Known by many as a very savvy stock picker, Joseph Edelman is the founder of the prestigious Perceptive Life Sciences Fund. The $2 billion fund is one of the most successful biotech-focused funds in the world according to HSBC data. Last year, its life sciences fund gained an impressive 51.8%. Indeed, the fund has been known to succeed even when the biotech sector struggles (see 2015 when the sector fell 20% but the fund gained 3.8%).
Based on 13F forms that hedge funds are required to file with the SEC, we can ascertain the fund’s sentiment on key small cap biotech stocks. In the second quarter, we can see how Edelman ramped reduced his exposure to AcelRx Pharmaceuticals Inc (NASDAQ:ACRX) and Synergy Pharmaceuticals Inc (NASDAQ:SGYP), but ramped up the fund’s positions in Antares Pharma Inc. (NASDAQ:ATRS)
The fund uses extensive fundamental analysis to find the most promising opportunities in healthcare. In order to avoid bias, the fund stresses that it performs “in depth scientific analysis of every step in the development pathway of a new therapeutic, device, or diagnostic.” Decisions are only made after analyzing and weighing critical data and catalysts which enables the fund to assess the real balance between market perception and reality.
And these methods are clearly working for Edelman- he was added to the rich list in 2015 after earning over $300 million. The 60-year old founded the fund back in 1999- following in the footsteps of his father Izzy, a renowned science professor at Columbia University. Edelman says: “We invest in a lot in small- and mid-cap biotech stocks where the essential questions are: Does the drug work? Will it be approved? Will it sell more or less than expected? If it works and is approved, the stock will go much higher.”
Bearing this in mind, let’s examine three of the fund’s most interesting recent biotech moves:
Edelman displayed a cautious attitude towards ACRX in the last quarter. Acelrx is focused on developing under-the-tongue pills for the treatment of moderate-to-severe acute pain, in medically supervised settings. The fund manager slashed the fund’s holding of this pharma stock by 1,677,386 shares. The remaining holding of 3,731,342 shares has a value of $8,022,000.
The fund’s move turned out to be right one given the recent trajectory of ACRX shares. Shares crashed by 58% after the company’s lead product candidate Dsuvia was confronted with its first Complete Response Letter (CRL) from the US Food and Drug Administration (FDA). Before the drug can be approved, the FDA now wants to see data on 50 patients at the highest proposed Dsuvia dose along with a human factor trial.
Following the letter, Cowen analyst Boris Peaker reiterated his hold rating on the stockwithout a price target. He comments, “We continue to believe that Dsuvia and Zalviso’s risks are largely political.” As for the required extra data, Peaker says the situation remains unclear and further information is required. He is waiting for the company’s third quarter earnings call to get the full lowdown on how Acelrx plans to proceed. Acelrx also plans to meet with the FDA later this year to discuss next steps.
Peaker explains, “At this point management does not know whether it already has the requested safety data on the 50 patients or if additional safety studies will need to be conducted. In terms of the Directions for Use, a human factor study is typically required when changes are made, and these studies are usually relatively quick to conduct. As such, we believe that the key limiting factor for resubmission will be the availability of the requested safety data and we anticipate and update on this on the 3Q17 earnings call.”
At the same time, it should be noted that the biotech’s Zalviso (also a pain management drug) also received a CRL letter from the FDA three years ago. Now the company is preparing to file the drug again by the end of the next year. According to Peaker this means ACRX could potentially be looking at an approval date towards the end of 2018.
Peaker has a strong track record with his recommendations according to TipRanks. The four-star analyst is rated #1,030 out of a total of 4,697 analysts covered by the financial engine. If we take a look at the bigger picture, analysts seem divided on the stock’s outlook. TipRanks shows that Acelrx has a Moderate Buy analyst consensus rating. Here this reflects the fact that in the last three months the stock has received three buy and three hold ratings from the Street. Analysts are predicting huge upside potential for the stock of 164% from the current share price.
Synergy Pharmaceuticals Inc
In the last quarter, Edelman turned bearish on gastrointestinal pharma Synergy. He completely killed off the fund’s position of 978,100 shares worth $4,558,000. Synergy is working to build momentum in the sales of its key drug Trulance for the treatment of CIC (chronic idiopathic constipation).
In contrast to Edelman, H.C. Wainwright analyst Ram Selvaraju is optimistic that these efforts will have tangible results. In particular, he likes an “optimized” specialty sales initiative backing the drug maker. He recommends buying Synergy and has an $8 price target on the stock (158% upside). According to Selvaraju, Synergy could be looking at sales next year of $85.4 million, thanks to an acceleration of script growth and increased reach.
The analyst is expecting a “broadening of the patient population accessible under the Trulance label in the wake of the approval of the drug for treatment of constipation-predominant irritable bowel syndrome (IBS-C), for which the PDUFA date for the supplemental New Drug Application (NDA) filed early this year is January 24, 2018.” And looking further ahead, Selvaraju now believes that the company could reach a cash flow breakeven point operationally within two years.
In fact, TipRanks reveals that the majority of analysts are bullish on SGYP. In the last three months, the stock has received 5 buy ratings and just 1 sell rating, giving it an overall analyst consensus rating of Moderate Buy. Meanwhile the average analyst price target of $8.58 translates into huge upside of 177% from the current share price.
Antares Pharma Inc
Unlike the previous 2 stocks here, Edelman decided to boost the fund’s share of Antares Pharma in the last quarter. He added an extra 1,350,000 shares to the fund’s Antares holding. As a result, the fund now holds a total of 4,267,253 shares in Antares valued at $13.7 million.
Unfortunately for Edelman, shares in Antares plunged by 40% on October 13. The fall came on the revelation that Antares expects the FDA to reject its marketing application for Antares’ testosterone replacement therapy Xyosted. The letter from the FDA stated that there are “deficiencies that preclude the continuation of the discussion of labeling and postmarketing requirements/commitments at this time.” Further information will be disclosed when the FDA completes its review on October 20.
However, even with this bad news, H.C. Wainwright analyst Oren Livnat remains confident that the stock is still worth snapping up. He takes a look at what would happen in the worst-case scenario and concludes: “We highlight that our sum-of-the-parts valuation still yields $3.3/share even if we entirely eliminate Xyosted from our model (which it is much too soon to do; this could be a minor delay).”
He points out that Antares already has approximately $45M annual revenue with the current base business and adds that, if Xyosted were entirely dead, Antares’ near-term liquidity position would actually improve. Livnat assigned a buy rating to the stock on October 13 with a $5 price target.
Overall we can see that Antares has a ‘Strong Buy’ analyst consensus rating on TipRanks. In the last three months, 3 analysts have published buy ratings on the stock. Their average price target of $5 stands at over 100% upside from the current share price of just $2.32.