Top Fund Managers' Small Cap Biotech Picks

by: GuruFundPicks

Small cap biotech companies generally have no commercial products, but rather a pipeline of product candidates being tested in early- to late-stage clinical trials for a variety of disease conditions. This contrasts with mid and large cap biotech companies, that generally have products in the marketplace that generate revenues, and in many cases the companies have reached sustained profitability. Furthermore, the small-cap biotech companies are speculative by definition, with potential revenues often being many years in the future, and hence they attract a less risk-averse investor.

Mid and large cap biotech companies, in contrast, often are more attractive to conservative investors that look for revenues and sustained profitability in constructing their value thesis. Hence, we have broken down the companies in the biotech group into these two categories, in discussing the investments of legendary or guru fund managers in the biotech industry.

In this article, we identify small cap biotech companies that are being accumulated and those being distributed by legendary or guru fund managers such as Warren Buffett, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, based on our extensive database of the buying and selling activities of over 60+ such managers. Overall, gurus are bullish on small-cap biotech, adding a net $117 million to their prior $1.31 billion position in the group, selling $237 million and buying $354 million worth of stocks in the group. Furthermore, overall they are slightly under weight in the group by a factor of 0.82; that is taken together guru funds have invested 0.3% of their capital in small-cap biotech companies compared to their 0.4% weighting in the market.

The hedge fund and mutual fund managers included in this select group include only high-profile names who by virtue of their long-term market-beating returns have earned their standing in the investment community and are worthy of our attention. They include well-known names such as those mentioned above, as well as perhaps relatively lesser-known names that also have a stellar long-term history of beating the markets, such as Seth Klarman, John Griffin, Prem Watsa, Robert Karr and Lee Ainslie.

The following are the small-cap biotech companies that these guru fund managers are most bullish and bearish about (see table):

Guru Funds Bullish on Amarin Corp. (NASDAQ:AMRN)

AMRN is 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. Guru funds added a net $47 million to their $41 million prior quarter position. Top guru funds that bought AMRN during the June quarter included SAC Capital Advisors LP ($38 million), Kingdon Capital Management LLC ($10 million) and Balyasny Asset Management LLC ($8 million). Fidelity Investments is the other major institutional owner of AMRN, holding 16.3 million or 13.0% of the outstanding shares. We recently covered AMRN, recommending a buy based on AMR101’s sales potential and a possible buyout.

Guru Funds Bearish on Dendreon Corp. (NASDAQ:DNDN)

DNDN develops targeted therapeutics to treat cancer using active immunotherapies, monoclonal antibodies and small molecules. Among investor circles, it is probably best known as the maker of Provenge® for prostate cancer. Guru funds cut a net $17 million from their $177 million prior quarter position. Top guru funds that hold DNDN include SAC Capital Advisors LP ($112 million) and Soros Fund Management LLC ($34 million). Other major institutional owners of DNDN include PRIMECAP Management (7.7 million or 5.2% of outstanding shares) and Ameriprise Financial (7.1 million or 4.8% of outstanding shares). We recently covered DNDN, recommending a buy based on our thesis that the recent quarterly miss was a sales and marketing failure that was fixable, and that the market was now severely under-estimating the sales potential of Provenge®.

Guru Funds Bearish on Opko Health Inc. (NYSEMKT:OPK)

OPK develops a broad range of pharmaceuticals and diagnostics as well as ophthalmic instrumentation products. None of the 60+ guru funds have a position in this $1.5 billion market-cap company. Overall, 107 institutions hold OPK shares, with Vanguard Group (6.1 million or 2.2% of outstanding shares) being the largest.

Guru Funds Neutral on Ariad Pharmaceuticals Inc. (NASDAQ:ARIA)

ARIA is engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules. It is also developing small-molecule drugs that block signal transduction pathways in cells responsible for osteoporosis, and immune and inflammatory diseases. Guru funds added a net $2 million from their $10 million prior quarter position, and they are under-weight ARIA as together gurus hold 1.1% of the outstanding shares. Top guru funds that hold ARIA include Driehaus Capital Management ($9 million) and Platinum Investment Management Ltd. ($2 million). Fidelity Investments (19.5 million or 14.7% of the outstanding shares) is the largest institutional owner of ARIA shares. We recommended ARIA in early August, indicating that it was a buy based on the strength of its pipeline and continue to stand behind that call.

Guru Funds Bearish on PDL Biopharma Inc. (NASDAQ:PDLI)

PDLI develops treatments for cancer and immune disorders based on proprietary antibody humanization technology. Guru funds cut a net $7 million from their $62 million prior quarter position, and they are over-weight PDLI as together gurus hold 5.7% of the outstanding shares. Baupost Group LLC ($54 million) is the only guru fund that has a significant ownership interest in PDLI. Other major institutional holders include BNY Mellon Corp. (11.9 million or 8.5% of outstanding shares) and Renaissance Technologies (10.4 million or 7.4% of outstanding shares).

Gurus Bearish on Avanir Pharmaceuticals (NASDAQ:AVNR)

AVNR develops products to treat the central nervous system and inflammatory diseases. None of the 60+ guru funds have a position in this $400 million market-cap company. Overall, 111 institutions hold AVNR shares, with T Rowe Price (18.5 million or 14.9% of outstanding shares) being the largest.

Guru Funds Bullish on Enzon Corp. (NASDAQ:ENZN)

ENZN engages in research and development of therapeutics for cancer patients. Guru funds added a net $31 million to their $179 million prior quarter position. Top guru funds that hold ENZN include Baupost Group LLC ($72 million) and Icahn Capital LP ($106 million). Other major institutional owners of DNDN include Iridian Asset Management (4.5 million or 9.3% of outstanding shares) and Vanguard Group Inc. (2.7 million or 5.6% of outstanding shares).

General Methodology and Background Information: The latest available institutional 13-F filings of over 60+ legendary or guru hedge fund and mutual fund managers were analyzed to determine their capital allocation from among 50+ different industry groupings, and to determine their favorite picks and pans in each group. Each guru has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 60-odd guru funds that justify their inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in the above Table and in article.

These legendary or guru fund managers number less than one percent of all funds, and yet they control almost ten percent of the U.S. equity discretionary fund assets. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high-alpha-generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, 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 or even go as far as constructing a model diversified portfolio based on the guru funds best picks.

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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