Jerome Pfund, founder of Montreal-based Sectoral Asset Management has turned sour on a few of his biotech investments, with this quarter seeing the hedge fund firm sell a majority of its shares in PTC Therapeutics, Inc. (NASDAQ:PTCT) and reign in its positions in DexCom, Inc. (NASDAQ:DXCM) and Teva Pharmaceutical Industries Ltd (NYSE:TEVA).
Establishing the firm together with Michael Sjostrom seventeen years ago, long before Pfund became the expert on a company’s fundamentals he is today, the man behind Sectoral worked at Pictet & Cie in Geneva as an asset manager and then as CIO. In 1997, Pfund relocated to Montreal where he became CEO of Pictet & Cie’s North American operations before starting Sectoral.
Building Sectoral’s portfolios from the bottom up, Pfund relies on primary research to approach investments with a Growth at a Reasonable Price strategy. Sectoral has an established investment process that it sticks to beginning with idea generation, when the firm conducts due diligence of the company’s scientific, financial and organizational strengths and weaknesses. After identifying a firm, Sectoral will conduct forecasting and scenario analysis using a range of assumptions and factors that are critical to a company’s success. Finally, Sectoral comes up with a realistic valuation range and decides whether to invest or not.
Let’s look at how this investment process led Pfund to pull back in his stakes in these pharmaceutical players:
PTC Therapeutics, Inc.
Pfund is growing impatient with PTC Therapeutics, having sold off 290,400 shares, or 83% of his total holding in the company in the latest quarter. Sectoral now has 60,735 shares left in the biotech firm for a total value of $1,113,000. After falling close to 20% over the last several weeks, PTC Therapeutics jumped 10% despite an FDA panel voting to not approve the company’s experimental drug ataluren (Translarna) in Duchenne muscular dystrophy, as the agency has not outright rejected the drug’s chances for later approval.
The gain in investor confidence spiraled as with more testing to prove ataluren’s efficacy, perhaps PTC can change the FDA’s sentiment. Though the panel’s vote is not ideal for ataluren’s approval, the biotech firm’s fate could have been dire with a total rejection of any chance at approval. Ataluren is currently approved in Europe on a conditional basis, which means the drug requires approval every year.
Among the FDA panel, 10 out of 11 members voted that the data was inconclusive with Dr. Kesselheim of Harvard Medical School saying that he was concerned the way the data would be analyzed could be misleading.
The head of PTC’s clinical development, Dr. Joe McIntosh insisted that the data showed ataluren can slow the loss of muscle function, an effect of Duchenne. He went on to say that the drug led to an increase in dystrophin and that the “FDA has approved another therapy for Duchenne based solely on dystrophin production.”
Analysts across the Street align with Pfund’s cautious backpedal on PTC stock, with 4 out of 6 analysts who have rated the company in the last 3 months assigning a Hold while the remaining 2 analysts rate a Buy on PTC Therapeutics. The 12-month average price target stands at $22.50.
Teva Pharmaceutical Industries Ltd
Pfund began to unload his shares of Teva after selling 151,542 shares, 21% of his holding. Nonetheless, Sectoral still has a holding of 602,279 shares worth $20,008,000. Teva’s shares have been hammered the last 3 months, falling close to 50%. The company has stabilized recently due to the hiring of a new CEO and reports that the company may sell off its oncology assets.
On September 11th, Teva appointed Kare Schultz to be the new CEO. Schultz has been tasked with setting up the company’s strategy, divesting assets, cutting debt and restoring investor confidence. Schultz is a natural fit for the job after having a 30-year career in global pharmaceutical and healthcare companies. The company released a statement describing Schultz’s success in “executing corporate turnaround strategies, driving growth and international expansion at low incremental cost and delivering on promises to shareholders, as well as a commitment to a culture of compliance.”
It seems that Schultz wasted no time being the head man for Teva with reports coming out this week that US private investment firm Cerberus has teamed up with Royalty Pharma to bid close to $1 billion for Teva’s European oncology and pain treatment portfolio. The talks are currently in an advanced stage and could be completed as early as next month.
Teva has been looking to delever some of its assets since the troubled biotech giant took on debt of $35 billion following an acquisition of Allergan’s Actavis generics division. As such, the company has a strategy to shed assets in order to lessen the repayment burden, having sold its women’s health assets segment just last month for $2.5 billion.
According to TipRanks, 12 out of 17 analysts who have rated the company in the last three months have recommended a Hold rating along with 2 analysts maintaining Buy ratings and 3 issuing Sell ratings. The average price target sits at $22.27, or a 26% upside from current levels.
Pfund pulled back his exposure in Dexcom by 7% after selling 24,000 shares worth $1,766,204. Sectoral now has a holding of 333,341 shares for a total value of $24,384,000. Even though Pfund retreated in the biotech player, his remaining 333,341 shares took a hit when the stock plunged 35% this past week.
The stock fell after competitor Abbott Laboratories received FDA approval for a blood sugar-monitoring system for diabetics that does not require a finger prick. Abbot intends to sell this product at retail pharmacies while also pursuing a Medicare reimbursement.
For Dexcom shareholders, the fear hinges upon the idea that Abbott’s success will affect one of Dexcom’s biggest businesses: glucose monitoring devices. Traditionally, patients with diabetes would measure their blood glucose levels by pricking their fingertips for blood samples and then use glucose monitoring devices from Dexcom to measure their blood sugar levels. Since Abbott’s device does not require a finger prick, analysts are worried that Dexcom is going to have issues attracting new patients in the near-term.
Nonetheless, there is cause for optimism as analysts across the Street acknowledge that Dexcom’s long-term growth plan still remains intact. Analysts have an average price target of $73.58, marking a nearly 53% upside. Furthermore, 10 out of 15 analysts in that last three months gave the company a Buy rating with the remaining 5 issuing Hold ratings.