What did we learn about hedge fund tycoon David Shaw in Q4? That he isn’t afraid of risk. The trading whizz took the plunge by ramping up holdings in two controversial healthcare stocks: MannKind Corporation (NASDAQ:MNKD) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX).
Shaw founded the D E Shaw & Co fund back in 1988, following a PhD from Stanford and a teaching appointment at the computer science faculty of Columbia University. Under his direction, the fund has exploded and now has assets under management of over $47 billion.
However, even with this major fund under his belt, Shaw’s main passion remains science and he is now only involved with the fund’s higher level strategic decisions. Indeed, he now spends the majority of his time working as chief scientist of D. E. Shaw Research where he carries out research in computational biochemistry. He has won multiple awards and academy positions, and advised both President Clinton and President Obama on science and technology. The conclusion: this is one of the smartest minds in the business.
As for the fund, it focuses on ‘the pursuit of attractive risk-adjusted returns.’ In other words it looks for unusual sources of return- which means finding alternative investment strategies that are less exposed to competitive pressures and market crises. According to the firm: “we seek to use quantitative techniques to generate returns that exceed standard benchmarks and that offer diversification from conventional style factors like value, growth, size, or momentum.”
So with this in mind, let’s now take a closer look at these two key trades made by the fund in the fourth quarter:
Shaw took a sizable swing with Mannkind in the fourth quarter, buying no less than 1,322,078 shares in the company. Following this massive 228% increase, the fund now holds 4,024,556 shares in Mannkind worth $9,337,000.
MNKD is a biopharma that focuses on the discovery and development of treatments for patients with diseases such as diabetes. Right now, it’s fortunes rest on the success of its Afrezza drug. This the only inhaled rapid-acting mealtime insulin available in the US. However, despite this impressive claim, sales of Afrezza have proved decidedly underwhelming. For the last 22 weeks, Afressa has only recorded sales of around 400 scripts per week (with an average of 428). This means that- despite ads and an expanded label- sales are now over 5% lower than this time last quarter. No doubt Shaw hopes that a pickup is round the corner- but is it?
Because now the company now has an extra problem to deal with. If Q1 sales continue at these low levels, Mannkind could begin to experience cash flow issues. Right now the company has an estimated $35 million in cash- but with these sales Afrezza is actually losing money. And the worrying impact of this is that Mannkind is now less likely to invest big money in the kind of substantial marketing push this drug requires to really take off.
On the other hand, Mannkind did just announce that it has hired 7 new sales representatives, so hopefully this may have an impact soon. And if we look back to this time last year, instead of just last quarter, the picture does look more optimistic. Retail sales, for example, are up 166%. Nonetheless, in order to change Street sentiment and keep advertising pumping, it is likely that MNKD will have to come up with some cash maneuver soon. The most likely option is a share dilution (although note that this has limits unless the company seeks approval from shareholders like Shaw first).
In the last three months, we can see that Mannkind has received only one rating from the Street. This is a hold rating from Maxim Group’s Jason Kolbert– which he assigned to the stock without a price target. However TipRanks reveals that Kolbert only has a success rate of 32% and an average return of -8%, suggesting that his recommendations can be taken with a pinch of salt.
Valeant Pharmaceuticals International Inc
In the fourth quarter, Shaw loaded up on volatile healthcare stock, Valeant. He bought 76,245 shares worth $1,584,354. As a result of this 14% holding increase he currently holds 638,072 VRX shares valued at $13,259,000.
Unfortunately for Shaw, Valeant has already sunk by around 11% in January. One reason for this negative turn is a very bearish report by Goldman Sachs. The firm’s Dana Flanders has decided that he is not going to sit on the sidelines any longer; and that he is not convinced CEO Joe Papa can turn this flailing company around. While he is impressed by the company’s progress in de-risking the business, he predicts a muted overall growth rate and initiates VRX with a Sell rating and bearish $18 price target (-3% downside from the current share price).
There are three main reasons behind Flanders’ take on VRX as one of his ‘Best Sell’ ideas, namely 1) high debt load of over $25 billion 2) competitive threats in 2018 to Apriso, Uceris, Acanya, which represent >$700mn in annual sales and 3) outstanding litigation risk that could require serious payouts. And yet despite all these concerns, shares soared over 40% in 2017. As a result the company’s valuation now appears stretched with shares re-rated (10x 2018 EBITDA) above the peer group. At the same time, VRX is investing so money in paying down its debts that it doesn’t have the funds required to commit to research and development- which is the backbone of any pharma stock’s long-term growth.
But note that (like Kolbert) Flanders only has 1 star rating on TipRanks where he comes in at 3,743 out of 4,760 tracked analysts. This is because of his 54% success rate and average return of only -3.2%. Overall analysts have a Hold consensus rating on VRX. In the last three months this breaks down into a rather negative picture of 2 buy ratings, 3 hold ratings and 4 bearish sell ratings. Meanwhile the average analyst price target of $19.29 indicates marginal upside potential of 3.65% from the current share price.