutical products to treat cancer, renal disease and other life-threatening diseases, in which mega funds together hold 10.09 million or 14.2% of the outstanding shares;
- Zalicus Inc. (ZLCS), that develops new drugs built from combinations of approved drugs to treat inflammatory and metabolic diseases, in which mega funds together hold 9.15 million or 8.1% of the outstanding shares; and
- Galena Biopharma Inc. (GALE), that is a biotech company engaged in the development of innovative targeted, oncology treatments, in which mega funds together hold 3.10 million or 4.7% of the outstanding shares.
General Methodology and Background Information: The latest available institutional 13-F filings of the largest 25 mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
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.