The biotech group is among the largest in the market in terms of the number of companies, which number well over 300. Within the group, large-caps (those with market-caps over $5 billion) have well established commercialized product portfolios that generate revenues, and in most cases generate profitability. Micro-cap biotech companies (those with market-caps of less than $300 million) in contrast generally have no commercial products, but rather a pipeline of product candidates being tested in early- to sometimes mid- or late-stage clinical trials for a variety of disease conditions.
In between the two are mid-cap (between $2 billion and $5 billion in market-cap) and small-cap biotech (between $300 million and $2 billion in market-cap) companies, that in the case of small-cap are more biased towards clinical stage product portfolios, and in the case of mid-caps are more biased towards one or more commercialized products in their portfolio and a clinical development pipeline. Both due to the size of the sector, investor interest and the differing characteristics of the constituent companies, we have broken the sector by capitalization, and in this article we discuss the investing activities of the world's largest funds in mid-cap biotech stocks (other articles discussing the investing activities of mega funds in micro-cap biotech and small-cap biotech stocks were covered in prior articles).
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 mid-cap biotech companies that these mega fund managers are most bullish about (see Table):
Alkermes Plc (ALKS): Alkermes, an integrated biotech company, develops injectable and oral products for the treatment of central nervous system disorders, addiction, diabetes and autoimmune disorders. Mega funds together added a net 17.02 million shares in Q1 to their 60.96 million share prior quarter position in the company, and taken together mega funds held $1.35 billion or 59.9% of the outstanding shares.
The top buyer was T Rowe Price Associates, with $520 billion in assets under management, that purchased 9.32 million shares. Other large mega fund purchasers included mutual fund powerhouse Fidelity Investments (2.54 million shares), with $555 billion in 13-F assets, Denver, CO-based mutual fund powerhouse Janus Capital Management (1.29 million shares), with over $96 billion in 13-F assets, Vanguard Group (1.29 million shares), with $1.7 trillion in assets under management, and Wellington Management (1.13 million shares), one of the largest private independent investment management companies in the world, with $634 billion in assets under management. Overall, institutional investors loaded up on ALKS in Q1, adding 23.8 million shares to their 91.7 million share prior quarter position.
In its latest Q4 (March), ALKS beat revenue and earnings estimates, with revenues up 155% year-over-year, boosted by the recent acquisition of the drug-delivery unit EDT of Elan Plc (ELN), while also continuing to post losses. However, going forward analysts are projecting a dramatic improvement in earnings from a 29c loss in FY 2012 to a 69c profit in 2013 and $1.02 in 2014. At its current price in the $17 range, the stock trades at 16-17 forward P/E and 2.6 P/B, a discount given the projected strong revenue and earnings growth.
Wall Street analysts are bullish on the company, putting a mean price target in the $21-$22 range, well above current prices in the $17 range. The upside is driven mostly by optimism in the Street about the potential of the Bydureon drug for Type 2 Diabetes that is being launched by partner Amylin Pharmaceuticals (AMLN). It is widely expected to be a multi-billion dollar blockbuster drug, and besides that the company also has other potential blockbusters in the pipeline, including ZOHYDRO for pain, and Lyxumia for diabetes, in addition to an existing business that is already delivering well over half a billion dollars in annual revenue and growing.
Other mid-cap biotech companies that mega fund managers are bullish about include:
- Medivation Inc. (MDVN), that develops novel small molecule drugs for the treatment of prostate cancer, Alzheimer's disease and Huntington's disease, in which mega funds together added a net 4.12 million shares to their 9.75 million share prior quarter position in the company;
- Cubist Pharmaceuticals (CBST), a biopharmaceutical company that develops anti-infective products to treat conditions in the acute care environment, in which mega funds together added a net 3.49 million shares to their 28.10 million share prior quarter position in the company;
- Ariad Pharmaceuticals Inc. (ARIA), engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules, in which mega funds together added a net 6.14 million shares to their 61.80 million share prior quarter position in the company;
- Questcor Pharmaceuticals (QCOR), an integrated specialty pharmaceutical company focused on the development, acquisition and marketing of innovative, acute care and critical care hospital and specialty pharmaceutical products, in which mega funds together added a net 2.31 million shares to their 24.20 million share prior quarter position in the company;
- Arena Pharmaceuticals (ARNA), a biotech developer of oral drugs for cardiovascular, central nervous system, inflammatory, and metabolic diseases, in which mega funds together added a net 4.05 million shares to their 33.14 million share prior quarter position in the company; and
- Seattle Genetics Inc. (SGEN), a clinical biotech company focusing on the development of monoclonal antibody-based therapeutics for the treatment of cancer and autoimmune diseases, in which mega funds together added a net 1.67 million shares to their 50.51 million share prior quarter position in the company.
The following are mid-cap biotech companies that mega funds are bearish about (see Table):
- biotech company United Therapeutics Corp. (UTHR), that is focused on developing therapies to treat cardiovascular, inflammatory and infectious diseases, in which mega funds together cut a net 2.70 million shares from their 23.93 million share prior quarter position in the company;
- Incyte Corporation (INCY), that develops small molecule drugs for hematologic and oncology indications, and inflammatory and autoimmune diseases, in which mega funds together cut a net 1.36 million shares from their 75.80 million share prior quarter position in the company; and
- Amarin Corp. (AMRN), a clinical stage Ireland-based global pharmaceutical group which develops novel drugs for the treatment of cardiovascular diseases using its proprietary advanced oral and trans-dermal drug delivery technologies, in which mega funds together cut a net 2.28 million shares from their 29.34 million share prior quarter position in the company.
Furthermore, the following are additional mid-cap biotech companies that are among the top holdings of mega funds in the group (see Table):
- Onyx Pharmaceuticals Inc. (ONXX), a developer of small molecule drugs designed to prevent cancer cell proliferation and angiogenesis, in which mega funds together hold 24.67 million or 38.3% of the outstanding shares;
- Human Genome Sciences (HGSI), currently the subject of a hostile take-over attempt by U.K. pharmaceutical giant GlaxoSmithKline (GSK), develops gene-based protein and antibody drugs to treat such diseases as hepatitis C, lupus, anthrax, cancer, rheumatoid arthritis and HIV/AIDS, in which mega funds together hold 107.94 million or 54.2% of the outstanding shares;
- Pharmacyclics Inc. (PCYC), a development stage biotech company that is focused on discovering and developing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases, in which mega funds together hold 21.54 million or 31.2% of the outstanding shares; and
- Theravance Inc. (THRX), that develops small molecule drugs for respiratory disease, bacterial infections, overactive bladder, and gastrointestinal disorders, in which mega funds together hold 31.07 million or 35.9% 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.
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