Hedge fund guru Jim Simons, founder of the $78 billion Renaissance Technologies fund, has made some intriguing biopharma moves in the last quarter. He turned bullish on Array Biopharma Inc (NASDAQ:ARRY) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX), but became more bearish on Synergy Pharmaceuticals Inc (NASDAQ:SGYP).
Simons, “the world’s smartest billionaire” according to the Financial Times, is also one of the richest. With a personal wealth of $18 billion, Simons is an award-winning mathematician and professor who began his working life cracking Cold War codes. He recently described how math influenced his investing: “In looking at the data, after a while I realized: it looks like there’s some structure here. And I hired a few mathematicians, and we started making some models — just the kind of thing we did back at IDA [Institute for Defense Analyses]. You design an algorithm — you test it out on a computer. Does it work? Doesn’t it work? And so on.”
And as the founder of one of the world’s best hedge funds, Simon’s trades are tracked closely by investors. The fund uses a quantitative trading fund based on carefully formulated mathematical and statistical methods. “Renaissance is the commercial version of the Manhattan Project,” says MIT finance professor Andrew Lo. He concludes: “They are the pinnacle of quant investing. No one else is even close.” As well as its investor fund, Renaissance is also famous for its highly-secretive employee-only Medallion Fund which uses high frequency trading to exploits inefficiencies in the stock market. Bloomberg estimates this fund has made a huge profit over the last 30 years of about $55 billion and concludes “the fund almost never loses money.”
So bearing this in mind, let’s delve in and take a closer look at these three stock moves:
Array Biopharma Inc
In the last quarter, Simons added Array Biopharma to the fund’s portfolio. Array BioPharma is focused on the discovering, developing and commercializing targeted small molecule drugs to treat patients with cancer. The fund picked up 990,441 ARRY shares valued at $8.29 million. And as a result, Simons has benefited from the stock’s recent 17% share price leap.
Shares rose on the news of positive data from a Phase 3 clinical trial, BEACON CRC, assessing the combination of three drugs for the treatment of colorectal cancer (CRC). In particular, the study examined the effect of binimetinib, encorafenib and Eli Lilly’s Erbitux (cetuximab) in CRC patients with very poor prognosis. Specifically, the study looked at patients whose disease has progressed after one or two prior courses of therapy. Out of the 30 patients treated with the trial drug, the confirmed overall response rate (ORR) was 41%, including one complete responder. Most impressively, almost all the patients showed some form of tumor regression and generally tolerated the drug well.
Following the news, Piper Jaffray analyst Edward Tenthoff reiterated his buy rating with a $14 price target. He calls the news ‘encouraging’ and expects approval of binimetinib and encorafenib in BRAF-mutant melanoma in 2018. Meanwhile Cantor Fitzgerald Mara Goldstein adds that “ARRY’s e-poster presentation of the safety lead in for the Phase III BEACON CRC study suggests that binimetinib/encorafenib could expand its market potential to colorectal cancer, which the shares do not currently reflect, in our view.”
Overall, the stock has a very bullish consensus from the Street. In the last three months, the stock has received six back to back ratings. While the stock has spiked, the average analyst price target of $12.60 suggests the stock has further room to grow of close to 15% over the next 12 months.
Valeant Pharmaceuticals Intl Inc
Simons revealed a bullish attitude towards troubled biopharma Valeant Pharmaceuticals in Q2. He initiated a new position in the stock with the purchase of 2,402,589 shares valued at $41.57 million.
His move places him in direct opposition with long-time VRX bear, top Mizuho Securities analyst Irina Rivkind Koffler. As an analyst, Koffler has a strong track record both in general and on VRX stock specifically. Across her 26 VRX stock ratings she has a 73% success rate and 16.3% average return. She believes the picture for VRX is bleaker than ever. In fact, she reiterated her sell rating with a $7 price target (down from $8). Her new price target represents a downside of over 40% from the current share price- and as you can see from the graph below is the lowest published price target on VRX stock.
Koffler explains: “Our valuation relies in part on SOTP [sum of the parts] analysis and we note that EBITA margins in the Diversified segment dropped from ~81% in 2016 to 73% YTD. This business remains very critical to Valeant and in 2Q:17 Diversified revenue declined 27.3% Y/Y (representing 16% of top line but 30% of EBITA).” The most worrying part is that Koffler expects this segment to perform even worse in the second half of the year. She believes that, to cut its huge debt burden, VRX has sold off B&L growth drivers like Dendreon, and Obagi, leaving behind less attractive businesses.
Furthermore, the Dermatology segment fell 30.9% year-over-year even at a time when comp odds were advantageous- making it unlikely that dermatology will be the driving force behind the company’s recovery. As a result, Koffler gives this bold conclusion: “We expect Valeant to miss its 2017 revenue and EBITDA guidance, and FactSet consensus 2018 estimates still appear too high.”
TipRanks reveals that the stock has a Hold analyst consensus rating. We can see that in the last three months analysts have published 3 buy, 7 hold and 3 sell ratings on the stock. Their average price target of $17.36 translates into a considerable 27.5% upside from the current share price.
Synergy Pharmaceuticals Inc
In Q2, Simons decided to exit Synergy Pharmaceuticals. He sold the fund’s entire position in SGYP of 56,534 shares worth $263,000. Did he make the right call?
Shares have plunged 16% following second quarter earnings results that fell short of market expectations. Syngery’s drug Trulance (plecanatide) for the treatment of chronic idiopathic constipation (CIC) in adult patients received approval from the FDA in January. And in the initial stages of the launch, the drug has struggled to make a big first impression due to challenges including lack of awareness, competitive pressure (from Takeda and Allergan) and limited coverage.
But top Canaccord Genuity analyst Willian Tanner has a more bullish analysis of the drug’s potential. Indeed, he believes that Trulance has the potential to turn Synergy into a market leader as patients struggle to tolerate the current available treatments. He says: “The notion that existing treatments and their marketers create insurmountable competition may underestimate the opportunity for a drug that appears to have an importantly differentiated profile.” Currently 95% of the estimated 45 million people afflicted with CIC in the United States go untreated, possibly because of tolerability concerns. Tanner believes that when you add in the fact that the company has already reached out to 27,000 prescribers, you appreciate the size of Synergy’s opportunity.
The analyst also pointed out that the company’s Q2 reported revenue of $2.3 million beat his $1.4 million forecast (although not the market’s $3.6 million estimate), while EPS of $0.33 beat his predicted EPS as well as the market consensus. As a result, Tanner reiterated his buy rating on September 8 with an $11 price target (294% upside). Note that Tanner has a very impressive track record with a 61% success rate and 19% average return- although he has been far less successful so far on SGYP stock specifically.
Synergy has a cautiously optimistic Moderate Buy analyst consensus rating. In the last three months, the stock has received 5 buy ratings and 1 sell rating. Meanwhile the average analyst price target of $9.95 stands at a massive 257% upside from the current share price of just $2.79.