Since 1986, Farallon Capital has built a proven record for success, mainly from steady hands at the helm and consistent returns for investors. The firm was founded by Tom Steyer, with $15 million in initial capital, and when he retired as managing director in 2012 Farallon had grown to hold over $20 billion in assets under management.
Steyer’s successor, Andrew Spokes, has continued the firm’s strategy of ‘absolute return’ investing, assuming every investment has a guaranteed return. As far as stocks are concerned, this investment strategy tends toward the conservative – but it also tends to ensure a good return.
So, it makes sense that Farallon would get rid of underperforming or overly risky stocks. In the last quarter, the firm backed out of three high-profile biotech firms.
Let’s dive into the TipRanks database to learn more about the doubts and why Farallon is backing out of these biotechs.
Sarepta Therapeutics (SRPT)
This Massachusetts-based firm takes a focus on genetic disorders, especially muscular dystrophy. Sarepta has one approved product, Exondys 51, a treatment for Duchenne muscular dystrophy, and approved for patients with a confirmed mutation in the DMD gene. With another 16 projects in the pipeline, Sarepta is well positioned for the future. The company is a collaborator on an additional 9 projects.
Biotech is a sector with inherent high overhead, high risk, and long lead times to profitability, so Sarepta, like many biotechs focused on clinical phase research, operates at loss. In Q3, the company’s EPS loss increased by 103% year-over-year, to $1.14, even though revenues, at $99 million, showed a 26% yoy gain. The quarterly report noted increased expenditures as the root cause of the increased earnings loss.
Interestingly, Farallon divested 500,000 shares – the firm’s entire position in Sarepta. It was a major move by a major fund, that signals a serious lack of confidence in SRPT going forward.
At least one Wall Street analyst would agree with Farallon’s position. Hartaj Singh, writing from Oppenheimer, set a Hold on the stock. He wrote, “We believe that with management’s focus on early stage gene therapy trials, investor sentiment is slowly shifting to a more skeptical stance on other projects.” The analyst added, “While management’s (and the Street’s) focus has been on the development pipeline, namely SRP-9001, we have highlighted the role a golodirsen CRL could have on the P&L in the medium term. Updates on regulatory actions remain a potential catalyst for 2019, but we keep vigilant on the progress of commercial supply development for SRP-9001. Feasibility of these outlined timelines could be put to the test in 2020.” (To watch Singh’s track record, click here)
Other analysts might have to seriously disagree with Singh. The Street considers Sarepta stock a Strong Buy. According to TipRanks analytics, out of 13 analysts, 12 are bullish, while only one is sidelined. The consensus price target stands at $184.91, showing a 73% upside from the current share price. (See Sarepta stock analysis on TipRanks)
Located in Alameda, not far from Silicon Valley, Exelixis develops medications for the treatment of a variety of cancers. Unlike many small- to mid-cap biotech companies, Exelixis operates at a profit, thanks to three approved medications on the market. Two of the drugs, Cabometyx and Cometriq, are brand names for cabozantinib, used to treat thyroid and renal cancers, while the third, Cotellic, is used for treatment of melanoma.
Having several products on the market for common cancers puts EXEL stock in the black. The company has been running a profit and beating earnings expectations since early in 2018. In its most recent quarterly report, EXEL posted an EPS of 31 cents, beating the 20-cent forecast by an impressive 55%. Still, the EPS was down 24% from the year-ago quarter. The drop in year-over-year earnings came even as revenues, at $271.7 million, increased 20% in the same period.
The slide in earnings, despite strong revenues, indicate slower sales than expected – and that induced Farallon to shed 42% of its Exelixis holdings. In all, Farallon sold off 1.25 million shares of EXEL in Q3. Farallon still owns more than $28 million worth of EXEL. It will be interesting to see what the fund does with this stock going forward.
5-star BMO analyst George Farmer looks at EXEL and says Hold. He notes the company’s profits, but is cautious on sales. He noted, “Weak Cabometyx sales of $187M, well below ours/consensus of $203M/ $198M, were recorded in spite of a 4.5% price increase last July. We believe this result, ostensibly due to a backlog of patients slow to progress, creates a new overhang on shares…” (To watch Farmer’s track record, click here)
However, it looks like other analysts aren’t ready to tap out just yet. This stock’s Moderate Buy consensus rating is based on 6 Buys and 3 Holds given in the past three months. Shares are priced at $16.28 and have an average price target of $24.78, indicating upside potential of 48%. (See Exelixis stock analysis on TipRanks)
The company’s omega-3 based drug, Vascepa, is available by prescription as a treatment for hypertriglyceridemia, an indicator for heart disease, and has been shown to have a clear beneficial effect in preventing heart attack. Vascepa was approved and put on the market in 2013, and forecasts show it reaching well over $2 billion in sales by 2024. However, the omega-3 niche is starting to fill up, and Vascepa is facing increasing competition.
That competition has not impacted Amarin’s profits – yet. The company’s Q3 results showed $112 million in revenues, a 103% year-over-year gain, and the company has $677 million in cash-on-hand. Vascepa prescription were up 9.9% from Q2, to 865,000 orders.
Amarin saw its shares surge as high as 50% this month. The boost came on the heels of Thursday’s FDA AdCom vote in favor of extending the label on the company’s flagship drug, Vascepa, to include patients at risk of a heart attack and other major adverse cardiovascular events. The FDA is set to make a final decision on December 28, 2019.
Spokes, however, saw risk here, and Farallon’s sale of Amarin shares was its largest biotech divestment. The firm sold off 2,249,400 shares in AMRN in Q3, reducing its holding by 53% to just over 2 million shares.
Two Wall Street analysts become more skeptical about Amarin’s valuation earlier this month. Joel Beatty of Citigroup, wrote, “We believe Vascepa is an effective drug and anticipate sales accelerating significantly over the next year, however, we believe this is now already priced into the stock.” Beatty downgraded AMRN from Buy to Hold, although his $27 target suggests an upside of 29% for AMRN. (To watch Beatty’s track record, click here)
Oppenheimer analyst Leland Gershell is even more downbeat on Amarin. He said, in his recent initiation of coverage report, “We believe that a ~12-month stream of late-stage competitor data starting next month will increasingly weigh on shares as these products, which we believe offer superior profiles, are factored into models.” Gershell’s price target, $7, implies a strong 66% downside here. (To watch Gershell’s track record, click here)
Overall, Amarin still gets a Moderate Buy from the analyst consensus, with 7 Buys, 2 Holds, and 1 Sell set in recent weeks. The stock has a $27.50 average price target, indicating a 35% upside from the $20.42 trading price. (See Amarin stock analysis on TipRanks)